Note 6 - Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 6. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received in the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value based upon the level of judgment associated with the inputs used to measure their fair value.

Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

● Level 1: Quoted prices in active markets for identical assets or liabilities that the organization has the ability to access at the reporting date.

● Level 2: Inputs other than quoted prices included in Level 1, which are either observable or that can be derived from or corroborated by observable data as of the reporting date.

● Level 3: Inputs include those that are significant to the fair value of the asset or liability and are generally less observable from objective resources and reflect the reporting entity’s subjective determinations regarding the assumptions market participants would use in pricing the asset or liability.

The Company’s financial instruments (cash and cash equivalents, receivables, and accounts payable) are carried in the consolidated balance sheet at cost, which reasonably approximates fair value based on their short-term nature. The Company’s warrant liability is recorded at fair value, with changes in fair value being reflected in the statements of operations for the period of change.

Financial assets and liabilities measured at fair value on a recurring basis

The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the hierarchy.

The June 2017 Warrants contain certain cash settlement features and, accordingly, the Company considered them to be liabilities and accounted for them at fair value using Level 3 inputs. The Company determined the fair value of this warrant liability using a binomial asset pricing model that consisted of a conditional probability weighted expected return method that values the Company’s equity securities assuming various possible future outcomes to estimate the allocation of value within one or more of the scenarios. Using this method, unobservable inputs included the Company’s equity value, expected timing of possible outcomes, risk free interest rates and stock price volatility. Variables used at March 31, 2022 include: (1) the Company stock price of $4.04, (2) the risk-free rate of 2.42%, (3) remaining expected life of 5.2 years, and (4) expected volatility of 82%.

The Series A Preferred Stock and the Series B Preferred Stock both contain a contingent put option and, accordingly, the Company considered the put options to be liabilities and accounted for them at fair value using Level 3 inputs. The Company determined the fair value of these liabilities was de minimis at issuance and as of March 31, 2022, due to the remote possibly of its occurrence, a Level 3 unobservable input.

The following table sets forth a summary of changes in the fair value of Level 3 liabilities measured at fair value on a recurring basis for the three months ended March 31, 2022:

Description	Balance at December 31, 2021		Established in 2022		Change in Fair Value			Balance at March 31, 2022
Warrant liability	$	12,818	$	-	$	(7,408	)	$	5,410

The following table identifies the carrying amounts of such liabilities at March 31, 2022 and December 31, 2021:

Description	Level 1		Level 2		Level 3		Total
Warrant liability	$	-	$	-	$	5,410	$	5,410
Balance at March 31, 2022	$	-	$	-	$	5,410	$	5,410

Description	Level 1		Level 2		Level 3		Total
Warrant liability	$	-	$	-	$	12,818	$	12,818
Balance at December 31, 2021	$	-	$	-	$	12,818	$	12,818

Financial assets and liabilities carried at fair value on a non-recurring basis

The Company does not have any financial assets or liabilities measured at fair value on a non-recurring basis.

Non-financial assets and liabilities carried at fair value on a recurring basis

The Company does not have any non-financial assets or liabilities measured at fair value on a recurring basis.

Non-financial assets and liabilities carried at fair value on a non-recurring basis

The Company measures its long-lived assets, including property and equipment and goodwill, at fair value on a non-recurring basis when they are deemed to be impaired. No such impairment was recognized during the three months ended March 31, 2022 and 2021.