FAIR VALUE MEASUREMENTS AND INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2023

FAIR VALUE MEASUREMENTS AND INVESTMENT SECURITIES

Fair Value of Financial Instruments

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

These inputs are classified into the following hierarchy:

Level 1 Inputs - quoted prices (unadjusted) for identical assets in active markets that the reporting entity has the ability to access at the measurement date;

Level 2 Inputs - inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly; and

Level 3 Inputs - unobservable inputs for the assets.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company believes the recorded values of its financial instruments, including cash and cash equivalents, accounts payable, and accrued liabilities approximate their fair values due to the short-term nature of these instruments.

Investment Securities

The following table presents the Company’s investment securities (including, if applicable, those classified on the Company’s balance sheet as cash equivalents) that are measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:


	Fair Value at March 31, 2023						Fair Value at December 31, 2022
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	14,029	$	—	$	—	$	20,024	$	—	$	—
Total cash equivalents	$	14,029	$	—	$	—	$	20,024	$	—	$	—

Money market funds are valued based on various observable inputs such as benchmark yields, reported trades, broker/dealer quotes, benchmark securities and bids.

Warrant Derivative Liability

The Company’s financial liabilities recorded at fair value on a recurring basis include the fair values of the warrant derivative liability. The Company estimates the fair value (Level 3) of the warrants using the Black-Scholes valuation technique, which utilizes assumptions including (i) the fair value of the underlying stock relative to the warrant exercise price at the valuation measurement date, (ii) volatility of the price of the underlying stock, (iii) the expected term of the warrants, and (iv) risk-free interest rates.

The fair value of the warrant derivative liability is classified as current liability in the accompanying condensed consolidated balance sheets. This liability is classified as current liability on the balance sheet because the exercisability of such warrants is outside of the Company’s control, and the Company does not have the unconditional right to defer settlement beyond 12 months.

The fair value of the warrants has been estimated with the following weighted-average assumptions, including the most sensitive input, volatility:


	March 31, 2023	December 31, 2022
Risk-free interest rate	3.80%	4.1%
Volatility	109.00%	102.00%
Expected term (years)	3.38	3.63

The following table provides the warrant derivative liability reported at fair value and measured on a recurring basis:


	Fair Value at March 31, 2023						Fair Value at December 31, 2022
(in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Warrant derivative liability	$	—	$	—	$	235	$	—	$	—	$	809

The ending balance of the Level 3 financial instruments presented above represents the Company’s best estimate of valuation and may not be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.

- 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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