What are Level 3 inputs for Crab N Spice's financial instruments?

According to the 2024 FDD, Level 3 inputs for financial instruments at Crab N Spice are defined as unobservable inputs used for determining fair values. Specifically, financial instruments are classified as Level 3 when their fair values are derived from pricing models, discounted cash flows, or similar techniques, and at least one significant assumption or input within these models is unobservable.

In simpler terms, this means that if Crab N Spice uses its own assumptions rather than relying on market data to value certain financial assets or liabilities, those items are categorized as Level 3. This often occurs when there isn't an active market for the particular asset or liability, requiring the company to estimate its value based on internal factors.

For a prospective franchisee, understanding Level 3 inputs is crucial because it reflects the degree of estimation and judgment involved in Crab N Spice's financial reporting. While the FDD does not specify which particular assets or liabilities are classified as Level 3, it's important to recognize that these valuations are more subjective and carry a higher degree of uncertainty compared to Level 1 or Level 2 valuations, which rely on observable market data. A potential franchisee may want to inquire about which specific financial instruments are categorized as Level 3 and what unobservable inputs are used to determine their fair value to better assess the financial health and reporting practices of Crab N Spice.