Note 3 - Fair Value Measurements

9 Months Ended

Sep. 30, 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
	September 30, 2022
	(unaudited)
	Total		Level 1		Level 2		Level 3
Assets
Money market funds	$	25,924	$	25,924	$	—	$	—

	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 which was classified as a derivative liability on the consolidated balance sheet as of March 31, 2022 contained unobservable inputs that reflected the Company’s own assumptions in which there was little, if any, market activity at the measurement date and was classified as a Level 3 input. Accordingly, the Company’s warrant liability was measured at fair value on a recurring basis using unobservable inputs at each reporting period. On April 1, 2022, the warrants were exercised and converted to equity.  The warrants were reclassified to additional paid-in-capital at their fair value on the warrant exercise date of April 1, 2022, with the change in estimated fair value during the period being recognized as a component of other income (expense), net in our statement of operations.

The fair value of the warrants was 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 and on the warrant exercise date represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair value could be materially different.

In January 2022, the Company entered into an investment agreement (the “Investment Agreement”) with Eshelman Ventures, LLC (“Eshelman Ventures”), a related party and, solely for purposes of Article IV and Article V of the Investment Agreement, Dr. Eshelman. Pursuant to the Investment Agreement, Eshelman Ventures agreed to purchase pre-funded warrants (the "January 2022 Warrants") of 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 were exercisable upon shareholder approval, which was obtained on April 1, 2022; thereafter, the January 2022 Warrants were exercisable at any time until all of the January 2022 Warrants were exercised in full and have an exercise price of $0.0001.

On April 1, 2022, the Company held a Special Meeting of Stockholders at which the Company’s stockholders voted on the proposal and approved for the purposes of Nasdaq Listing Rule 5635(b), of the issuance of up to 4,545,455 shares of the Company’s common stock, par value $0.0001 per share, in the aggregate (subject to adjustment under certain circumstances), pursuant to the January 2022 Warrants issued to Eshelman Ventures, LLC. On April 1, 2022, Eshelman Ventures, after obtaining the requisite approval from the Company’s stockholders at the Special Meeting, exercised the January 2022 Warrants in full and the Company issued 4,545,455 shares of Common Stock to Eshelman Ventures.

At March 31, 2022 and April 1, 2022 (the warrant exercise date), the Company estimated the fair values of the financial liability arising from the January 2022 Warrants using the following assumptions:

		March 31, 2022			April 1, 2022
Expected term (in years)		0.25			0.25
Expected volatility		112	%		112	%
Risk-free interest rate		1.46	%		1.46	%
Expected dividend yield		0.00	%		0.00	%
Fair value of common share	$	1.93		$	1.89
Exercise price	$	0.0001		$	0.0001

The following table provides a summary of changes in the estimated fair value of the Company’s warrant liability (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
Change in fair value		(182)
Reclass to additional paid-in-capital upon exercise		(8,590)
Balance at September 30, 2022	$	—

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 September 30, 2022 or December 31, 2021.