Fair Value Measurements and Marketable Securities

9 Months Ended

Sep. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements and Marketable Securities

3. Fair Value Measurements and Marketable Securities

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value Measurements at September 30, 2022 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	—	$	49,569	$	—	$	49,569
Total cash equivalents		—		49,569		—		49,569
Total cash equivalents and marketable securities		—		49,569		—		49,569
Liabilities:
Derivative liability	$	—	$	—	$	141	$	141
	$	—	$	—	$	141	$	141

	Fair Value Measurements at December 31, 2021 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	—	$	109,316	$	—	$	109,316
Corporate bonds		—		2,701		—		2,701
Total cash equivalents		—		112,017		—		112,017
Marketable securities:
Corporate bonds		—		11,479		—		11,479
Commercial paper		—		22,339		—		22,339
Total marketable securities		—		33,818		—		33,818
Total cash equivalents and marketable securities	$	—	$	145,835	$	—	$	145,835
Liabilities:
Derivative liability	$	—	$	—	$	802	$	802
	$	—	$	—	$	802	$	802

Excluded from the tables above is cash of $0.9 million and $0.6 million as of September 30, 2022, and December 31, 2021, respectively. During the nine months ended September 30, 2022, there were no transfers between Level 1, Level 2 and Level 3 categories.

Marketable Securities

The Company’s marketable securities are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing sources, which generally derive security prices from recently reported trades for identical or similar securities. The Company evaluated debt securities with unrealized losses for any expected credit losses and determined unrealized losses on these securities were related to non-credit factors. Additionally, the Company currently does not intend to and is not required to sell these investments prior to an anticipated recovery in value.

The Company did not have any assets classified as marketable securities as of September 30, 2022. The following table summarizes the gross unrealized gains and losses of the Company’s marketable securities as of December 31, 2021 (in thousands):

	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Assets:
Corporate bonds	$	11,481	$	—	$	(2	)	$	11,479
Commercial paper		22,339		—		—			22,339
	$	33,820	$	—	$	(2	)	$	33,818

As of December 31, 2021, all of the Company’s marketable securities had remaining contractual maturity dates of one year or less from the respective consolidated balance sheet date.

Embedded Derivative

Liability related to change of control

In connection with the termination of the Revenue Interest Agreement (as defined below) (see Note 10), the Company classified $0.1 million as a derivative liability on its condensed consolidated balance sheet because of an embedded feature that represents a conditional obligation to pay HCR (as defined below) an additional cash amount upon a change of control. The Company will remeasure the derivative liability to fair value at each reporting date until it expires on December 31, 2022, and recognize changes in the fair value of the derivative liability as a component of other income (expense) in the condensed consolidated statement of operations and comprehensive loss. The Company valued the change of control provision under the Revenue Interest Termination Agreement, dated June 7, 2022, by and between the Company and HCR, using a series of Black-Scholes-Merton option pricing models. The assumptions used in the valuation model include (1) the Company's estimates of the probability of a change of control event occurring prior to or as of December 31, 2022, (2) the Company's closing stock price as of June 7, 2022, (3) the Company's fully-diluted number of shares outstanding as of June 7, 2022, (4) volatility, (5) risk-free rate, and (6) the Company's credit-risk-adjusted discount rate.

The fair value of the derivative liability both upon issuance in June 2022 and as of September 30, 2022 is $0.1 million and is classified as Level 3 liability under the fair value hierarchy.

Liability related to the sale of future royalties

As of December 31, 2021, in connection with the liability related to the sale of future royalties, the Company classified $1.0 million at inception of its Revenue Interest Financing Agreement as a derivative liability on its consolidated balance sheet because there were embedded instruments that represented a conditional obligation to pay HCR the final payment, which is 250% of the Investment Amount, upon an event of default or change of control.

The fair value of the derivative liability upon issuance in October 2021 was $1.0 million, and was classified as Level 3 liability under the fair value hierarchy. As of December 31, 2021 the fair value of the derivative liability decreased by $0.2 million to $0.8 million, primarily due to the passage of time and changes in the market volatility and underlying credit risk inputs.

The fair value for the liability related to the sale of future royalties at the time of the initial transaction was based on the Company's current estimates of future royalties expected to be paid to HCR over the remaining patent life of the product, which were considered Level 3 inputs (see Note 10).