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Fair Value Measurements
12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 7. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The authoritative guidance establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The three-level hierarchy for the inputs to valuation techniques is summarized as follows:

Level 1 - Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access.

Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data, such as quoted prices, interest rates, and yield curves.

Level 3 - Inputs that are unobservable data points that are not corroborated by market data.

There were no significant transfers between these fair value measurement classifications during the years ended December 31, 2022 and 2021.

Fair Value of Financial Instruments

The Company’s Level 3 liabilities consist of the embedded derivative liability associated with the Company’s Convertible Notes (see Note 8) and the warrant liabilities resulting from the November 2022 and August 2021 issuance of warrants (see Note 11). The Convertible Notes conversion feature was bifurcated and recorded as an embedded derivative liability with a corresponding discount at the date of issuance that is netted against the principal amount of the Convertible Notes. The Company utilizes a Monte Carlo simulation method to determine the fair value of the conversion feature, which utilizes inputs including the common stock price, volatility of common stock, the risk-free interest rate and the probability of conversion to common shares at the conversion rate in the event of a major transaction (e.g. a change in control). Due to the use of significant unobservable inputs, the overall fair value measurement of the conversion feature is classified as Level 3. As of December 31, 2021, the fair value of the embedded derivative liability was zero. As of December 31, 2022, the conversion option has expired and there is no longer an embedded derivative.

The Company uses the Black-Scholes Model to value the Level 3 warrant liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, and volatility. The significant unobservable input for the Level 3 warrant liabilities include volatility. Given the limited period of time the Company’s stock has been traded in an active market, the expected volatility is estimated by taking the average historical price volatility for industry peers, consisting of several public companies in the Company’s industry that are similar in size, stage, or financial leverage, over a period of time commensurate to the expected term of the warrants. At December 31, 2022 and 2021, the fair value of the warrant liabilities were estimated using the Black-Scholes Model with the following inputs and assumptions:

 

 

 

December 31,
2022

 

 

December 31,
2021

 

Risk-free interest rate

 

4.0%

 

 

1.3%

 

Expected volatility

 

106.2% - 107.1%

 

 

91.9%

 

Stock price

 

$

3.30

 

 

$

52.25

 

Expected life (years)

 

3.6 - 5.4

 

 

4.6

 

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2022

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

5

 

 

$

 

 

$

 

Warrant Liabilities

 

$

 

 

$

 

 

$

3,538

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

85,866

 

 

$

 

 

$

 

Warrant Liabilities

 

$

 

 

$

 

 

$

18,731

 

 

(1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.

The carrying value of the Company’s Convertible Notes does not approximate its fair value because the carrying value of the Convertible Notes reflects the balance of unamortized discount related to the derivative liability associated with the value of the

conversion feature assessed at inception. The carrying value of the Company’s Convertible Notes, net of discount, was $127.8 million and $126.4 million at December 31, 2022 and 2021, respectively. Based on unadjusted quoted prices in active market obtained from third-party pricing services, the Company determined the fair value of the Convertible Notes was $71.8 million and $86.6 million as of December 31, 2022 and 2021, respectively.