In accordance with the Merger Agreement, 5,000,000 Earn-Out Shares were contingently issuable to Old eFFECTOR stockholders and option holders upon the occurrence of the Triggering Event, defined within the Merger Agreement as the date on which the common stock price equals or exceeds $20.00 over at least 20 trading days out of 30 consecutive trading day period for the two-year period following the close date of the Business Combination. The Triggering Event did not occur during the two-year period following the close date of the Business Combination and therefore the achievement period for the earn-out expired on August 25, 2023. As such, the Old eFFECTOR stockholders and option holders are no longer eligible to receive Earn-Out shares as of August 25, 2023 and the value of the earn-out liability is zero as of September 30, 2023. The resulting reduction in value was recorded as a gain on change in fair value of the earn-out liability and included within the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2023.

As of December 31, 2022, the stockholders and option holders were eligible to receive approximately 4,561,353 and 438,647 Earn-Out Shares, respectively. The fair value per share of the Earn-Out Shares was less than $0.01 as of December 31, 2022. The fair value was determined using a Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis over the earn-out period using the most reliable information available. Assumptions used in the valuation were as follows:


	December 31, 2022
Stock price	$	0.43
Expected volatility		115.0	%
Risk-free interest rate		4.8	%
Forecast period (in years)		0.6
Cost of equity		20.0	%

The Company determined that the contingent obligation to issue Earn-Out Shares to existing Old eFFECTOR stockholders was not indexed to the Company's stock under ASC 815-40 and therefore equity treatment was precluded. The Triggering Event that would determine the issuance of the Earn-Out Shares includes terms that are not solely indexed to the common stock of the Company, and as such liability classification was required. The Company estimated the fair value of the shareholder Earn-Out Shares at date of issuance and revalued the liability each reporting period with the changes in fair value being recorded to the consolidated statements of operations and comprehensive loss. In accordance with the Merger Agreement, Earn-Out Shares attributable to Old eFFECTOR option holders who discontinue providing service before the occurrence of the Triggering Event are reallocated to the remaining eligible stockholders and option holders. As the two-year period following the close date of the Business Combination expired on August 25, 2023, the earn-out liability of approximately $6,000 was reduced to zero during the three months ended September 30, 2023 and a gain on change in fair value was recognized on the consolidated statement of operations and comprehensive loss. For the three and nine months ended September 30, 2022, there was a decrease in the earn-out liability of $0.1 million and $12.1 million, respectively, which was recorded as a gain on change in fair value within the consolidated statement of operations and comprehensive loss.

The following table presents activity for the earn-out liability measured at fair value using significant unobservable Level 3 inputs at December 31, 2022 and September 30, 2023 (in thousands):


	Earn-out Liability
Balance at December 31, 2022	$	6
Change in fair value		(6	)
Balance at September 30, 2023	$	—

The contingent obligation to issue Earn-Out Shares to existing Old eFFECTOR option holders falls within the scope of ASC 718, Share-based Compensation, because the option holders were required to continue providing service until the occurrence of the Triggering Event. The fair value of the option holder Earn-Out Shares at the consummation date of the Business Combination was approximately $7.9 million, which was recorded as share-based compensation over the derived service period of 0.36 years following the consummation of the Business Combination. There was zero share-based compensation recorded for the three and nine months ended September 30, 2023 related to the Earn-Out Shares. For the three and nine months ended September 30, 2022, there was approximately zero and $0.3 million, respectively, recorded in share-based compensation related to the Earn-Out Shares and the derived service period was completed as of March 31, 2022, with no additional share-based compensation expense to be recorded.