Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2024

Fair Value of Financial Instruments

Fair Value of Financial Instruments

4. Fair Value of Financial Instruments

As a basis for determining the fair value of certain of the Company’s financial instruments, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level I – Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level II – Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level III – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. The Company’s cash equivalents are classified within Level I of the fair value hierarchy.

As of September 30, 2024 and December 31, 2023, the fair values of cash and cash equivalents, accounts payable, and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. The Company’s short-term investments consist of Level I securities which are comprised of highly liquid money market funds. The estimated fair value of the short-term investments was based on quoted market prices. There were no transfers between fair value hierarchy levels during the quarters ended September 30, 2024 or 2023.

The fair value of financial instruments measured on a recurring basis is as follows:

	As of September 30, 2024
Description	Total		Level 1			Level 2	Level 3
Assets:
Short-term investments	$	250,391	$	250,391	$	—	$	—
Related party receivable	$	1,570,000	$	—	$	—	$	1,570,000
Liability:
Convertible promissory note, related party	$	(2,060,000)	$	—	$	—	$	(2,060,000)

	As of December 31, 2023
Description	Total			Level 1		Level 2	Level 3
Assets:
Short-term investments	$	2,206,555	$	2,206,555	$	—	$	—
Contingent consideration receivable, related party	$	268,000	$	—	$	—	$	268,000
Contingent earn-out receivable, related party	$	1,720,000	$	—	$	—	$	1,720,000

The following tables summarize the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs for the three and nine months ended September 30, 2024 and 2023:

			Contingent
	Related Party		Earn-out Rec.,		Promissory Notes,
	Receivable		Related Party		Related Party
Balance at June 30, 2024	$	—	$	2,720,000	$	(2,680,000)
Issuance of non-convertible promissory note, related party		—		—		—
Loss on partial extinguishment		—		(1,480,000)		—
Gain on partial extinguishment		—		—		750,000
Change in fair value		140,000		190,000		(130,000)
Reclass contingent earn-out receivable, related party to related party receivable		1,430,000		(1,430,000)		—
Balance at September 30, 2024	$	1,570,000	$	—	$	(2,060,000)

	Contingent		Contingent
	Consideration Rec.,		Earn-out Rec.,		Related Party		Promissory Notes,
	Related Party		Related Party		Receivable		Related Party
Balance at December 31, 2023	$	268,000	$	1,720,000	$	—	$	—
Issuance of non-convertible promissory note, related party		—		—		—		(750,000)
Issuance of convertible promissory note, related party		(268,000)		—		—		(1,985,750)
Loss on partial extinguishment		—		(1,480,000)		—		—
Gain on partial extinguishment		—		—		—		920,000
Change in fair value		—		1,190,000		140,000		(244,250)
Reclass contingent earn-out receivable, related party to related party receivable		—		(1,430,000)		1,430,000		—
Balance at September 30, 2024	$	—	$	—	$	1,570,000	$	(2,060,000)

	Contingent
	Consideration
Balance at June 30, 2023	$	12,334,115
Payment of contingent consideration		(100,344)
Change in fair value		(286,855)
Reclassification to held for sale		(11,946,916)
Balance at September 30, 2023	$	—

	Contingent
	Consideration
Balance at December 31, 2022	$	12,224,614
Payment of contingent consideration		(100,344)
Change in fair value		(177,354)
Reclassification to held for sale		(11,946,916)
Balance at September 30, 2023	$	—

Adjustments associated with the change in fair value of contingent earn-out, related party, convertible promissory note, related party, and contingent consideration are included in the Company’s consolidated statements of operations and comprehensive loss.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements of financial assets and liabilities classified as Level 3  as of September 30, 2024 and December 31, 2023:

	As of September 30, 2024
	Valuation	Significant		Weighted Average
	Methodology	Unobservable Input		(range, if applicable)
Related party receivable	Discounted cash flow analysis	Timing of expected payment		2028
		Market interest rate		11.6%
		Fixed payment amount	$	2.5 million
Convertible promissory note, related party	Discounted cash flow analysis	Maturity term		11 months
		Market interest rate		12.1%
		Principal amount	$	2.25 million

	As of December 31, 2023
	Valuation	Significant		Weighted Average
	Methodology	Unobservable Input		(range, if applicable)
Contingent consideration receivable, related party	Discounted cash flow analysis	Maturity term		1 year
		Market interest rate		14.7%
		Principal amount	$	2.25 million
Contingent earn-out receivable, related party	Discounted cash flow analysis	Timing of expected payments		2026-2029
		Discount rate		15.0%
		Future revenue projections	$	141.4 million
		Minumum earn-out payment		3% or $5.0 million
		Earn-out term through		December 31, 2028