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Note H - Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2022
Notes to Financial Statements |
Fair Value Disclosures [Text Block] |
H. | Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability. The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:
| ● | Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
| ● | Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
| ● | Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
The carrying amounts of certain financial instruments, including cash and cash equivalents, investments and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments. Assets and Liabilities Measured at Fair Value on a Recurring Basis The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The following table summarizes the conclusions reached regarding fair value measurements as of September 30, 2022, and December 31, 2021 (in thousands):
|  | Balance as of September 30, 2022 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Deerfield Warrant liability |  | $ | 30 |  |  | $ | — |  |  | $ | — |  |  | $ | 30 |
Embedded Warrant Put Option |  |  | 4 |  |  |  | — |  |  |  | — |  |  |  | 4 |
KVK Warrant liability |  |  | 1 |  |  |  | — |  |  |  | 1 |  |  |  | — |
Total liabilities |  | $ | 35 |  |  | $ | — |  |  | $ | 1 |  |  | $ | 34 |
|  |  | — |  |  |  |  |  |  |  |  |  |  |  |  |
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government-sponsored agency securities |  | $ | 7,171 |  |  | $ | — |  |  | $ | 7,171 |  |  | $ | — |
Certificates of deposit |  |  | 20,475 |  |  |  | 20,475 |  |  |  | — |  |  |  | — |
U.S. Treasury securities |  |  | 9,649 |  |  |  | 9,649 |  |  |  | — |  |  |  | — |
Total assets |  | $ | 37,295 |  |  | $ | 30,124 |  |  | $ | 7,171 |  |  | $ | — |
|  | Balance as of December 31, 2021 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Deerfield Warrant liability |  | $ | 288 |  |  | $ | — |  |  | $ | — |  |  | $ | 288 |
Embedded Warrant Put Option |  |  | 18 |  |  |  | — |  |  |  | — |  |  |  | 18 |
KVK Warrant liability |  |  | 24 |  |  |  | — |  |  |  | 24 |  |  |  | — |
Total liabilities |  | $ | 330 |  |  | $ | — |  |  | $ | 24 |  |  | $ | 306 |
Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government-sponsored agency securities |  | $ | 4,997 |  |  | $ | — |  |  | $ | 4,997 |  |  | $ | — |
Certificates of deposit |  |  | 490 |  |  |  | 490 |  |  |  | — |  |  |  | — |
U.S. Treasury securities |  |  | 9,935 |  |  |  | 9,935 |  |  |  | — |  |  |  | — |
Total assets |  | $ | 15,422 |  |  | $ | 10,425 |  |  | $ | 4,997 |  |  | $ | — |
The Company’s Deerfield Warrant liability, embedded Warrant Put Option and securities are measured at fair value on a recurring basis. As of September 30, 2022, and December 31, 2021, the Deerfield Warrant liability and the embedded Warrant Put Option are reported on the unaudited condensed consolidated balance sheets in derivative and warrant liability. As of September 30, 2022, and December 31, 2021, the securities are reported on the unaudited condensed consolidated balance sheets in short-term and long-term investments. The Company used a Monte Carlo simulation to value the Deerfield Warrant liability and embedded Warrant Put Option for all periods presented herein. Significant unobservable inputs used in measuring the fair value of these financial instruments included the Company’s estimated enterprise value, an estimate of the timing of a liquidity or fundamental change event and a present value discount rate. Changes in the fair value of the Deerfield Warrant liability and embedded Warrant Put Option are reflected in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2022, and 2021, as a fair value adjustment related to derivative and warrant liability. The derivative liability for the Deerfield Warrant was $30,000 and $288,000 at September 30, 2022, and December 31, 2021, respectively. The derivative liability for the embedded Warrant Put Option was $4,000 and $18,000 at September 30, 2022, and December 31, 2021, respectively. A 10% increase in the enterprise value would result in an increase of $13,000 in the estimated fair value of the Deerfield Warrant liability and an increase of $1,000 in the estimated fair value of the embedded Warrant Put Option liability. In addition, the Company assumed a weighted-average probability of a liquidity event occurring of approximately 25% with an estimated probability-weighted value of approximately $40.0 million and a weighted-average probability of a fundamental change event occurring of approximately 29% with an estimated probability-weighted value of approximately $555.0 million, respectively, with estimated timing in each scenario of the third quarter of 2023. The Company’s KVK Warrant liability is measured at fair value on a recurring basis. As of September 30, 2022, and December 31, 2021, the KVK Warrant liability is reported on the unaudited condensed consolidated balance sheets in derivative and warrant liability. The Company estimates the fair value of the KVK Warrant using a probability-weighted Black-Scholes option-pricing model, which requires the use of subjective assumptions, including the expected term of the warrant, the expected stock price volatility, expected dividend yield and the risk-free interest rate for the expected term of the warrant. The expected term represents the period of time the warrant is expected to be outstanding. For the KVK Warrant, the Company used an expected term equal to the contractual term of the warrant. Expected volatility is based on the Company's historical volatility since the IPO. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends. Changes in the fair value of the KVK Warrant liability are reflected in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2022, and 2021, as a fair value adjustment related to derivative and warrant liability. A reconciliation of the beginning and ending balances for the derivative and warrant liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (in thousands):
|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Balance as of beginning of period |  | $ | 56 |  |  | $ | 666 |  |  | $ | 306 |  |  | $ | 255 |
Adjustment to fair value |  |  | (22 | ) |  |  | (305 | ) |  |  | (272 | ) |  |  | 106 |
Balance as of end of period |  | $ | 34 |  |  | $ | 361 |  |  | $ | 34 |  |  | $ | 361 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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