PLXP PLx Pharma Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(unaudited)

NOTE 1. BACKGROUND AND ORGANIZATION

Business Operations

PLx Pharma Inc. (the “Company”, “we”, “our” or “us”), together with its subsidiary PLx Opco Inc., is a commercial-stage drug delivery platform technology company focused on improving how and where active pharmaceutical ingredients (“APIs”) are absorbed in the gastrointestinal ("GI") tract via its clinically-validated and patent-protected PLxGuard™ technology.  The Company has two Food and Drug Administration (“FDA”) approved products, VAZALORE® 81 mg and VAZALORE® 325 mg (referred to together as “VAZALORE”), which are liquid-filled aspirin capsules for over-the-counter distribution ("OTC").  

Impact of COVID-19 Pandemic on Financial Statements

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a “pandemic”, or a worldwide spread of a new disease. Many countries imposed and continue to enforce quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses.

The Company has not experienced a significant disruption or delay in the development, manufacturing or sales of VAZALORE due to COVID-19, and has not otherwise experienced any significant negative impact on its financial condition, results of operations or cash flows. However, the extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the remaining duration of the pandemic, travel restrictions and social distancing in the United States and other countries as well as, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the pandemic. The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Recent Developments

In August 2022, the Company engaged Raymond James & Associates, Inc. (“Raymond James”) as financial advisor to explore and evaluate its strategic alternatives with the goal of enhancing stockholder value. The strategic review process is underway and the strategic alternatives to be considered may include, without limitation, exploring the potential for a possible merger, business combination, or investment into the Company. In conjunction with the exploration of strategic alternatives, the Company has been streamlining its sales and marketing plan in order to preserve its capital and cash resources.

NOTE 2. GOING CONCERN

During the nine months ended September 30, 2022, the Company had a net loss of $31.1 million and used cash in operations of $46.0 million.  As of September 30, 2022, the Company had an accumulated deficit of approximately $179.4 million.  Due to the difficult macroeconomic environment that has put pressure on the rate of acceptance of VAZALORE in the marketplace and on our commercial resources combined with restrictive capital markets, the Company engaged Raymond James in August 2022 to explore and evaluate strategic alternatives.  There is no assurance that such activities will result in any agreements or transactions that will enhance stockholder value or provide additional capital. The rate of acceptance of VAZALORE in the marketplace, together with the uncertainty with regards to completing a transaction or the ability to raise additional capital, creates substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date that the accompanying financial statements are issued.

The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations and the Company’s ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due.  The Company’s unaudited consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

The accompanying consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The December 31, 2021 consolidated balance sheet included herein was derived from audited consolidated financial statements as of that date. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously filed in its Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2022 and the results of operations for the three and nine months ended September 30, 2022 and 2021.

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, PLx Opco Inc. All significant intercompany balances and transactions have been eliminated within the unaudited consolidated financial statements.

Use of Estimates

The preparation of our unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying unaudited consolidated financial statements, estimates are used for, but not limited to, the fair value of warrant liability, the fair value of stock-based compensation, trade promotional allowances, and allowance for inventory obsolescence. Actual results could differ from those estimates.

The Company regularly reviews inventory quantities on hand and assesses the need for an allowance for obsolescence based on estimates of net realizable value. During the three and nine months ended September 30, 2022, the Company reserved $0.9 million and $1.2 million, respectively, for obsolete finished goods.

Revenue Recognition

The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenue upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. Deferred revenue results from cash receipts from or amounts billed to customers in advance of the transfer of control of the promised services to the customer and is recognized as performance obligations are satisfied. When sales commissions or other costs to obtain contracts with customers are considered incremental and recoverable, those costs are deferred and then amortized as selling and marketing expenses on a straight-line basis over an estimated period of benefit.

The Company began generating revenue in the U.S. from its sales of VAZALORE in 81 mg and 325 mg doses in the third quarter of 2021 and recognizes revenue, at a point in time, when control of a promised good is transferred to a customer in an amount that reflects consideration that the Company expects to be entitled to in exchange for that good. This occurs either when the finished goods are received by the customer or when a product is picked up by the customer or the customer’s carrier. The Company recognized total revenue from sales of VAZALORE of $0.4 million with 58% of net sales for the 81 mg dose and 42% of net sales for the 325 mg dose for the three months ended September 30, 2022. The Company recognized total revenue from sales of VAZALORE of $3.0 million with 70% of net sales for the 81 mg dose and 30% of net sales for the 325 mg dose for the nine months ended September 30, 2022. For the three and nine months ending September 30, 2021, total revenue from sales of VAZALORE was $6.6 million with 81 mg dose representing 67% of the net sales.

Nature of Goods and Services

The Company generates revenue from the sale of its VAZALORE products through a broad distribution platform that includes drugstores, mass merchandisers, grocery stores, and e-commerce channels, all of which sell its products to consumers. Finished goods products are typically shipped FOB destination and accordingly, the Company recognizes revenue upon delivery to the customer or pick-up by the customer’s carrier.

Satisfaction of Performance Obligations

The Company had no unsatisfied performance obligations or deferred revenue as of September 30, 2022.

Variable Consideration

Provisions for certain customer promotional programs, product returns and discounts to customers are accounted for as variable consideration and recorded as a reduction in sales, based on an estimate of future returns, and customer prompt payment discounts, redemption of coupons by consumers and trade promotional allowances paid to customers. These allowances cover extensive promotional activities, primarily comprised of cooperative advertising, slotting, coupons, periodic price reduction arrangements, and other in-store displays.

The reserves for sales returns and consumer and trade promotion obligations are established based on the Company’s best estimate of the amounts necessary to settle future and existing obligations for products sold as of the balance sheet date.  The Company uses trend experience and coupon redemption inputs to determine coupon reserve requirements and uses forecasted customer and sales organization inputs, and historical trend analysis for consumer brands to determine the reserves for other promotional activities and sales returns. The balance of reserves for sales returns and consumer and trade promotion obligations, reflected in the accompanying unaudited consolidated balance sheets in accounts payable and accrued liabilities, was $1.0 million and $1.3 million as of September 30, 2022 and December 31, 2021, respectively.

Advertising

Advertising costs are expensed as they are incurred. The Company incurred advertising costs of $1.4 million and $16.6 million during the three and nine months ended September 30, 2022, respectively, which are included in selling, marketing, and administrative (“SM&A”) expenses in the unaudited consolidated statements of operations. During the three and nine months ended September 30, 2021 the Company incurred advertising costs of $2.7 million.

Income (Loss) Per Share

In periods of net loss, basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company’s Series A convertible preferred stock (the “Series A Preferred Stock”) and Series B convertible preferred stock (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, collectively the “Preferred Stock”) contain non-forfeitable rights to dividends, and therefore are considered to be participating securities; in periods of net income, the calculation of basic earnings per share excludes from the numerator net income attributable to the Preferred Stock and excludes the impact of those shares from the denominator. 

In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potential dilutive common shares is anti-dilutive. For periods of net income, diluted earnings per share is computed using the more dilutive of the “two class method” or the “treasury method.” Dilutive earnings per share under the “two class method” is calculated by dividing net income available to common stockholders as adjusted for the participating impacts of the Preferred Stock, by the weighted-average number of shares outstanding plus the dilutive impact of all other potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method. Dilutive earnings per share under the “treasury method” is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method, and convertible preferred stock using the if-converted method.

Due to net losses, none of the participating securities nor potential dilutive securities had a dilutive impact during the three and nine months ended September 30, 2022 and 2021.

The following table sets forth the potential dilutive securities:

Recent Accounting Developments

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating ASU 2016-13 and its impact on its financial position, results of operations and cash flows.

In August 2020, the FASB issued ASU 2020-06 Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (subtopic 815-40) that provides new guidance on the accounting for convertible debt instruments and contracts in an entity’s own equity. The guidance simplifies the accounting for convertible instruments by reducing the various accounting models that can require the instrument to be separated into a debt component and equity component or derivative component. Additionally, the guidance eliminated certain settlement conditions previously required to be able to classify a derivative in equity. The new guidance is effective on a modified or full retrospective basis for fiscal years beginning after December 15, 2023, including interim periods with those fiscal years. The Company is currently evaluating ASU 2020-06 and its impact on its financial position, results of operations and cash flows.

Reclassifications

Certain reclassifications have been made to the prior-year financial statements to conform to the current-year presentation.  These reclassifications had no effect on the reported results of operations.

Subsequent Events

The Company’s management reviewed all material events through the date the unaudited consolidated financial statements were issued for subsequent event disclosure consideration.

NOTE 4. STOCKHOLDERS’ EQUITY

Common Stock

On March 5, 2021, the Company completed an underwritten public offering in which the Company issued and sold 7,875,000 shares of the Company’s common stock at a price to the public of $8.00 per share (the "Offering"). Gross proceeds of the Offering were $63.0 million before deducting underwriting discounts and commissions and other offering expenses payable by the Company and resulted in net proceeds of $59.0 million after deducting underwriting discounts and commissions and other offering expenses payable by the Company. The underwriters retained a customary 30-day overallotment option to purchase up to 1,181,250 shares of common stock at the public offering price, less underwriting discounts and commission. The overallotment option was exercised on March 16, 2021 for 1,049,700 shares with gross proceeds of $8.4 million and net proceeds of $7.9 million after deducting underwriting discounts and commissions and other offering expenses payable by the Company.

Convertible Preferred Stock

Series A Preferred Stock

In December 2018, the Company entered into a purchase agreement with certain accredited investors for the private placement of $15.0 million of Series A Preferred Stock pending stockholders' approval, which approval was subsequently obtained on February 19, 2019. Accordingly, the Company completed the private placement on February 20, 2019, raising $15.0 million through the issuance of 15,000 shares of Series A Preferred Stock.

The Series A Preferred Stock was issued at $1,000 per share and was initially convertible into common shares at a conversion price of $2.60 per share, subject to certain adjustments. Holders of the Series A Preferred Stock are entitled to an initial dividend rate of 8.0% per annum, which ended on February 26, 2021, the date of the FDA’s approval of the supplemental NDA of VAZALORE 325 mg and VAZALORE 81mg. The dividends were compounded quarterly and payable in cash or shares of Series A Preferred Stock at the Company’s option or, alternatively, the initial conversion price will be adjusted upon conversion to reflect the impact of the accrued dividends. The Series A Preferred Stock carries a liquidation preference equal to its stated value of $1,000 plus accrued and unpaid dividends.

In June 2021, the Series A Preferred Stock holders converted 2,358 shares of Series A Preferred Stock into shares of common stock pursuant to the original terms of the Series A Preferred Stock. Upon conversion, accrued dividends payable of $2.6 million were settled by adjusting the initial conversion price, resulting in a new conversion price of $2.22 per share. The revision of the conversion price resulted in both the recognition and write-off of a contingent beneficial conversion feature in the amount of $2.2 million which is reflected as a deemed dividend which was accounted for as an increase and decrease to additional-paid-in capital in equity due to the Company’s accumulated deficit position. As a result of the conversion, Series A Preferred Stock carrying value was reduced $2.6 million and the Company issued 1,064,517 shares of its common stock to such holders.

As of September 30, 2022, 12,642 shares of Series A Preferred Stock remain outstanding with a conversion price of $2.22 per share. The Series A Preferred Stock is classified as temporary equity due to the presence of certain contingent cash redemption features, and has a carrying value of $13.7 million as of September 30, 2022.

The Company recognized no dividends on the Series A Preferred Stock during the three and nine months ended September 30, 2022. The Company recognized $2,419,893 (or $0.11 per share) of total dividends on the Series A Preferred Stock (including the contingent beneficial conversion feature) during the nine months ended September 30, 2021 (none during the three months ended September 30, 2021). 

Series B Preferred Stock

In March 2020, the Company entered into a purchase agreement with certain accredited investors for the private placement of $8.0 million of Series B Preferred Stock pending stockholders' approval, which approval was subsequently obtained on May 15, 2020. Accordingly, the Company completed the private placement on May 15, 2020, raising $8.0 million through the issuance of 8,000 shares of Series B Preferred Stock. The Series B Preferred Stock was issued at $1,000 per share and is convertible into common shares at a conversion price of $3.10 per share, subject to certain adjustments. Holders of the Series B Preferred Stock are entitled to an initial dividend rate of 8.0% per annum, which ended on February 26, 2021, the date of the FDA’s approval of the supplemental NDA of VAZALORE 325 mg and VAZALORE 81mg. The dividends are compounded quarterly and payable in cash or shares of Series B Preferred Stock at the Company’s option or, alternatively, the initial conversion price will be adjusted upon conversion to reflect the impact of the accrued dividends. The Series B Preferred Stock carries a liquidation preference equal to its stated value of $1,000 plus accrued and unpaid dividends.

In June 2021, certain Series B Preferred Stockholders converted 5,636 shares of Series B Preferred Stock into shares of common stock pursuant to the original terms of the Series B Preferred Stock. Upon conversion, accrued dividends payable of $0.4 million were settled by adjusting the initial conversion price, resulting in a new conversion price of $2.91 per share for those holders (the conversion price for holders that did not convert shares remains at $3.10 per share). As a result of the conversion, Series B Preferred Stock carrying value was reduced by $5.8 million and the Company issued 1,935,483 shares of its common stock to such holders.

As of September 30, 2022, 2,364 shares of Series B Preferred Stock remain outstanding with a conversion price of $2.91 per share and 2,000 shares remain outstanding with a conversion price of $3.10 per share. The Series B Preferred Stock is classified as temporary equity due to the presence of certain contingent cash redemption features, and has a carrying value of $2.3 million as of September 30, 2022.

The Company recognized no dividends on the Series B Preferred Stock during the three and nine months ended September 30, 2022. The Company recognized $105,065 (or $0.005 per share) of total dividends on the Series B Preferred Stock during the nine months ended September 30, 2021 (none during the three months ended September 30, 2021). 

ATM Offering

On August 6, 2021, the Company entered into an Equity Distribution Agreement with JMP Securities LLC (“JMP”), as sales agent, and commenced an at-the-market offering (the “ATM Offering”) pursuant to which the Company may sell from time to time, at its option, shares of the Company’s common stock, having an aggregate offering price of up to $75.0 million. Sales of the common stock under the ATM Offering are made under the Company’s previously filed and currently effective shelf registration statement on Form S-3 and the sales agreement prospectus that forms a part of such registration statement. The aggregate compensation payable to JMP is 3.0% of the gross proceeds from each sale of the Company’s common stock. Under the ATM Offering, the Company sold 965,224 shares and raised gross proceeds of $1.1 million and net proceeds of $1.1 million during the three months ended September 30, 2022. During the nine months ended September 30, 2022, the Company sold 1,598,463 shares and raised gross proceeds of $2.5 million and net proceeds of $2.4 million under the ATM Offering. As of September 30, 2022, $64.4 million remained available under the ATM Offering. The Company sold 448,268 shares and raised gross proceeds of $8.0 million and net proceeds of $7.6 million during the three months ended September 30, 2021.

Warrants

In June 2017, the Company issued stock purchase warrants to purchase 2,646,091 shares of common stock at an exercise price of $7.50 per share. The warrants, exercisable beginning six months and one day after issuance, have a 10-year term and are liability classified due to the holders’ right to require the Company to repurchase the warrants for cash upon certain deferred fundamental transactions ( “June 2017 Warrants”). See Note 7 for the fair value measurement of the warrant liability.  

In connection with the entry into a term loan facility with Silicon Valley Bank (“SVB”) on August 9, 2017, which was paid in full on February 9, 2021, the Company issued to SVB and one of its affiliates stock purchase warrants to purchase an aggregate of 58,502 shares of the Company’s common stock at an exercise price of $6.41 per share (“SVB Warrants”). These warrants are immediately exercisable, have a 10-year term, contain a cashless exercise provision, and are classified in equity.

In November 2020, the Company issued warrants to purchase 5,230,910 shares of common stock which have an exercise price of $4.31 per share, contain a cashless exercise provision, will expire five years from the date of issuance and are equity classified (the “November 2020 Warrants”).

During the third quarter of 2021, holders of 20,364 of the June 2017 Warrants and 871,099 of the November 2020 Warrants exercised the warrants pursuant to their original terms. As a result of the warrants exercised, 20,364 of the warrants were exercised on a cashless basis and 871,099 of the warrants were exercised for $3.8 million in cash, additional-paid-in-capital was increased $4.1 million, and the Company issued an aggregate of 883,746 shares of common stock upon exercise of such warrants.

For the nine months ended September 30, 2021, holders of 188,590 of the June 2017 Warrants and 1,081,099 of the November 2020 Warrants exercised the warrants pursuant to their original terms. As a result of the warrants exercised, 152,226 of the warrants were exercised on a cashless basis and 1,117,463 of the warrants were exercised for $4.9 million in cash, additional-paid-in-capital was increased $7.1 million and the Company issued an aggregate of 1,192,421 shares of common stock upon exercise of such warrants.

The following is a summary of warrant activity for the nine months ended September 30, 2022:

Stock Options

The following is a summary of stock option activity for the nine months ended September 30, 2022:

On September 13, 2018, the Company’s stockholders approved the 2018 Incentive Plan (as amended from time to time, the “2018 Plan”). The 2018 Plan provides that the Company may grant equity interests to employees, consultants, and members of the Company's Board of Directors (the “Board” or “Board of Directors”) in the form of incentive and nonqualified stock options, restricted stock and restricted stock units, stock appreciation rights and various other forms of stock-based awards. On November 10, 2020, the Company held its 2020 annual meeting of stockholders at which the Company’s stockholders approved an amendment to the 2018 Plan, to increase the number of shares of the Company’s common stock issuable under the 2018 Plan by 1,750,000 shares. On November 9, 2021, the Company held its 2021 annual meeting of stockholders at which the Company’s stockholders approved an amendment to the 2018 Plan to increase the number of shares of the Company’s common stock issuable under the 2018 Plan by 4,000,000 shares (the “Plan Amendment”). The Board of Directors previously approved the Plan Amendment on August 3, 2021, subject to stockholder approval. There are 7,000,000 shares authorized for issuance pursuant to the 2018 Plan, of which 3,667,650 shares are available for issuance under the 2018 Plan.

Prior to the approval of the 2018 Plan, the Company granted options to employees, directors, advisors, and consultants from two former plans which were frozen upon the adoption of the 2018 Plan. The Company is no longer authorized to grant awards under either of the former plans.

The Company granted 810,000 options during the nine months ended September 30, 2022 with an aggregate fair value of $2.8 million calculated using the Black-Scholes model on the grant date. Variables used in the Black-Scholes model include: (1) discount rate ranging from 1.6% - 4.1%, (2) expected life of 6 years, (3) expected volatility of 82 – 84%, and (4) zero expected dividends. As of September 30, 2022, the Company had $6.6 million in unamortized expense related to unvested options which is expected to be expensed over a weighted average of 1.8 years.

During the three months ended September 30, 2022 and 2021, the Company recorded $1.1 million and $0.7 million, respectively, in total stock-based compensation expense related to the stock options. During the nine months ended September 30, 2022 and 2021, the Company recorded $3.2 million and $1.9 million, respectively, in total stock-based compensation expense related to the stock options Substantially all stock-based compensation expense is classified as SM&A expenses in the accompanying unaudited consolidated statements of operations.

NOTE 5. COMMITMENTS AND CONTINGENCIES

Lease Agreements

The Company leases office space under operating lease agreements, expiring in September 2023 and June 2024. The office leases require the Company to pay for maintenance, and insurance. Rental expense under these agreements was $0.03 million and $0.01 million for the three months ended September 30, 2022 and 2021, respectively, and was $0.09 million and $0.02 million for the nine months ended September 30, 2022 and 2021, respectively.

Operating lease right-of-use assets of $0.2 million are included in other assets in the Company's unaudited consolidated balance sheets. Operating lease liabilities are included in other current and non-current liabilities in the Company’s unaudited consolidated balance sheets.

All the Company’s existing leases as of September 30, 2022 are classified as operating leases and have a weighted average remaining lease term of 1.4 years. Certain of the Company’s existing leases have fair value renewal options, none of which the Company considers certain of being exercised or included in the minimum lease term. The discount rate used in the calculation of the Company’s lease liability ranges from 7.25% to 9.75%.

A maturity analysis of the Company’s operating leases follows:

Purchase Commitments

The Company has supply agreements with its contract manufacturer and packager for VAZALORE which contain minimum annual purchase commitments that started in 2021 and continue through 2025. The minimum annual purchase commitments are intended to ensure that manufactured product is available when required to enable the Company to meet its expected market demand for VAZALORE.

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:

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 September 30, 2022 include: (1) the Company stock price of $0.65, (2) the risk-free rate of 4.09%, (3) remaining expected life of 4.7 years, and (4) expected volatility of 84%.

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 September 30, 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 and nine months ended September 30, 2022:

The following table identifies the carrying amounts of such liabilities at September 30, 2022 and December 31, 2021:

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 and nine months ended September 30, 2022 and 2021.