Fair Value

6 Months Ended

Jun. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value

Note 14. Fair Value

Cash and cash equivalents are carried at fair value. Financial instruments, including accounts receivable, accounts payable, and accrued expenses are carried at cost, which approximates fair value given their short-term nature. Marketable securities, the Avenue Warrant, and the Contingent Earn-outs are carried at fair value. The 2019 MD Loan and the 2019 Cecil Loan are carried at the greater of principal plus accrued interest or the value of Phantom Shares. The 2021 Avenue Loan, including the convertible notes payable and Conversion Feature, and the 2022 MD Loan are carried at amortized cost, which approximate fair value due to our credit risk and market interest rates.

Financial Instruments with Fair Value Measurements on a Recurring Basis

The fair value hierarchy for financial instruments measured at fair value on a recurring basis as of June 30, 2022 is as follows:

	June 30, 2022
(in thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market funds	$	3,568	$	—	$	—	$	3,568
Marketable securities
Commercial paper		—		6,916		—		6,916
Municipal debt securities		—		1,524		—		1,524
Corporate debt securities		—		10,593		—		10,593
Common stock warrant liability		—		—		167		167
Clene Nanomedicine contingent earn-out		—		—		9,847		9,847
Initial Stockholders contingent earn-out		—		—		1,263		1,263

The fair value hierarchy for financial instruments measured at fair value on a recurring basis as of December 31, 2021 is as follows:

	December 31, 2021
(in thousands)	Level 1		Level 2		Level 3		Total
Notes payable	$	736	$	—	$	—	$	736
Common stock warrant liability		—		—		474		474
Clene Nanomedicine contingent earn-out		—		—		18,100		18,100
Initial Stockholders contingent earn-out		—		—		2,317		2,317

There were no transfers between Level 1, Level 2, or Level 3 during any of the periods above.

Changes in the fair value of our Level 3 financial instruments for the six months ended June 30, 2022 were as follows:

(in thousands)	Common Stock Warrant Liability			Clene Nanomedicine Contingent Earn-out			Initial Stockholders Contingent Earn-out
Balance - December 31, 2021	$	474		$	18,100		$	2,317
Change in fair value		(2	)		(8,253	)		(1,054	)
Reclassification from liability to equity		(305	)		—			—
Balance - June 30, 2022	$	167		$	9,847		$	1,263

Changes in the fair value of our Level 3 financial instruments for the six months ended June 30, 2021 were as follows:

(in thousands)	Common Stock Warrant Liability			Clene Nanomedicine Contingent Earn-out		Initial Stockholders Contingent Earn-out
Balance - December 31, 2020	$	—		$	52,053	$	5,906
Initial fair value of instrument		1,457			—		—
Change in fair value		(133	)		16,970		1,729
Balance - June 30, 2021	$	1,324		$	69,023	$	7,635

Valuation of Notes Payable and Convertible Notes Payable

As of June 30, 2022 and December 31, 2021, the carrying value of the 2019 MD Loan was $0.6 million and $0.6 million, respectively; and the carrying value of the 2019 Cecil Loan was $0.1 million and $0.1 million, respectively. In all periods presented, the loans were recorded at principal plus accrued interest in the condensed consolidated balance sheets.

As of June 30, 2022, the amortized cost of the 2021 Avenue Loan was $18.8 million, which included notes payable carried at $14.1 million; and convertible notes payable and embedded Conversion Feature, carried at $4.7 million. As of December 31, 2021, the amortized cost of the 2021 Avenue Loan was $18.3 million, which included notes payable carried at $13.7 million; and convertible notes payable and embedded Conversion Feature, carried at $4.6 million. The valuation of the Conversion Feature is discussed below. As of June 30, 2022, the amortized cost of the 2022 MD Loan was $0.7 million.

Valuation of Conversion Feature

The Conversion Feature of the convertible notes payable from the 2021 Avenue Loan is carried at amortized cost and did not meet the requirements for separate accounting as a derivative instrument. As of June 30, 2022 and December 31, 2021, the estimated fair value of the Conversion Feature was $0.3 million and $0.8 million, respectively, and was determined using a Black-Scholes option-pricing model. The unobservable inputs to the Black-Scholes option-pricing model were as follows:

	June 30,			December 31,
	2022			2021
Expected stock price volatility		115.00	%		105.00	%
Risk-free interest rate		3.00	%		0.70	%
Expected dividend yield		0.00	%		0.00	%
Expected term	1.89 years			2.39 years

Valuation of the Common Stock Warrant Liability

The common stock warrant liability associated with the Avenue Warrant is comprised of the potentially issuable Tranche 2 warrant to purchase an estimated 245,832 shares of Common Stock, which was classified as a liability and recorded at fair value at issuance. The fair value and number of underlying shares will be remeasured at each reporting period.

The estimated fair value was determined using a Black-Scholes option-pricing model. The carrying amount of the liability may fluctuate significantly and actual amounts may be materially different from the liabilities’ estimated value. The unobservable inputs to the Black-Scholes option-pricing model were as follows:

	June 30,			December 31,
	2022			2021
Expected stock price volatility		115.00	%		105.00	%
Risk-free interest rate		3.00	%		1.20	%
Expected dividend yield		0.00	%		0.00	%
Expected term	3.70 years			3.89 – 4.39 years
Probability of drawing Tranche 2		45.00	%		50.00	%

As we did not complete a bona fide round of equity financing by March 31, 2022, the exercise price and underlying shares of the Tranche 1 warrant became fixed and therefore qualified for equity classification. We remeasured the Tranche 1 warrant liability to fair value as of March 31, 2022 and recognized the change in fair value in the condensed consolidated statements of operations and comprehensive loss and the Tranche 1 warrant liability was reclassified to additional paid-in-capital.

Valuation of the Contingent Earn-Outs

The Clene Nanomedicine and Initial Stockholders Contingent Earn-outs were recorded at fair value at the closing of the Reverse Recapitalization and are remeasured at each reporting period. As of June 30, 2022 and December 31, 2021, Clene Nanomedicine’s common stockholders were entitled to receive up to 5,842,334 shares of Common Stock and the Initial Stockholders were entitled to receive up to 750,000 shares of Common Stock. As of December 31, 2021, we did not achieve Milestone 3 and the 2,503,851 Milestone 3 Contingent Earn-out shares were cancelled (see Note 3).

The estimated fair value of the Contingent Earn-outs is determined using a Monte Carlo valuation model in order to simulate the future path of our stock price over the earn-out periods. The carrying amount of the liabilities may fluctuate significantly and actual amounts paid may be materially different from the liabilities’ estimated value. The unobservable inputs to the Monte Carlo valuation model were as follows:

	June 30,			December 31,
	2022			2021
Expected stock price volatility		115.00	%		105.00	%
Risk-free interest rate		3.00	%		1.10	%
Expected dividend yield		0.00	%		0.00	%
Expected term	3.50 years			4.00 years