5. |
Fair Value Measurements |
The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Each level of input has different levels of subjectivity and difficulty involved in determining fair value.
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Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date. Therefore, determining fair value for Level 1 investments generally does not require significant judgment, and the estimation is not difficult. |
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Level 2 – Pricing is provided by third-party sources of market information obtained through investment advisors. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information received from its advisors. |
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Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 instruments involves the most management judgment and subjectivity. |
5. |
Fair Value Measurements, continued |
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 by level within the fair value hierarchy, are as follows:
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(in thousands) |
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September 30, 2022 |
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|
|
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Significant |
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|
|
|
|
Quoted prices |
|
other |
|
Significant |
|
|
in active |
|
observable |
|
unobservable |
|
|
markets |
|
inputs |
|
inputs |
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Liabilities: |
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|
|
|
|
|
|
|
|
Derivative liability |
|
$ |
— |
|
$ |
— |
|
$ |
286 |
Warrant liability |
|
|
— |
|
|
— |
|
|
719 |
|
|
$ |
— |
|
$ |
— |
|
$ |
1,005 |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
December 31, 2021 |
|
|
|
|
Significant |
|
|
|
|
|
Quoted prices |
|
other |
|
Significant |
|
|
in active |
|
observable |
|
unobservable |
|
|
markets |
|
inputs |
|
inputs |
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Liabilities: |
|
|
|
|
|
|
|
|
|
Warrant liability |
|
$ |
— |
|
$ |
— |
|
$ |
8 |
There were no transfers between Level 1, 2 or 3 during the three and nine months ended September 30, 2022 or September 30, 2021.
Warrant Liability
The changes in the fair value of the warrant liability for the three and nine months ended September 30, 2022 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
|
|
|
|
Value at |
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|
|
|
|
|
|
December 31, |
|
issuance |
|
Change in |
|
September 30, |
|
|
2021 |
|
date |
|
fair value |
|
2022 |
Warrant Liability |
|
$ |
8 |
|
985 |
|
(274) |
|
$ |
719 |
The calculation of the fair value is described in Note 6 – Convertible Preferred Stock and Stockholders’ Equity.
Derivative Liability
As described above, the conversion provisions embedded in the Convertible Note requires bifurcation and measurement at fair value as a derivative. The fair value was calculated using a Monte Carlo simulation to create a distribution of potential market capitalizations and share prices for the Company on a weekly basis over the assumed period, given the various scenarios. The average value of the Convertible Note was discounted to the valuation date to determine a calibrated discount rate so that the fair value of the Convertible Note was $3 million. The value of the Convertible Note was compared with the value of a hypothetical note with no conversion rights in order to determine the fair value of the conversion feature.
5. |
Fair Value Measurements, continued |
The changes in the fair value of the derivative liability for the three and nine months ended September 30, 2022 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
|
|
|
|
Value at |
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|
|
|
|
|
|
December 31, |
|
issuance |
|
Change in |
|
September 30, |
|
|
2021 |
|
date |
|
fair value |
|
2022 |
Derivative liability |
|
$ |
— |
|
286 |
|
— |
|
$ |
286 |
|