Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2022

Fair Value of Financial Assets and Liabilities

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

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 used to determine such fair values:


	Fair Value Measurements as of September 30, 2022 Using:
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents—money market funds	$	—	$	2,516	$	—	$	2,516
	$	—	$	2,516	$	—	$	2,516
Liabilities:
Embedded derivative liability	$	—	$	—	$	310	$	310
	$	—	$	—	$	310	$	310


	Fair Value Measurements as of December 31, 2021 Using:
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents—money market funds	$	20,000	$	27,793	$	—	$	47,793
	$	20,000	$	27,793	$	—	$	47,793
Liabilities:
Embedded derivative liability	$	—	$	—	$	821	$	821
	$	—	$	—	$	821	$	821

The Company’s cash equivalents consisted of money market funds invested in U.S. Treasury securities. The money market funds were valued based on reported market pricing for the identical assets, which represents a Level 1 measurement, or by using inputs observable in active markets for similar securities, which represents a Level 2 measurement.

The following table provides a roll-forward of the aggregate fair values financial instruments for which fair values are determined using Level 3 inputs:


(in thousands)	Embedded Derivative Liability		Warrant Liability		Total
Balance as of December 31, 2021	$	821	$	—	$	821
Issuance of warrants (see Note 10)	—		41,249		41,249
Change in fair value	(511)		(2,495)		(3,006)
Reclassification of warrant liability to permanent equity	—		(38,754)		(38,754)
Balance as of September 30, 2022	$	310	$	—	$	310

Embedded Derivative Liability— The fair value of the embedded derivative liability recognized in connection with the Company’s loan agreement with Hercules (see Note 7), which is associated with additional fees due to Hercules upon events of default, was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of this embedded derivative liability, which is reported within other non-current liabilities on the condensed consolidated balance sheets, is estimated by the Company at each reporting date based, in part, on the results of third party valuations, which are prepared based on a discounted cash flow model that considers the timing and probability of occurrence of a redemption upon an event of default, the potential amount of prepayment fees or contingent interest upon an event of default and the Company’s risk-adjusted discount rate of 14%.

Warrant Liability— As discussed in Note 10, on July 6, 2022, the Company issued common stock, pre-funded warrants and warrants for the purchase of its common stock in a private placement transaction. The warrants have an exercise price of $1.095 per share and expire five years from the original issuance date. As of July 6, 2022, due to the shortfall in authorized and

available common shares, the warrants did not meet the criteria required for permanent equity accounting. As a result, the Company allocated a portion of the offering proceeds to a warrant liability at its fair value. The fair value was calculated using the Black-Scholes option valuation model using significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. These assumptions are shown in the table below. On September 1, 2022, the Company’s shareholders approved an increase in the Company’s authorized shares. Upon shareholder approval of the increase to the Company’s authorized shares, the warrants met all criteria required for permanent equity accounting and, accordingly, the Company remeasured the fair value of the warrants through earnings, including within other expense, net, and reclassified the fair value of the liability to additional paid-in capital.


	July 6, 2022			September 1, 2022
Risk-free interest rate	2.96		%	3.29		%
Expected term (in years)	5.0 years			4.9 years
Expected volatility	97.3		%	97.5		%
Expected dividend yield	—		%	—		%
Fair value of warrant liability	$	41,249		$	38,754

- 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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