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Fair Value Measurements
9 Months Ended
Sep. 30, 2022
Fair Value Measurements  
Fair Value Measurements

4. Fair Value Measurements

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on

three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

Level 1 – Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.
Level 2 – Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable.
Level 3 – Unobservable inputs that reflect the reporting entity’s own assumptions.

The following tables set forth the fair value of the Company’s financial instruments that were measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021.

September 30, 2022

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Warrant liability

$

$

$

$

Streeterville note

7,167

7,167

Total fair value

$

$

$

7,167

$

7,167

December 31, 2021

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Warrant liability

$

$

$

1

$

1

Streeterville note

$

$

$

7,818

$

7,818

Total fair value

$

$

$

7,819

$

7,819

The change in the estimated fair value of Level 3 liabilities is summarized below:

Nine Months Ended

September 30, 2022

(in thousands)

Warrant liability

    

Streeterville note

Beginning fair value of Level 3 liability

  

$

1

  

$

7,818

Additions

Exercises

Change in fair value

  

 

(1)

(651)

Ending fair value of Level 3 liability

  

$

  

$

7,167

Warrant Liability

The warrants associated with the Level 3 warrant liability is the October 2018 Underwriter Warrants, which, at September 30, 2022, were valued at zero in the Company’s unaudited condensed consolidated balance sheet. The warrants associated with the Level 3 warrant liability were the November 2016 Series A Warrants and the October 2018 Underwriter Warrants, which, at December 31, 2021, were valued at zero and $1,000, respectively, in the Company’s unaudited condensed consolidated balance sheet.

The October 2018 Underwriter Warrants

The October 2018 Underwriter Warrants valuation of zero at September 30, 2022 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.16, a strike price of $158 per share, an expected term of 1.01 years, volatility of 307% and a risk-free discount rate of 4.05%. The October 2018 Underwriter Warrants valuation of $1,000 at December 31, 2021 was computed using the Black-Scholes-Merton pricing model using a stock price of $1.04, a strike price of $158 per share, an expected term of 1.75 years, volatility of 180% and a risk-free discount rate of 0.65%. The change in the fair value of the warrants for the three and nine months ended September 30, 2022 was $1,000.

The November 2016 Series A Warrants

Series A Warrants has expired on May 29, 2022. The Series A warrant valuation of zero at December 31, 2021 was computed using the Black-Scholes-Merton pricing model using a stock price of $1.04, a strike price of $2,363 per share, an expected term of 0.41 years, volatility of 89% and a risk-free discount rate of 0.19%. The change in fair value of the warrants for the three and nine months ended September 30, 2022 was zero.

The May 2020 Series 3 Warrants

There were no outstanding May 2020 Series 3 Warrants as of September 30, 2022 and December 31, 2021. For the year ended December 31, 2021, certain holders of the Series 3 Warrants agreed to exercise total of 206,915 shares for a 1-for-1 exchange of common shares in an Alternate Cashless Exercise. The aggregate fair value of the common stock issued upon the exercise of the Series 3 Warrants as of the exercise date was $1.8 million.

Streeterville Note

The fair value of the Streeterville Note at January 13, 2021, date of issuance and as of September 30, 2022 amounting to $6.0 million and $7.2 million, respectively, were based on the weighted average discounted expected future cash flows representing the terms of the note, discounting them to their present value equivalents. This was classified as Level 3 fair values in the fair value hierarchy due to the use of unobservable inputs, including the Company’s own credit risk.

The Company determined and performed the valuations of the Streeterville Note with the assistance of an independent valuation service provider. On a quarterly basis, the Company considers the main Level 3 inputs used derived as follows:

Discount rate for the Streeterville note which was determined using a comparison of various effective yields on bonds as of the valuation date
Market indications for vouchers, which affect the Return Bonus from the sale of Tropical Disease Priority Review Voucher (“TDPRV”)
Weighted probability of cash outflows which was estimated based on the entity's knowledge of the business and how the current economic environment is likely to impact the timing of the cash outflows, attributed to the different repayment features of the note

The following table summarizes the quantitative information about the significant unobservable inputs used in Level 3 fair value measurement:

Range of Inputs

(probability-weighted average)

Relationship of unobservable inputs

Unobservable Inputs

2022

2021

to fair value

Risk Adjusted Discount Rate

12.81%-27.34% (27.34%)

6.78% - 21.31% (21.31%)

If discount rate is adjusted to total of additional 100 basis points (bps), fair value would have decreased by $262,000.

If discount rate is adjusted to total deduction of 100 bps, fair value would have increased by $262,000.

Sales Proceeds: Amount of comparable TDPRV

$67.5 million to $350 million ($100 million)

$67.5 million to $350.0 million ($100.0 million)

If expected cash flows by Management considered the lowest amount of market indications for vouchers, FV would have decreased by $825,000.

If expected cash flows by Management considered the highest amount of market indications for vouchers, FV would have increased by $6.35 million.

Range of Probability for Timing of Cash Flows:
Variations of the terms and conditions of the timing of cash flows, including settlement of the note principal, interest, penalties, and acceleration clause.

0.39%-41.88%

0.35%-46.06%

If expected cash flows by Management considered the Scenario with the least amount of indicated value, FV would have decreased by $705,000.

If expected cash flows by Management considered the scenario with the greatest amount of indicated value, FV would have increased by $2.76 million.

Fair Value Option

Beginning January 1, 2021, the Company elected to apply the FVO accounting to selected financial instruments to align the measurement attributes of those instruments under U.S. GAAP and to simplify the accounting model applied to those financial instruments. The Company elected to apply FVO accounting to the entire class of hybrid instruments, including structured notes, of which there are assessed embedded derivatives that would be eligible for bifurcation. Changes in the fair value of FVO assets and liabilities as well as the mark-to-market adjustment on the entire class of hybrid instruments, including derivatives and the net realized gains or losses on these instruments are reported in the change in fair value of financial instruments in the unaudited condensed consolidated statements of operations.

As of September 30, 2022, the Company did not note any fair value movement on FVO liabilities attributable to any instrument-specific credit risk, which is recorded in other comprehensive loss.

Hybrid Instruments

The Company elected to apply FVO accounting to all of the hybrid instruments issued, including structured notes. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments. The Company determined and performed the valuations of the hybrid instruments with the assistance of an independent valuation service provider. The valuation methodology utilized is consistent with the income approach for estimating the fair value of the interest-bearing portion of the instrument and the related derivatives. Cash flows of the hybrid instruments in their entirety, including the embedded derivatives, are discounted at an appropriate rate for the applicable duration of the instrument. Interest on the interest-bearing portion of the instrument that is held to maturity is aggregated as gain (loss) on instruments designated at fair value and related derivatives in the change in fair value of

financial instruments and hybrid instruments designated at FVO of the unaudited condensed consolidated statements of operations.

The following table summarizes the fair value and unpaid principal balance for items the Company accounts for under FVO:

(in thousands)

Fair value

Unpaid Principal Balance

Fair Value Over (Under) Unpaid Principal Balance

At September 30, 2022

Hybrid Instrument:

Streeterville note

$

7,167

$

6,221

$

946