4. Fair Value Measurement

6 Months Ended

Jun. 30, 2022

Fair Value Disclosures [Abstract]

4. Fair Value Measurement

4. Fair Value Measurement

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values. There were no transfers between fair value measurement levels during the three and six months ended June 30, 2022.

The Company’s financial assets and liabilities measured at fair value at June 30, 2022 and December 31, 2021 are as follows (in thousands):

		Fair Value Measurements
		as of June 30, 2022
		(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Cash	$	41,251	$	-	$	-	$	41,251
Liabilities:
Convertible notes payable, at fair value	$	-	$	-	$	19,260	$	19,260
Warrant liabilities, at fair value		-		-		141		141
	$	-	$	-	$	19,401	$	19,401

		Fair Value Measurements
		as of December 31, 2021
		(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Cash	$	78,734	$	-	$	-	$	78,734
Liabilities:
Convertible notes payable, at fair value	$	-	$	-	$	18,920	$	18,920
Derivative liability, at fair value		1,174		-		-		1,174
Warrant liabilities, at fair value		-		-		424		424
	$	1,174	$	-	$	19,344	$	20,518

The fair value of the Company’s money market funds is based on quoted active market prices for the funds and is determined using the market approach.

The Company measures the 2021 Convertible Notes and warrant liabilities at fair value based on significant inputs not observable in the market, which causes them to be classified as a Level 3 measurement within the fair value hierarchy. These valuations use assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of the convertible notes payable and warrant liabilities related to updated assumptions and estimates are recognized within the Condensed Consolidated Statements of Operations and Comprehensive Loss.

The fair value of the convertible notes payable and warrant liabilities may change significantly as additional data is obtained, impacting the Company’s assumptions regarding probabilities of outcomes used to estimate the fair value of the liabilities. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods. 

Derivative Liability

The derivative liability represented the fair value of the “Shortfall Amount” provision provided for in the license agreement with iX Biopharma Europe Limited.

At issuance, the fair value of the embedded derivative was estimated by using a Monte Carlo simulation model. As of December 31, 2021, the Company determined it was probable it would settle the Shortfall Amount in cash and estimated the fair value based on a probability weighted market approach. The Company paid the Shortfall Amount of $1.2 million in cash in January 2022.

2021 Convertible Notes

The 2021 Convertible Notes are valued using a Monte Carlo simulation model. The following assumptions were used in determining the fair value of the 2021 Convertible Notes during the six months ended June 30, 2022 and the year ended December 31, 2021:

		Six Months Ended		Year Ended
		June 30, 2022		December 31, 2021
Risk-free interest rate		2.97%		0.90% - 0.95%
Volatility		105%		113% - 114%
Dividend yield		-%		-%
Contractual term (years)		2.4		3.0
Stock price	$	0.68	$	1.74 - 1.95

Warrant Liabilities

The common stock warrant liabilities were recorded at fair value using the Black-Scholes option pricing model.  

The following assumptions were used in determining the fair value of the warrant liabilities valued using the Black-Scholes option pricing model for the six months ended June 30, 2022 and 2021:

		Six Months Ended June 30,
		2022		2021
Risk-free interest rate		2.85%		0.37%
Volatility		98.60%		119.55%
Dividend yield		-%		-%
Expected term (years)		1.57		2.57
Weighted-average fair value	$	0.68	$	2.43

The following table is a reconciliation for the common stock warrant liabilities and convertible notes measured at fair value using Level 3 unobservable inputs (in thousands): 

		Warrant		Derivative		Convertible notes,
		liabilities		liability		at fair value
Balance as of December 31, 2020	$	1,062	$	-	$	-
Warrant liability reclassified to stockholders' equity		(1,155)		-		-
Issuance of convertible notes, at fair value		-		-		19,150
Issuance of derivative liability		-		805		-
Change in fair value measurement of derivative liability		-		369		-
Change in fair value measurement of convertible notes		-		-		(230)
Change in fair value measurement of warrant liability		517		-		-
Balance as of December 31, 2021	$	424	$	1,174	$	18,920
Settlement of derivative liability		-		(1,174)		-
Change in fair value measurement of convertible notes		-		-		340
Change in fair value measurement of warrant liability		(283)		-		-
Balance as of June 30, 2022	$	141	$	-	$	19,260

For the three and six months ended June 30, 2022 and the year ended December 31, 2021, the changes in fair value of the convertible notes, derivative liability and warrant liability primarily resulted from the volatility of the Company’s common stock.