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Note H - Fair Value of Financial Instruments
 9 Months Ended
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:

 

 

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Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; 

 

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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

 

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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