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Fair Value Measurements

9 Months Ended

Sep. 30, 2022

3. Fair Value Measurements

The Company measures the following financial assets at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during any of the periods presented. The following tables set forth the Company’s financial assets and liabilities carried at fair value categorized using the lowest level of input applicable to each financial instrument as of September 30, 2022 and December 31, 2021 (in thousands):

	Balance at September 30, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities:
Derivative warrant liability	$	186	$	—	$	186	$	—
Derivative liability		1,792		—		—		1,792
	$	1,978	$	—	$	186	$	1,792

	Balance at December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
US Treasury securities		9,996		9,996		—		—
	$	9,996	$	9,996	$	—	$	—

The Company’s cash equivalents and available-for-sale marketable securities were comprised of government securities. Securities are classified as cash equivalents when the original maturities are within 90 days of the purchase dates. The Company also maintains money market accounts classified as restricted cash for $1.1 million at September 30, 2022 and $1.6 million at December 31, 2021 (Note 4).

The Company estimated the fair value of the derivative warrant liability (Note 7) using the Black-Scholes Model, which uses multiple inputs including the Company’s stock price, the exercise price of the warrant, volatility of the Company’s stock price, the risk-free interest rate and the expected term of the warrant.

The Company has a single compound derivative related to its Term Loan Agreement with CRG (the “Term Loan Agreement”) (Note 6), which is required to be re-measured at fair value on a quarterly basis. The fair value of the derivative at September 30, 2022 is $1.8 million and is classified as a non-current liability on the balance sheet at September 30, 2022 to match the classification of the related Term Loan Agreement (Note 6). As of December 31, 2021, the Company had no derivative liability.

The estimated fair value of the derivative at September 30, 2022 was determined using a probability-weighted discounted cash flow model that includes contingent interest payments under the following scenarios:

		Probability
4% contingent interest beginning in Q1 2023			50	%

The following table provides a roll-forward of the fair value of the derivative liability (in thousands):

Balance at December 31, 2021	$	—
Change in fair value of derivative liability		1,675
Balance at June 30, 2022		1,675
Change in fair value of derivative liability		117
Balance at September 30, 2022	$	1,792

- 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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