SUNation Energy, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

3 Months Ended

Mar. 31, 2024

NOTE 13 – FAIR VALUE MEASUREMENTS

The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.

Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 are summarized below.



	March 31, 2024

	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	1,720,912	$	—	$	—	$	1,720,912
Subtotal		1,720,912		—		—		1,720,912

Liabilities:
Contingent value rights		—		—		(1,314,987)		(1,314,987)
Warrant liability		—		—		(6,863,627)		(6,863,627)
Earnout consideration		—		—		(3,150,000)		(3,150,000)
Subtotal		—		—		(11,328,614)		(11,328,614)


Total	$	1,720,912	$	—	$	(11,328,614)	$	(9,607,702)



	December 31, 2023

	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	1,799,357	$	—	$	—	$	1,799,357
Subtotal		1,799,357		—		—		1,799,357

Current Liabilities:
Contingent value rights		—		—		(1,691,072)		(1,691,072)
Earnout consideration		—		—		(3,500,000)		(3,500,000)
Subtotal		—		—		(5,191,072)		(5,191,072)

Total	$	1,799,357	$	—	$	(5,191,072)	$	(3,391,715)

The estimated fair value of the CVRs as of March 31, 2024 and December 31, 2023 was $1,314,987 and $1,691,072, respectively, as noted above. The Company recorded a $376,085 gain on the fair value remeasurement of the CVRs during the three months ended March 31, 2024 and a $250,000 loss on the fair value of the remeasurement of the CVRs during the three months ended March 31, 2023.

The estimated fair value of earnout consideration related to the acquisition of SUNation as of March 31, 2024 and December 31, 2023 was $3,150,000 and $3,500,000, respectively. Included in the $3,150,000 at March 31, 2024 is $2,500,000 related to the first earnout period recorded in current liabilities and $650,000 related to the second earnout period, which is recorded in long-term liabilities. The estimated fair value is considered a Level 3 measurement. In order to update the fair value of the earnout consideration, the Company utilized a Monte Carlo simulation, which included the following significant assumptions: the expected probability and timing of achievement of milestone events. As a result of the fair value remeasurement, the Company recorded a remeasurement gain of $350,000 and loss of $825,000 during the three months ended March 31, 2024 and 2023.

The estimated fair value of the PIPE warrants was $6,863,627 and $0 as of March 31, 2024 and December 31, 2023, respectively. As noted in Note 11, the warrants were classified as a liability during the first quarter of 2024. The estimated fair value is considered a Level 3 measurement and the fair value of the warrant liability is determined using a Monte Carlo simulation to model future movement of the stock price. As a result of the fair value remeasurement, the Company recorded a remeasurement gain of $3,728,593 and $0 during the three months ended March 31, 2024 and 2023.

The fair value remeasurement related to the SUNation earnout was recorded within operating expenses. The other fair value remeasurements noted above were recorded within other income (expense) in the condensed consolidated statements of operations.

We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were no transfers between levels during the three months ended March 31, 2024.

- 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.

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