Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2023

Fair Value of Financial Instruments

Fair Value of Financial Instruments

3. Fair Value of Financial Instruments

The carrying amount of certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses and other payables approximate fair value due to their short maturities.

As a basis for determining the fair value of certain of the Company’s financial instruments, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level I – Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level II – Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level III – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and

consider factors specific to the asset or liability. The Company’s cash equivalents are classified within Level I of the fair value hierarchy.

The Company’s short-term investments consist of Level I securities which are comprised of highly liquid money market funds. The estimated fair value of the short-term investments was based on quoted market prices. There were no transfers between fair value hierarchy levels during the quarters ended March 31, 2023 or 2022.

In January 2020, the Company issued warrants in connection with the public offering of common stock (the “January 2020 Warrants”). Pursuant to the terms of these warrants, the warrants were not considered indexed to the Company’s own stock and therefore are required to be measured at fair value and reported as a liability in the consolidated balance sheets. Additionally, upon the closing of the January 2020 offering, 479,595 outstanding warrants were evaluated for whether they were modified for accounting purposes, and it was determined that they were required to be classified as a liability. The fair value of the warrant liability is based on the Monte Carlo methodology. The Company is required to revalue the warrants at each reporting date with any changes in fair value recorded in our consolidated statements of operations and comprehensive loss. The valuation of the warrants is classified under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. In order to calculate the fair value of the warrants, certain assumptions were made, including the selling price or fair market value of the underlying common stock, risk-free interest rate, volatility, and remaining life. Changes to the assumptions could cause significant adjustments to valuation. The Company estimated a volatility factor utilizing its own data. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.

The following table presents quantitative information about the inputs used in the valuation for the Company’s fair value measurement of the warrant liability classified as Level 3:

	March 31, 2023			December 31, 2022
Current stock price	$	0.87		$	0.81
Estimated volatility of future stock price		60.81	%		80.94	%
Risk free interest rate		4.91	%		4.75	%
Contractual term		0.66	years		0.90	years

As of March 31, 2023, there were a total of 9,357 warrants outstanding that are subject to quarterly revaluation with a fair value of $0.

The fair value of financial instruments measured on a recurring basis is as follows:

	As of March 31, 2023
Description	Total		Level 1		Level 2	Level 3
Assets:
Short-term investments	$	20,815,405	$	20,815,405	—		—
Liabilities:
Contingent consideration	$	11,234,114		—	—	$	11,234,114
Warrant liability		—		—	—		—

	As of December 31, 2022
Description	Total			Level 1	Level 2	Level 3
Assets:
Short-term investments	$	35,837,309	$	35,837,309	—		—
Liabilities:
Contingent consideration		12,224,614		—	—		12,224,614
Warrant liability		—		—	—		—

The following tables summarize the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs for the three months ended March 31, 2023 and 2022:

	Elusys
	Contingent
	Consideration
Balance at December 31, 2022	$	12,224,614
Change in fair value		(990,500)
Balance at March 31, 2023	$	11,234,114

	Pelican
	Contingent		Warrant
	Consideration		Liability
Balance at December 31, 2021	$	3,342,515	$	11,020
Change in fair value		(21,000)		(7,779)
Balance at March 31, 2022	$	3,321,515	$	3,241

The change in the fair value of the contingent consideration of $1.0 million and $0.02 million for the three months ended March 31, 2023 and 2022, respectively, was primarily due to the change in timing and amount of the contract deferred consideration. Adjustments associated with the change in fair value of contingent consideration are included in the Company’s consolidated statements of operations and comprehensive loss.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements of contingent consideration classified as Level 3 as of March 31, 2023 and December 31, 2022:

	As of March 31, 2023
	Valuation	Significant		Weighted Average
	Methodology	Unobservable Input		(range, if applicable)
Elusys revenue earn-out	Discounted cash flow analysis	Timing of expected payments		2025-2036
		Discount rate		24.5%
		Future revenue projections	$	325.9 million
Elusys deferred contract consideration	Discounted cash flow analysis	Timing of expected payments		2023
		Discount rate		15.5%
		Future revenue projections	$	6.6 million

	As of December 31, 2022
	Valuation	Significant		Weighted Average
	Methodology	Unobservable Input		(range, if applicable)
Elusys revenue earn-out	Discounted cash flow analysis	Timing of expected payments		2025-2036
		Discount rate		24.5%
		Future revenue projections	$	325.9 million
Elusys deferred contract consideration	Discounted cash flow analysis	Timing of expected payments		2023
		Discount rate		15.5%
		Future revenue projections	$	7.6 million

The Company records certain non-financial assets on a non-recurring basis, including goodwill and in-process R&D. This analysis requires significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post-launch cash flows and a risk-adjusted weighted average cost of capital.