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Fair Value Measurements

3 Months Ended

Mar. 31, 2023

12.

Fair Value Measurements

The Company’s financial instruments consist of its convertible notes and warrants.

There were no assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022. Liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 were as follows:


	Fair value measurements as of March 31, 2023
	Level 1		Level 2		Level 3		Total
	(in thousands)
Liabilities
Convertible notes		—		—		4,350		4,350
Warrants		—		—		594		594
Total	$	—	$	—	$	4,944	$	4,944


	Fair value measurements as of December 31, 2022
	Level 1		Level 2		Level 3		Total
	(in thousands)
Liabilities
Convertible notes		—		—		4,270		4,270
Warrants		—		—		3,004		3,004
Total	$	—	$	—	$	7,274	$	7,274

During the three months ended March 31, 2023, there were no transfers between Level 1 and Level 2, nor into and out of Level 3.

The following tables summarize the activity for the Company Level 3 liabilities measured at fair value on a recurring basis for the three months ended March 31, 2023:


(in thousands)	Convertible Notes
Fair value at December 31, 2022	$	4,270
Issuance of convertible notes		—
Change in estimated fair value of financial instruments		80
Fair value at March 31, 2023	$	4,350


(in thousands)	Warrants
Fair value at December 31, 2022	$	3,004
Issuance of warrants		—
Change in estimated fair value of financial instruments		(2,410	)
Fair value at March 31, 2023	$	594

The following tables summarize the activity for the Company Level 3 liabilities measured at fair value on a recurring basis for the three months ended March 31, 2022:


(in thousands)	Convertible Notes
Fair value at December 31, 2021		—
Issuance of convertible notes		5,902
Change in estimated fair value of financial instruments		24
Conversion of convertible notes into Series A preferred stock		(5,926	)
Fair value at March 31, 2022	$	—

Convertible Notes

As further described in Note 10, the Company entered into several convertible note arrangements with certain investors during 2022. The Company recorded the liability related to the convertible notes at fair value and subsequently remeasured the instruments to fair value using level 3 fair value measurements. The fair value of the convertible notes was determined using a PWERM, in which the probability and timing of potential future events (such as a qualified equity financing prior to maturity) is considered in order to estimate the fair value of the convertible notes as of each valuation date. For the outstanding notes as of March 31, 2023, management determined the fair value of the convertible notes using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, and (3) a discount rate of 21.05%.

The Company recorded a change in fair value adjustment of $0.08 million and $0.02 million in the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2023 and 2022, respectively.

Warrants

As further described in Note 11, on November 13, 2022, the Company issued an aggregate 92,296 warrants to purchase Class A Common Stock to various third-party investors in conjunction with the issuance of its November 2022 Convertible Notes. The Company recorded the liability related to the warrants at fair value and subsequently remeasured the instruments to fair value using level 3 fair value measurements. The fair value of the warrants was determined using a PWERM, in which the probability and timing of potential future events (such as a qualified equity financing prior to maturity) is considered in order to estimate the fair value of the warrants as of each valuation date. For the outstanding warrants as of March 31, 2023, management determined the fair value of the warrants using the following significant unobservable inputs: (1) probability and timing of events, (2) expected future equity value of the underlying shares at the time of conversion, and (3) a discount rate of 21.37%.

The Company recorded a change in fair value adjustment of $2.4 million and $0 million in the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2023 and 2022, respectively.

- Definition

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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