Fair Value Measurements

6 Months Ended

Jun. 30, 2024

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 5 – Fair Value Measurements

Certain of the Company’s assets and liabilities are carried at fair value and measured on either a recurring or nonrecurring basis. Per Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, 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.

The GAAP fair value valuation hierarchy categorizes assets and liabilities measured at fair value into one of three levels depending on the observability of the inputs used in determining fair value. The three levels of the fair value hierarchy are 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 classification of an asset or liability within the fair value hierarchy is based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement of an asset or liability requires judgment and may affect the valuation of the fair value asset or liability and its placement within the fair value hierarchy. There have been no transfers between fair value hierarchy levels.

Fair Value of Financial Instruments

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2023, the Company had the following liabilities measured at fair value on a recurring basis:

AR Debentures. Through September 2023, the fair value of the Company’s AR Debentures (discussed further in Note 8 – Long–term Debt) 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, therefore, they are considered Level 3 inputs within the fair value hierarchy. The AR Debentures were converted in October 2023, therefore, the Company stopped remeasuring the change in fair value at that time. The fair value at conversion was determined using the Company’s common stock price.

As of June 30, 2023, the fair value of the AR Debentures was $2.7 million, which represented an increase of $0.7 million from the date of the Merger. The Company recognized the change in fair value as Loss on adjustment to fair value – AR Debentures on its condensed consolidated statements of operations for the three and six months ended June 30, 2023 and condensed consolidated statement of cash flows for the six months ended June 30, 2023. Refer to Note 8 – Long–term Debt for a further discussion of the AR Debentures.

Common Stock Obligation Shares. As discussed in Note 12 – Common Stock, as a result of the Merger and related transactions, the Company had the obligation to issue 205,970 shares of common stock (the “Obligation Shares”). The fair value of the Obligation Shares was based on the quoted price of the Company’s common stock and, as such, was considered a Level 1 input within the fair value hierarchy. The underlying shares were fully issued in September 2023, therefore, the Company stopped remeasuring the change in the fair value of the obligation at that time.

As of June 30, 2023, the fair value of the Obligation Shares was $1.2 million, which represented an increase of $0.7 million from the date of the Merger. The Company recognized the change in fair value as Loss on adjustment to fair value – Obligation Shares on its condensed consolidated statements of operations for the three and six months ended June 30, 2023 and condensed consolidated statement of cash flows for the six months ended June 30, 2023. Refer to Note 12 – Common Stock for a further discussion of the Obligation Shares.

As of June 30, 2024 and December 31, 2023, the Company does not have any assets or liabilities measured at fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Non–Recurring Basis

Acquisition and merger–related assets and liabilities. The fair values of assets acquired and liabilities assumed in an acquisition or merger are measured on a non–recurring basis on the acquisition or merger date. If the assets acquired and liabilities assumed are current and short–term in nature, the Company uses their approximate carrying values as their fair values, which is considered a Level 1 input in the fair value hierarchy. If the assets acquired are not short–term in nature, then the fair value is determined using the estimated replacement values of the same or similar assets and, as such, are considered Level 3 inputs in the fair value hierarchy. Refer to Note 2 – Acquisitions and Merger for a further discussion of the Company’s acquisitions and merger.