Fair Value Measurement

9 Months Ended

Sep. 30, 2022

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

There has been no movement between Level 1 and Level 2 or between Level 2 and Level 3 from December 31, 2021, to September 30, 2022. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Debt Derivative Liabilities

The Debt Derivative Liabilities are measured using a ‘with and without’ valuation model to compare the fair value of the Company's financing agreement with Oberland Capital including the identified embedded derivative features and the fair value of a plain vanilla note with the same terms. The fair value of the Oberland Facility including the embedded derivative features was determined using a probability-weighted expected return model based on four potential settlement scenarios for the Oberland Facility due to (a) a 5% probability of a mandatory prepayment event of the Oberland Facility on December 31, 2023; (b) a 15% probability of a mandatory prepayment event of the Oberland Facility on March 31, 2026; (c) a 5% probability of the prepayment of the Oberland Facility at the Company’s option on December 31, 2025; and (d) a 75% probability that the Oberland Facility will be held to its scheduled maturity dates in accordance with the terms of the debt agreement. The estimated settlement value of each scenario, which would include any required make-whole payment, is then discounted to present value

using a discount rate that is derived based on the initial terms of the Oberland Facility at issuance and corroborated utilizing a synthetic credit rating analysis.

The significant inputs that are included in the valuation of the Debt derivative liability - first tranche include:


	September 30, 2022			December 31, 2021
Input
Remaining term (years)	4.75 years			5.5 years
Maturity date	June 30, 2027			June 30, 2027
Coupon rate	9.5% - 12.3%			9.5	%
Revenue participation payments	Maximum each year			Maximum each year
Discount rate	14.7%		(1)	10.72%		(1)
Probability of mandatory prepayment before 2024	5.0	%	(1)	5.0	%	(1)
Estimated timing of mandatory prepayment event before 2024	December 31, 2023		(1)	December 31, 2023		(1)
Probability of mandatory prepayment 2024 or after	15.0	%	(1)	15.0	%	(1)
Estimated timing of mandatory prepayment event 2024 or after	March 31, 2026		(1)	March 31, 2026		(1)
Probability of optional prepayment event	5.0	%	(1)	5.0	%	(1)
Estimated timing of optional prepayment event	December 31, 2025		(1)	December 31, 2025		(1)

(1)Represents a significant unobservable input

The significant inputs that are included in the valuation of the Debt derivative liability - second tranche include:


	September 30, 2022			December 31, 2021
Input
Remaining term (years)	5.75 years			6.5
Maturity date	June 30, 2028			June 30, 2028
Coupon rate	9.5% - 12.3%			9.5%
Revenue participation payments	Maximum each year			Maximum each year
Discount rate	18.3	%	(1)	13.21	%	(1)
Probability of mandatory prepayment before 2024	5.0%		(1)	5.0%		(1)
Estimated timing of mandatory prepayment event before 2024	December 31, 2023		(1)	December 31, 2023		(1)
Probability of mandatory prepayment 2024 or after	15.0%		(1)	15.0%		(1)
Estimated timing of mandatory prepayment event 2024 or after	March 31, 2026		(1)	March 31, 2026		(1)
Probability of optional prepayment event	5.0%		(1)	5.0%		(1)
Estimated timing of optional prepayment event	December 31, 2025		(1)	December 31, 2025		(1)

(1)Represents a significant unobservable input

The following table presents the financial assets and liabilities that the Company measured at fair value on a recurring basis as of September 30, 2022, classified in accordance with the fair value hierarchy (in thousands):


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds	$	7,610	$	—	$	—	$	7,610
U.S. government securities	22,874		—		—		22,874
Commercial paper	—		15,918		—		15,918
Total assets	$	30,484	$	15,918	$	—	$	46,402

Liabilities

Debt derivative liabilities	—		—		4,407		4,407
Total liabilities	$	—	$	—	$	4,407	$	4,407

The following table presents the financial assets and liabilities that the Company measured at fair value on a recurring basis as of December 31, 2021, classified in accordance with the fair value hierarchy (in thousands):


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds	$	22,012	$	—	$	—	$	22,012
U.S. government securities	12,081		—		—		12,081

Commercial paper	—		39,249		—		39,249

Total assets	$	34,093	$	39,249	$	—	$	73,342

Liabilities

Debt derivative liabilities	$	—	—		$	5,562	$	5,562
Total liabilities	$	—	$	—	$	5,562	$	5,562

The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2022, were as follows (in thousands):


Three Months Ended September 30, 2022
Beginning Balance, July 1, 2022	$	4,876



Change in fair value included in net loss	(469)
Ending Balance, September 30, 2022	$	4,407


Nine Months Ended September 30, 2022
Beginning Balance, January 1, 2022	$	5,562



Change in fair value included in net loss	(1,155)
Ending Balance, September 30, 2022	$	4,407

The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2021, were as follows (in thousands):


Three Months Ended September 30, 2021
Beginning Balance, July 1, 2021	54,439





Change in fair value of Oberland Facility	(826)
Change in fair value of debt derivative	46
Ending Balance, September 30, 2021	$	53,659


Nine Months Ended September 30, 2021
Beginning Balance, January 1, 2021	$	39,352



Addition of Oberland Facility - second tranche	13,827
Addition of debt derivative - second tranche	1,173
Change in fair value of Oberland Facility	(845)
Change in fair value of debt derivative	152
Ending Balance September 30, 2021	$	53,659

The fair value of cash, restricted cash, accounts receivable, accounts payable and accrued expenses approximate the carrying values because of the short-term nature of these instruments. The Oberland Facility is classified as Level 3 within the fair value hierarchy. The carrying value and estimated fair value of the Oberland Facility were $45,487 and $49,392 at September 30, 2022, and $45,325 and $52,605 at December 31, 2021, respectively. See "Note 8 - Long-Term Debt, Net of Debt Discount and Financing Fees."

- 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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