Fair Value Measurements

12 Months Ended

Dec. 31, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 10. Fair Value Measurements

Fair value of financial instruments

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 valuations – Consist of observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.

Level 2 valuations – Consist of observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable as of the reporting date.

Level 3 valuations – Consist of unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

The carrying values of cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities on the consolidated balance sheets approximate fair value because of their short-term nature. For debt and warrant liabilities, the following methods and assumptions were used to estimate fair value:

Debt: Through September 2023, the fair value of the Company’s AR Debentures (as defined below) was based on a widely accepted valuation methodology that utilizes (i) the Company’s common stock price, (ii) value of the debt component, and (iii) the value of the equity component. The key unobservable inputs in the valuation model are the volatility that is appropriate to use in the Company stock price and the yield that is appropriate for the Company. These inputs could change significantly and result in significantly higher or lower fair values at different measurement dates. The Company considers the fair value of its debt to be a Level 3 measurement on the fair value hierarchy. At conversion on October 11, 2023, the fair value was determined using the Company’s common stock price.

Warrant liabilities: The fair value of the Company’s warrant liabilities is estimated using a Black-Scholes option pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected warrant life, and expected volatility in the market value of the underlying common stock.

There were no assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022.

Senior convertible debentures

The significant unobservable inputs used in the Level 3 fair value measurement of the senior convertible debentures as of May 3, 2023 (date of the Merger) and their values are as follows:

	May 3, 2023
Volatility		75	%
Yield		20.00	%

Volatility was estimated using stock price volatility of the Company and a set of peer companies over a lookback period equal to the time to maturity. Yields were estimated using a range of 15.00% to 25.00% at May 3, 2023.

The table below provides a summary of changes in the fair value of the Company’s Level 3 senior convertible debentures for the year ended December 31, 2023. The debentures were converted on October 11, 2023 and fair value at such date was estimated using the Company’s common stock price, which is a Level 1 valuation. There were no Level 3 liabilities in the period from June 7, 2022 (date of inception) through December 31, 2022.

	Year Ended December 31, 2023
Balance at beginning of year	$	—
Senior convertible debentures assumed in the Merger		1,981,000
Losses reported in earnings		3,790,428
Conversion to common stock		(5,771,428	)
Balance at December 31, 2023	$	—

Warrant liabilities

The estimated fair value of the warrant liabilities at various dates during the year ended December 31, 2023 through when they were reclassified into equity (see Note 14) was determined using Level 3 inputs. Inherent in a Black-Scholes option-pricing model are assumptions used in calculating the estimated fair values which represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different.

The following table summarizes the Company’s assumptions used in the valuation of warrant liabilities for the year ended December 31, 2023. There were no warrant liabilities at December 31, 2023 or 2022.

Stock price	$	6.71 – 14.71
Option exercise price	$	6.00
Expected term (years)		4.56 – 5.00
Volatility		75.0	%
Discount rate		4.27% - 4.58	%

The following table sets forth a summary of the changes in the fair value of the Level 3 warrant liabilities for the year ended December 31, 2023. There were no Level 3 liabilities in the period from June 7, 2022 (date of inception) through December 31, 2022.

	Year Ended December 31, 2023
Balance at beginning of period	$	—
Reclassification to warrant liabilities		25,883,095
Change in estimate fair value		39,797,994
Reclassification to equity		(65,681,089	)
Balance at December 31, 2023	$	—