Note 3 - Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

3. Fair Value Measurements

The Company’s financial instruments consist principally of cash and cash equivalents, prepaid expenses, accounts payable, accrued liabilities, and a warrant liability. These financial instruments are reported on the Company’s consolidated balance sheets at amounts that approximate current fair value.  The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

	Fair Value Measurements at
	March 31, 2022
	(unaudited)
	Total		Level 1		Level 2		Level 3
Assets
Money market funds	$	49,223	$	49,223	$	—	$	—
Liabilities
Warrant liability	$	8,772	$	—	$	—	$	8,772

	Fair Value Measurements at
	December 31, 2021
	Total		Level 1		Level 2		Level 3
Assets
Money market funds	$	49,217	$	49,217	$	—	$	—

Warrant liability

The Company’s warrant liability contains unobservable inputs that reflected the Company’s own assumptions in which there is little, if any, market activity at the measurement date. Accordingly, the Company’s warrant liability is measured at fair value on a recurring basis using unobservable inputs at each reporting period. The warrant liability is classified as a Level 3 input. This liability is shown as a non-current liability on the balance sheet.

The fair value of the warrants is estimated using the Black-Scholes option-pricing model. For warrants that do not have a fixed termination date, the expected terms represent the periods that the warrants are expected to be outstanding based upon managements' estimate. The risk-free interest rates are based on the U.S. Constant Maturity treasury curve commensurate with the time outstanding. The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future. The expected volatilities are estimated by our historical volatility over a similar time period.

The assumptions used in calculating the estimated fair value at the end of the reporting period represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair value could be materially different.

On January 5, 2022, the Company entered into an investment agreement (the “Investment Agreement”) with Eshelman Ventures, LLC a related party and, solely for purposes of Article IV and Article V of the Investment Agreement, Dr. Eshelman relating to the issuance of pre-funded warrants (the "January 2022 Warrants") to purchase up to 4,545,455 shares of the Company’s common stock, par value $0.0001 per share, at a price of $2.20 per share, which was the consolidated closing bid price of the Company’s common stock on Nasdaq on December 31, 2021, for an aggregate purchase price of $10 million.  On the issuance date, the January 2022 Warrants were valued at the aggregate purchase price of $10 million and the Company received $9.9 million in net proceeds. As of March 31, 2022, the 4,545,455 January 2022 Warrants are exercisable upon shareholder approval, which was obtained on April 1, 2022 (see Note 10), thereafter the January 2022 Warrants are exercisable at any time until all of the January 2022 Warrants are exercised in full and have an exercise price of $0.0001.

At March 31, 2022, the Company estimated the fair values of the financial liability arising from these warrants using the following assumptions:
 

Parameter	January 2022 Warrants
Expected term (in years)		0.25
Expected volatility		112	%
Risk-free interest rate		1.46	%
Expected dividend yield		0.00	%
Fair value of common share	$	1.93
Exercise price	$	0.0001

The warrant liability will increase or decrease each reporting period based on fluctuations of the fair value of the underlying common stock until such time this financial liability is no longer considered a derivative liability, or the earlier of settlement and expiration of warrants. The change in the fair value of the warrant liability for each presented period is recognized as a component of other income (expense), net in the consolidated statements of operations.

The following table provides a summary of changes in the estimated fair values of the Company’s Level 3 financial liabilities, which are measured at fair value on a recurring basis using unobservable inputs (in thousands):

	January 2022 Warrants
Balance at January 1, 2022	$	—
Issuance of warrants		10,000
Change in fair value		(1,228	)
Balance at March 31, 2022	$	8,772

Fair Value Hierarchy Transfers

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the periods ended March 31, 2022 or December 31, 2021.