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Note 3 - Fair Value Measurements

6 Months Ended

Jun. 30, 2023

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*
		*June 30, 2023*
		(unaudited)
		*Total*				*Level 1*				*Level 2*				*Level 3*
Assets
Money market funds		$	17,596			$	17,596			$	—			$	—
Liabilities
Warrant liability		$	30,496			$	—			$	—			$	30,496

		*Fair Value Measurements at*
		*December 31, 2022*
		*Total*				*Level 1*				*Level 2*				*Level 3*
Assets
Money market funds		$	52,905			$	52,905			$	—			$	—
Liabilities
Warrant liability		$	26,881			$	—			$	—			$	26,881

Warrant Liability

The Company’s warrant liability for the October 2022 warrants which was classified as a derivative liability on the consolidated balance sheet as of June 30, 2023 and December 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. Refer to Note 2.

The fair value of the warrants was estimated using the Black-Scholes option-pricing model. As of December 31, 2022, the fair value of the common share has been adjusted for a discount for lack of marketability due to the uncertainty and timing of obtaining shareholder approval to increase the Company's authorized number of common shares. 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.

At December 31, 2022 and June 30, 2023, the Company estimated the fair values of the financial liability arising from the October 2022 Warrants using the following weighted average assumptions:

		*October 2022 Warrants*
		*June 30, 2023*				*December 31, 2022*
Expected term (in years)			1.4				1.9
Expected volatility			82.9	%			49.9	%
Risk-free interest rate			5.14	%			4.48	%
Expected dividend yield			0.00	%			0.00	%
Fair value of common share		$	1.26			$	1.25
Exercise price		$	0.7949			$	0.7949

The following table provides a summary of changes in the estimated fair value of the Company’s warrant liability (in thousands):

		*October 2022 Warrants*
Balance at December 31, 2022		$	26,881
Change in fair value			33,207
Balance at March 31, 2023			60,088
Change in fair value			(29,592	)
Balance at June 30, 2023		$	30,496

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 June 30, 2023 or December 31, 2022.

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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