Warrants and derivative liability

6 Months Ended

Jun. 30, 2022

Warrants and derivative liability

Warrants and derivative liability

9.         Warrants and derivative liability

Warrants

On September 15, 2021, the Company entered into the Loan Agreement with the Lender pursuant to which the Lender may provide the Company with term loans in an aggregate principal amount of up to $50.0 million.

On September 15, 2021, in connection with the funding of the First Tranche Term Loan, the Company issued a warrant exercisable for 147,600 shares of the Company’s common stock at an exercise price of $2.29 per share. The warrant is immediately exercisable for 147,600 shares and expires on September 15, 2031.

On March 14, 2022, in connection with the funding of the Second Tranche Term Loan, the Company issued a warrant exercisable for 98,399 shares of the Company’s common stock at an exercise price of $2.29 per share. The warrant is immediately exercisable for 98,399 shares and expires on September 15, 2031.

No warrants had been exercised as of June 30, 2022. Any shares of the Company’s common stock issued upon exercise of the warrants are permitted to be settled in unregistered shares. The warrants are classified as equity as they meet all of the conditions under GAAP for equity classification. The Company has calculated the fair value of the warrants for initial measurement and date of funding of the Second Tranche Term Loan, and reassesses whether equity classification for the warrants is appropriate upon any changes to the warrants or capital structure, at each balance sheet date.

The Company determined that the fair value of the warrants issued in connection with the First Tranche Term Loan and Second Tranche Term Loan was $0.3 million and $0.2 million, respectively. The specific assumptions used to determine the fair value of the warrants were as follows:

	First Tranche		Second Tranche
	Term Loan		Term Loan
Expected volatility	95	%	93	%
Expected dividends	None		None
Expected term	5.00 Years		5.00 Years
Risk-free rate	0.81	%	2.10	%

Derivative Liability

The Additional Warrants’ (as defined below) derivative liability will be remeasured each reporting period until settled or extinguished with subsequent changes in fair value recorded through other income (expense), net in the condensed statements of operations. The fair value of the Additional Warrants derivative liability was determined using a Black-Scholes option pricing model based on the same input assumptions above, with an additional assessment required for the probability that the Additional Tranche Term Loans will be funded which would trigger the issuance of the Additional Warrants.

The Company is conditionally obligated to issue a fixed number of additional warrants (“Additional Warrants”) in the amount of 344,398 shares upon the funding of the Second, Third and Fourth Tranche Term Loans with the same exercise price and contractual term. The contingent obligation to issue the Additional Warrants did not meet the derivative scope exception or equity classification criteria and were accounted for as a derivative liability. The contingently issuable Additional Warrants derivative liability had an initial fair value of $0.3 million and was recorded as additional debt discount and as a separate derivative liability within other long-term liabilities in the condensed balance sheet.

As a result of the funding of the Second Tranche Term Loan, the Company issued a warrant exercisable for 98,399 shares of the Company’s common stock at $2.29 per share. Upon issuing the warrants, the Company reclassified the related portion of its Additional Warrants derivative liability into equity. The remaining Additional Warrant Liability that remains outstanding was remeasured as of period end. The Company recorded a $0.1 million loss on change in fair value through other (income) expense, net in the condensed statement of operations.

The following table provides a reconciliation of the beginning and ending balances for the Company’s Additional Warrants derivative liability recognized in connection with the term loan measured at fair value using significant unobservable inputs (Level 3):

	Additional
	Warrants
Balance at December 31, 2021	$	331
Fair value of Additional Warrant Derivative Liability issued during the period		—
Change in fair value		(109)
Derecognition		(206)
Balance at June 30, 2022	$	16

The specific assumptions used to determine the fair value of the warrants as of June 30, 2022, and December 31, 2021 were as follows:

	June 30,		December 31,
	2022		2021
Expected volatility	97	%	95	%
Expected dividends	None		None
Expected term	5.00 Years		5.00 Years
Risk-free rate	3.01	%	1.26	%