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Fair Value Measurements

9 Months Ended

Sep. 30, 2023

4. Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following three levels:

●Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

●Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

●Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash equivalents include investments in a money market fund of $0.5 million as of September 30, 2023 and December 31, 2022, which are carried at fair value and represent Level 1 financial instruments under the fair value hierarchy.

The Company's Convertible Loan (Note 7) is measured at fair value and remeasured at each measurement period, with changes in fair value recorded as other income (expense) in the condensed consolidated statement of operations. The Company estimates the fair value of its Convertible Loan using a weighted probability model of various debt settlement scenarios during its term discounted to the reporting date. Conversion option scenarios are valued using option pricing models with significant assumptions and estimates such as volatility, expected term and risk-free interest rates, which are Level 3 fair value inputs unobservable from active markets.

The following table presents the Company’s fair value measurements using Level 3 inputs during the three and nine months ended September 30, 2023.


	Three Months Ended		Nine Months Ended

	September 30, 2023
Discount rate		22.38%-42.49%		22.38%-45.88%
Probabilities of settlement scenarios		0%-85%		0%-85%
Volatility		106.7%-123.6%		101.1%-123.6%
Expected term		0.2-1.5 Year		0.2-1.5 Year
Risk-free rate		4.97%-5.39%		4.62%-5.39%

The following table presents a summary of the changes in the fair value of the Company’s Level 3 financial liabilities (in thousands):


	Convertible Loan Pre Modification		Convertible Loan Post Modification
Balance at December 31, 2022	$	—	$	—
Net issuance of the Convertible Loan (1)		29,226,000		—
Initial recognition of modified Convertible Loan (1)		—		35,031,000
Change in fair value		(1,757,000)		14,716,000
Amount exchanged (2)		(31,332,000)		—
Loss on extinguishment		3,863,000		—
Balance at September 30, 2023	$	—	$	49,747,000

(1) The Convertible Loan before and after amendment was carried at fair value in the condensed consolidated balance sheets. As such, the principal and accrued interest were included in the determination of fair value. The related debt issuance costs were expensed.

(2) The Company concluded that the amendment to the Convertible Loan was an extinguishment for accounting purposes and the amount exchanged was the relative fair value allocated to the Convertible Loan at the extinguishment date. See Note 7 for further details.

- 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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