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Fair Value Measurements

6 Months Ended

Jun. 30, 2022

3. Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, investments, receivables, accounts payable, and accrued liabilities that approximate fair value due to their relatively short maturities.

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities 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 related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds as Level 1. When quoted market prices are not available for the specific security, then the Company estimates fair value by using quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and market reference data. The Company classifies its corporate notes and U.S. government agency securities as Level 2. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability.

The following table sets forth the fair value of our financial assets and liabilities, allocated into Level 1, Level 2 and Level 3, that were measured on a recurring basis (in thousands):


	June 30, 2022
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	41,201	$	—	$	—	$	41,201
Total financial assets	$	41,201	$	—	$	—	$	41,201
Financial Liabilities:
Short-term warrants	$	—	$	—	$	9	$	9
Long-term warrants		—		—		487		487
Total financial liabilities	$	—	$	—	$	496	$	496

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	56,337	$	—	$	—	$	56,337
Total financial assets	$	56,337	$	—	$	—	$	56,337

Fair Value Measurement of the Warrant Liabilities

On April 1, 2022, the Company closed an underwritten public offering of 925,925 shares of common stock and accompanying warrants at a combined offering price of $10.80 per share, for $10 million in gross proceeds. The common stock was accompanied by warrants to purchase 925,925 shares of common stock at an exercise price of $10.80 per share, which are immediately exercisable and will expire 18 months from the date of issuance, or short-term warrants, and warrants to purchase 925,925 shares of common stock at an exercise price of $10.80 per share, which are immediately exercisable and will expire 5 years from the date of issuance, or long-term warrants.

The Company estimated the fair value for the warrants using a Black-Scholes model. The warrants are classified as Level 3 due to the use of unobservable inputs. The key inputs into the Black-Scholes model for the warrants were as follows:


	Fair Value Inputs for the Warrants
	April 1, 2022
Input	(Initial Measurement)			June 30, 2022
Short-term warrants:
Risk-free interest rate		2.07	%		2.81	%
Term in years	1.5 years			1.25
Expected volatility		48.3	%		55.0	%
Exercise price per share of common stock	$	10.80		$	10.80
Stock price	$	7.34		$	2.46

Long-term warrants:
Risk-free interest rate		2.53	%		2.99	%
Term in years	5 years			4.75 years
Expected volatility		48.3	%		55.0	%
Exercise price per share of common stock	$	10.80		$	10.80
Stock price	$	7.34		$	2.46

The estimated probability and timing of a fundamental transaction were also evaluated at both measurement dates to estimate the term and fair value of the warrants.

The expected volatility as of April 1, 2022 was derived using a blended volatility rate incorporating a calibrated volatility as of April 1, 2022 based on the gross proceeds at the time of issuance of the common stock and the accompanying warrants and volatilities based on comparable companies. The expected volatility as of June 30, 2022 was derived using a blended volatility rate incorporating the calibrated volatility as of April 1, 2022 based on the gross proceeds at the time of issuance of the common stock and the accompanying warrants, considering changes in Company specific historic volatility since issuance, and volatilities based on comparable companies' volatilities since issuance.

The fair value of the short-term and long-term warrants at initial measurement on April 1, 2022 was estimated to be $0.86 and $2.60 per common share issuable, respectively. The fair value of the short-term and long-term warrants at June 30, 2022 was estimated to be $0.01 and $0.53 per common share issuable, respectively. The following table presents the changes in the fair value of the Level 3 warrant liabilities (in thousands):


	Short-Term			Long-Term
	Warrants			Warrants			Total
Initial fair value measurement on April 1, 2022	$	793		$	2,409		$	3,202
Change in valuation		(784	)		(1,922	)		(2,706	)
Fair value as of June 30, 2022	$	9		$	487		$	496

- 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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