Cingulate Inc. Fair Value Disclosure
(3) Fair Value of Assets and Liabilities
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair values based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1—Inputs represent unadjusted quoted prices for identical assets exchanged in active markets.
Level 2—Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets exchanged in active or inactive markets; quoted prices for identical assets exchanged in inactive markets; other inputs that are considered in fair value determinations of the assets, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3—Inputs include unobservable inputs used in the measurement of assets. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or related observable inputs that can be corroborated at the measurement date. Measurements of certain investments carried at fair value are based primarily on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets.
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s policy is to recognize significant transfers between the levels at the actual date of the event. For the year ended December 31, 2021 and 2020, there were no transfers in or out of Levels 1, 2, or 3.
The Company has no Level 2 or Level 3 investments. The cash and short-term investments held by the Company are categorized as Level 1 investments as quoted market prices are readily available for these investments.
Assets measured and carried at fair value on a recurring basis are summarized below:
| December 31, 2021 | ||||||||||||||||||||||||
| Amortized | Gross Unrealized | Gross Unrealized | Fair Value of Current | Fair Value of Non-Current | Fair Value of Total | |||||||||||||||||||
| Cost | Gains | Losses | Assets | Assets | Assets | |||||||||||||||||||
| Equity investments | ||||||||||||||||||||||||
| Mutual funds | $ | 933 | $ | $ | $ | $ | $ | 933 | ||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| Amortized | Gross Unrealized | Gross Unrealized | Fair Value of Current | Fair Value of Non-Current | Fair Value of Total | |||||||||||||||||||
| Cost | Gains | Losses | Assets | Assets | Assets | |||||||||||||||||||
| Equity investments | ||||||||||||||||||||||||
| Mutual Funds | $ | 920 | $ | 13 | $ | $ | 933 | $ | $ | 933 | ||||||||||||||
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About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.