Under what conditions are Crab N Spice's financial instruments considered Level 3?

According to the 2024 FDD, Crab N Spice categorizes its financial instruments into three levels based on the observability of inputs used in valuation techniques. Level 3 represents the lowest priority, relying on unobservable inputs and market assumptions.

Specifically, Crab N Spice considers financial instruments as Level 3 when their fair values are determined using pricing models, discounted cash flows, or similar techniques. A key condition for this classification is that at least one significant model assumption or input is unobservable. This means that the valuation relies heavily on the company's own assumptions rather than market data.

For a prospective franchisee, this is important to understand because it reflects the degree of subjectivity involved in valuing certain financial instruments. While the FDD does not specify which particular financial instruments, if any, are classified as Level 3, it's essential to recognize that their valuation involves a higher degree of estimation and may be more susceptible to changes based on management's assumptions. This contrasts with Level 1 instruments, which are based on readily available market prices and are thus considered more objective.