Fair value of financial instruments

9 Months Ended

Sep. 30, 2024

Fair value of financial instruments

Fair value of financial instruments

4. Fair value of financial instruments

The Company determines the fair value of its financial instruments based upon the fair value hierarchy, which prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

Level 1 inputs	Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.
Level 2 inputs	Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs	Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

Items Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis (in thousands):

	September 30, 2024
Description	Total		Level 1		Level 2		Level 3
Financial assets
Cash equivalents	$	93,191	$	93,191	$	—	$	—
Total financial assets	$	93,191	$	93,191	$	—	$	—
Warrant liability	$	26,138	$	—	$	—	$	26,138

	December 31, 2023
Description	Total		Level 1		Level 2		Level 3
Financial assets
Cash equivalents	$	46,093	$	46,093	$	—	$	—
Short-term investments		59,220		5,992		53,228		—
Total financial assets	$	105,313	$	52,085	$	53,228	$	—
Preferred stock tranche liability	$	4,189	$	—	$	—	$	4,189

The Company’s cash equivalents and short-term investments consist of U.S. Government money market funds, corporate bonds, agency bonds and commercial paper of publicly traded companies. The investments and cash equivalents have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the prices provided by third party pricing services by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. After completing its validation procedures, the Company did not adjust or override any fair value measurements provided by the pricing services as of September 30, 2024, or December 31, 2023.

Preferred Stock tranche liability

A preferred stock tranche liability was recorded as a result of the entry into the Securities Purchase Agreement (defined herein) (see Note 10. Capital Stock). The fair value measurement of the preferred stock tranche liability is classified as Level 3 under the fair value hierarchy. The fair value of the preferred stock tranche liability at inception and December 31, 2023 was determined using a Monte-Carlo simulation. The inputs to the Monte-Carlo include the risk-free rate, stock price volatility, expected dividends and remaining term. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement. The preferred stock tranche liability expired in July 2024 and is no longer outstanding.

Below are the inputs used to value the preferred stock tranche liability at December 31, 2023:

	December 31, 2023
Risk-free interest rate	5.13-5.52	%
Volatility	75	%
Dividend yield	—
Remaining term (years)	0.6

The following table represents a reconciliation of the preferred stock right liability recorded in connection with the entry into the Securities Purchase Agreement (in thousands):

January 1, 2024	$	4,189
Fair value adjustment		(4,189)
September 30, 2024	$	—

Warrant liability

A warrant liability was recorded as a result the July 2024 Offering (defined herein) (see Note 10. Capital Stock). The fair value measurement of the warrant liability is classified as Level 3 under the fair value hierarchy. The fair value of the warrant liability at inception and September 30, 2024, was determined using the Black-Scholes valuation model. The inputs to the Black-Scholes valuation model include the risk-free rate, stock price volatility, expected dividends and remaining term. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

Below are the inputs used to value the warrant liability at July 23, 2024 and September 30, 2024:

	September 30, 2024		July 23, 2024
Risk-free interest rate	3.88	%	4.63	%
Volatility	118	%	132	%
Dividend yield	—		—
Remaining term (years)	1.3		1.5

The following table represents a reconciliation of the warrant liability (in thousands):

July 23, 2024	$	39,595
Fair value adjustment		(13,457)
September 30, 2024	$	26,138

Long-term debt

The fair value of the Company’s long-term debt was determined using a discounted cash flow analysis with current applicable rates for similar instruments as of the condensed consolidated balance sheet dates. The Company estimates that the fair value of its long-term debt was approximately $40.6 million as of September 30, 2024, which differs from the carrying value of $40.5 million. The Company estimates that the fair value of its long-term debt was approximately $39.6 million as of December 31, 2023, which differs from the carrying value of $40.1 million. The fair value of the Company’s long-term debt was determined using Level 3 inputs.