NOTE 14 – FAIR VALUE MEASUREMENTS

Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value for assets and liabilities required to be carried at fair value and provide for certain disclosures related to the valuation methods used within the valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows. 

A summary of financial assets and liabilities that are measured at fair value on a recurring basis were as follows:

Short-term investments

The Company holds marketable equity securities consisting of publicly traded common stock and warrants exercisable for publicly traded common stock measured at fair value of $18.9 million, and certificates of deposit carried at amortized cost of $2.85 million as of December 31, 2025, which are excluded from the fair value hierarchy table because they are not measured at fair value on a recurring basis. Our investments in marketable equity securities are concentrated in three publicly traded companies, representing 46%, 29%, and 25% of total investments in equity securities as of December 31, 2025. As of December 31, 2025, our beneficial ownership in each of the three publicly traded companies is less than 5%. The Company classifies its warrants within Level 3 in the fair value hierarchy because it uses unobservable inputs related to volatility to determine fair value. There were no transfers between Level 1 and Level 3 during the year ended December 31, 2025. The following table summarizes the Company’s investments in marketable equity securities:

During the year ended December 31, 2025, the Company recognized gross unrealized gains of $6.41 million and gross unrealized losses of $1.02 million. The Company’s investment in warrants exercisable for publicly traded stock allow us to purchase up to 500,000 shares of publicly traded common stock at an exercise price of $6.00 per share. The warrants are exercisable in whole or in part until August 20, 2028.

The Company had no Level 3 assets that were required to be measured at fair value as of December 31, 2024. The Company had Level 3 assets that are required to be measured at fair value as of December 31, 2025, and at each subsequent reporting period for as long as the warrants remain outstanding. The fair value of the Company’s investment in warrants in a publicly traded company was determined using a Black-Scholes Model. For the year ended December 31, 2025, the key assumptions used in the Black-Scholes Model are as follows:

The following table provides a reconciliation of the beginning and ending balances for the Level 3 warrant assets measured at fair value using significant unobservable inputs:

Government grants

The Company had Level 3 liabilities that are required to be valued at fair value as of December 31, 2025, and 2024. The fair value of the government grant liability is determined as the sum of 3% royalty payments on forecasted future sales of the products developed using the grant funds, discounted using a discounted cash flow model. As of December 31, 2025, the Company made the following assumptions: (i) royalty payments will be made on certain forecasted future sales through 2031, and (ii) using a discount rate of 19%. The following table provides a reconciliation of the beginning and ending balances for the Level 3 government grant liability measured at fair value using significant unobservable inputs:

Warrant liability

The fair value of the warrants was determined using Level 3 inputs in a Black-Scholes option-pricing model. Inherent in the valuation were assumptions related to the expected stock-price volatility, expected term, risk-free interest rate, and dividend yield. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the warrant term. Our estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available over a period equal to the expected life of the awards. We used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price. The expected term was assumed to be equivalent to the warrants’ remaining contractual term. The risk-free interest rate was estimated using the yield on actively traded non-inflation-indexed U.S. treasury securities with contract maturities equal to the expected term. The dividend yield was based on the historical rate, which the Company anticipates remaining at zero.

The assumptions used to estimate the fair value of warrants during the period were as follows:

Non-recurring fair value measurements

In connection with the business combinations completed during the year ended December 31, 2025, the Company recognized identifiable intangible assets, including developed technology, customer relationships, trade names, and non-compete agreements. These intangible assets were measured at fair value on a non-recurring basis as of their respective acquisition dates in accordance with ASC 805, Business Combinations. These measurements are not subsequently remeasured and the assets are amortized over their estimated useful lives.

The fair value of the acquired intangible assets was determined using valuation techniques consistent with the income approach, including discounted cash flow models such as the multi-period excess earnings method for developed technology and customer relationships, the relief-from-royalty method for trade names, and the with-and-without method for non-compete agreements.

These fair value measurements are classified within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs, including projected future revenues, operating margins, customer attrition rates, royalty rates, and discount rates, which reflect management’s assumptions regarding the expected economic benefits derived from the acquired assets. The fair value measurements were determined as of the respective acquisition dates and represent non-recurring measurements.