Note 5 - Fair Value of Assets and Liabilities

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 5. FAIR VALUE OF ASSETS AND LIABILITIES

GAAP defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date, and establishes a hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:

● Level I - inputs are quoted prices in active markets as of the measurement date for identical assets and liabilities that the Company has the ability to access. This category includes exchange-traded mutual funds and equity securities;

● Level II - inputs are inputs other than quoted prices included in Level I that are observable for the asset or liability, either directly or indirectly. Level II inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates or yield curves, that are observable at commonly quoted intervals; this category includes mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal debt securities, U.S. Treasury securities, and derivative contracts; and

● Level III - inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The measurements are highly subjective.

The availability of observable inputs can vary and is affected by a variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is the greatest for assets or liabilities categorized in Level III.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment level within the fair value hierarchy is 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 fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The following table presents information about the Company’s assets measured at fair value as of the years ended December 31, 2022 and December 31, 2021.

	Level I		Level II		Level III
December 31, 2022	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Investments in securities, at fair value (cost $5,802,395)	$	5,860,688	$	-	$	-
W-1 Warrant and Class B Common Stock liability, at fair value		-		-		576,000
Total	$	5,860,688	$	-	$	576,000

	Level I		Level II		Level III
December 31, 2021	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Investments in securities, at fair value (cost $2,265,489)	$	2,265,088	$	-	$	-
W-1 Warrant and Class B Common Stock liability, at fair value		-		-		-
Total	$	2,265,088	$	-	$	-

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As discussed previously, through Enterprise Diversified, the Company holds Level I investments, among which include shares of CrossingBridge Ultra-Short Duration Fund, CrossingBridge Low Duration High Yield Fund, and CrossingBridge Responsible Credit Fund, which are SEC registered mutual funds for which CBA is the adviser, as well as shares of CrossingBridge Pre-Merger SPAC ETF, which is an ETF also advised by CBA. As of December 31, 2022, Level I investments held by the Company in investment products advised by CBA totaled $4,850,308. The Company’s remaining Level I investments held as of December 31, 2022 includes marketable U.S. fixed income securities. There is no liquidity restriction in connection with these investments held through Enterprise Diversified.

As discussed previously, pursuant to the Merger Agreement, the Company issued 1,800,000 Class B common shares that are mandatorily redeemable upon exercise of the W-1 Warrant. Management has determined that the W-1 Warrant represents an embedded equity-linked feature within the Class B common shares, and therefore is valued in conjunction with the Class B common shares as a long-term liability on the consolidated balance sheets. The value of the W-1 Warrant and Class B common shares is determined using a Black-Scholes pricing model, resulting in a Level III classification. The pricing model considers a variety of inputs at each measurement date including, but not exclusively, the Company’s closing stock price, the Company’s estimated equity volatility over the remaining warrant term, the warrant exercise price, the Company’s annual rate of dividends, the bond equivalent yield, and remaining term of the W-1 Warrant. Additionally, a discount is applied based on an analysis of the underlying marketability of the Company’s Class A common stock with respect to Rule 144 restrictions. This value is remeasured at each reporting date with the change in value flowing through the consolidated statements of operations for the relevant period. The table below represents the relevant inputs used in the value determination as of December 31, 2022 and change in value from the Closing Date to December 31, 2022.

W-1 Warrant and Class B Common Stock
Inputs below are as of December 31, 2022
ENDI Corp. closing stock price	$	3.75
Warrant exercise price	$	8.00
Estimated equity volatility over remaining term		38.00	%
ENDI Corp. annual rate of dividends		0.00	%
Bond equivalent yield		3.99	%
Remaining term of W-1 Warrant	4.75 years
Discount for lack of marketability		23.00	%
August 11, 2022	$	1,476,000
Less: Unrealized gains reported in other income		522,000
September 30, 2022		954,000
Less: Unrealized gains reported in other income		378,000
December 31, 2022	$	576,000

On the Closing Date, the fair market value of the liability associated with the W-1 Warrant and Class B common shares was recorded for $1,476,000. Subsequently, as of the year ended December 31, 2022, the liability was remeasured to $576,000. This change in value, largely attributed to the fluctuation of the Company’s closing stock price on the last trading day of each measurement date, resulted in the Company recognizing $900,000 of other income related to the “mark-to-market” of the W-1 Warrant on the consolidated statements of operations for the year ended December 31, 2022.

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

The Company analyzes its intangible assets — goodwill, customer relationships, trade names, and domain names — on an annual basis or more often if events or changes in circumstances indicate potential impairments. No impairments were recorded during the year ended December 31, 2022. No comparable analysis was performed for the year ended December 31, 2021 as the Company did not hold any intangible assets prior to the Closing Date.

As discussed previously, Enterprise Diversified holds promissory notes receivable from Triad DIP Investors, LLC and 847,847 aggregate shares of Triad Guaranty, Inc. common stock. The Company carries the promissory notes on the consolidated balance sheet at fair value, which is reported at $50,000 as of December 31, 2022. As described in Note 4, during the three-month period ended December 31, 2022, the Company recorded a measurement period adjustment to the preliminary recorded fair value assigned to the Company’s Triad DIP Investors, LLC notes receivable, reducing the preliminarily assessed fair value from $300,000 to $50,000, with the decrease in value allocated to the Company’s residual amount of goodwill held as of December 31, 2022. This adjustment was the product of an expanded legal analysis performed by management in December 2022. The fair values assigned to tangible and intangible assets acquired are based on management’s estimates and assumptions and may be subject to change as additional information is received. The Company expects to finalize the fair values of assets acquired and liabilities assumed as soon as practicable, but not later than one year from the Closing Date. The Company periodically reassesses the collectability of its notes receivable if events or circumstances indicate that a note may not be fully recoverable. As of December 31, 2022, the Company attributed no value to its shares of Triad Guaranty, Inc. common stock due to the stocks’ general lack of marketability.