Fair Value Measurements

3 Months Ended

Mar. 31, 2023

4. Fair Value Measurements

In accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the fair value of liabilities related to certain outstanding warrants, certain embedded conversion features associated with convertible debt and the contingent payable to Cognate BioServices on a recurring basis to determine the fair value of these liabilities. ASC 820 establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:

Level 1 - Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date.

Level 2 - Quoted prices in markets that are not active or inputs which are either directly or indirectly observable.

Level 3 - Unobservable inputs for the instrument requiring the development of assumptions by the Company.

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2023 and December 31, 2022 (in thousands):


	Fair value measured at March 31, 2023
			Quoted prices in active		Significant other		Significant
	Fair value at		markets		observable inputs		unobservable inputs
	March 31, 2023		(Level 1)		(Level 2)		(Level 3)
Warrant liability	$	1,445	$	—	$	—	$	1,445
Contingent payable derivative liability		8,451		—		—		8,451
Share liability		585		—		—		585
Total fair value	$	10,481	$	—	$	—	$	10,481


	Fair value measured at December 31, 2022
			Quoted prices in active		Significant other		Significant
	Fair value at		markets		observable inputs		unobservable inputs
	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Warrant liability	$	80,559	$	—	$	—	$	80,559
Embedded redemption option		807		—		—		807
Contingent payable derivative liability		8,668		—		—		8,668
Share liability		678		—		—		678
Total fair value	$	90,712	$	—	$	—	$	90,712

There were no transfers between Level 1, 2 or 3 during the three-month period ended March 31, 2023.

The following table presents changes in Level 3 liabilities measured at fair value for the three-month period ended March 31, 2023. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (in thousands).


	Warrant			Embedded		Contingent Payable		Share
	Liability			Redemption Option		Derivative Liability		Liability		Total
Balance - January 1, 2023	$	80,559		$	807	$	8,668	$	678	$	90,712
Additional share liability		—			—		—		538		538
Redemption of share liability		—			—		—		(683)		(683)
Reclassification of warrant liabilities		(76,258)			—		—		—		(76,258)
Change in fair value		(2,856)			(807)		(217)		52		(3,828)
Balance - March 31, 2023	$	1,445	⁽¹⁾	$	—	$	8,451	$	585	$	10,481

(1)

The remaining balance of $1.4 million in warrant liability as of March 31, 2023 was related to certain conditional rights to independently purchase shares from the Company in a future raise of capital (the “Piggy-back Rights”). The Company accounted for the Piggy-back Rights as a freestanding financial instrument, which was classified as a liability at fair value on the Condensed Consolidated Balance Sheet.

On January 9, 2023, the Company reclassified the fair value of the warrant liability of $76.3 million into the additional paid-in capital. The change in fair value of the common stock warrant liability of $2.3 million between December 31, 2022 and January 9, 2023 is reflected in “Change in fair value of derivative liabilities” in the accompanying condensed consolidated statements of comprehensive loss for the three months ended March 31, 2023.

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of January 9, 2023 (the reclassification date), March 31, 2023 and December 31, 2022 is as follows:


	As of January 9, 2023			As of March 31, 2023
	Warrant			Share			Contingent Payable
	Liability			Liability			Derivative Liability
Strike price	$	0.31		$	0.63	*	$	0.63	*
Contractual term (years)		1.5			0.04			1.3
Volatility (annual)		87	%		114	%		73	%
Risk-free rate		4.3	%		2.2	%		4.9	%
Dividend yield (per share)		0	%		0	%		0	%


	As of December 31, 2022
	Warrant			Share			Contingent Payable
	Liability			Liability			Derivative Liability
Strike price	$	0.31		$	0.78	*	$	0.78	*
Contractual term (years)		1.5			0.1			0.6
Volatility (annual)		86	%		76	%		77	%
Risk-free rate		4.3	%		2.0	%		4.8	%
Dividend yield (per share)		0	%		0	%		0	%

The strike price assumes the current stock price as of March 31, 2023 and December 31, 2022.

The key unobservable inputs for Piggy-back rights that was included in the warrant liability as of March 31, 2023 and December 31, 2022 was the assumption of the estimated remaining life which was based on the estimate of next qualified financing.

- 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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