Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

Fair Value of Financial Instruments [Abstract]

4. Fair Value of Financial Instruments

The Company has certain financial assets and liabilities recorded at fair value. Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions. The carrying amounts reflected in the consolidated balance sheets for cash equivalents, accounts payable and accrued expenses approximate their carrying value due to their short-term nature. There were no level 2 assets or liabilities at September 30, 2022 or December 31, 2021. See below for Fair Value of Derivatives related to Convertible Notes Payable at September 30, 2022 and December 31, 2021, which are level 3 liabilities.

Assets and liabilities measured and recorded at fair value on a recurring basis at September 30, 2022 were as follows:

	Level 1		Level 2		Level 3		Total
Derivative Liability – Contingent Interest April Note	$	—	$	—	$	373,000	$	373,000
Derivative Liability – Contingent Interest September Note	$	—	$	—	$	177,000	$	177,000
Derivative Liability – Contingent Interest December Note	$	—	$	—	$	301,000	$	301,000

The April Note derivative liability – contingent interest was valued using a Monte Carlo Geometric Brownian Stock Path Model. The key assumptions used in the model at inception, and at September 30, 2022 are as follows:

				September 30,
	Inception			2022
Stock Price	$	2.19		$	1.63
Conversion Price of conversion feature	$	5.00		$	5.00
Term	4 years			2.54 years
Risk Free Interest Rate		0.59	%		4.24	%
Credit Adjusted Discount Rate		7.60	%		17.42	%
Volatility		88	%		83	%
Dividend Rate		0	%		0	%

The roll forward of the April Note derivative liability – contingent interest is as follows:

Balance – December 31, 2020	$	—
Issuance of April convertible note payable – related party		420,000
Fair Value Adjustment		75,000
Balance – December 31, 2021	$	495,000
Fair Value Adjustment		(122,000	)
Balance – September 30, 2022	$	373,000

The September Note derivative liability – contingent interest was valued using a Monte Carlo Geometric Brownian Stock Path Model. The key assumptions used in the model at inception, and at September 30, 2022 are as follows:

		Inception				September 30, 2022
Stock Price		$	4.06			$	1.63
Conversion Price of conversion feature		$	8.64			$	8.64
Term	4 years				2.97 years
Risk Free Interest Rate			0.68	%			4.25	%
Credit Adjusted Discount Rate			7.59	%			17.42	%
Volatility			91	%			83	%
Dividend Rate			0	%			0	%

The roll forward of the September Note derivative liability – contingent interest is as follows:

Balance – December 31, 2020	$	—
Issuance of September convertible note payable – related party		433,000
Fair Value Adjustment		(183,000	)
Balance – December 31, 2021	$	250,000
Fair Value Adjustment		(73,000	)
Balance – September 30, 2022	$	177,000

The December Note derivative liability – contingent interest was valued using a Monte Carlo Geometric Brownian Stock Path Model. The key assumptions used in the model at inception, and at September 30, 2022 are as follows:

				September 30,
	Inception			2022
Stock Price	$	2.32		$	1.63
Conversion Price of conversion feature	$	5.43		$	5.43
Term	4 years			3.22 years
Risk Free Interest Rate		1.04	%		4.24	%
Credit Adjusted Discount Rate		8.54	%		17.42	%
Volatility		86	%		81	%
Dividend Rate		0	%		0	%

The roll forward of the December Note derivative liability – contingent interest is as follows:

Balance – December 31, 2020	$	—
Issuance of September convertible note payable – related party		415,000
Fair Value Adjustment		(30,000	)
Balance – December 31, 2021	$	385,000
Fair Value Adjustment		(84,000	)
Balance – September 30, 2022	$	301,000

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details