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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2023

Fair Value of Financial Instruments [Abstract]

Note 8 - Fair Value of Financial Instruments

ASC 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The levels of the fair value hierarchy established by ASC 820 are:

Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

As of September 30, 2023 and December 31, 2022, we considered the recorded value of certain of our financial assets and liabilities, which consist primarily of cash and cash equivalents, contract receivable and accounts payable, to approximate fair value based upon their short-term nature.

Our convertible debt issued in February 2022, amended in June 2023 and our new convertible debt issued in June 2023 (see Note 10) includes certain embedded redemption features that are required to be bifurcated as embedded derivatives and measured at fair value on a recurring basis. We estimate the fair value using a Monte Carlo simulation based on estimates of our future stock price and assumptions about the possible redemption scenarios.

The Company used the Monte Carlo simulation model to determine the fair value of the Warrants (see Note 10) and Cash-Settled PRSUs, which required the input of subjective assumptions. The fair value of the Warrants as of September 30, 2023 was estimated with the following assumptions.

	Amended 2022 Convertible Note			2023 Convertible Note

Exercise Price	$	19.40		$	5.00
Common Stock Price	$	2.02		$	2.02
Risk Free Rate		4.7	%		4.13	%
Volatility		80.0	%		80.0	%
Term (in years)	3.4 yrs.			4.7 yrs.

The following table presents assets and liabilities measured at fair value at September 30, 2023:

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Derivative liability	$	-	$	-	$	1,064	$	1,064
Warrant liability		-		-		474		474
Cash settled performance-vesting restricted stock units		-		-		82		82
Total liabilities	$	-	$	-	$	1,620	$	1,620

The following table presents assets and liabilities measured at fair value at December 31, 2022:

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Derivative liability	$	-	$	-	$	285	$	285
Warrant liability		-		-		267		267
Cash settled performance-vesting restricted stock units		-		-		51		51
Total liabilities	$	-	$	-	$	603	$	603

The following table summarizes changes in the fair value of our Level 3 liabilities during the nine months ended September 30, 2023.

(in thousands)	Embedded Redemption Features		Warrant			Cash Settled PRSUs		Level 3 Total
Balance at December 31, 2022	$	285	$	267		$	51	$	603
FV of derivatives with new convertible note issuance		286		1,120			-		1,406
Change in FV included in gain on derivative instruments, net		493		(913	)		-		(420	)
Stock compensation less payments made		-		-			31		31
Balance at September 30, 2023	$	1,064	$	474		$	82	$	1,620

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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