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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2023
Fair Value Disclosures [Abstract] |
Fair Value Measurements |
(14) | Fair Value Measurements
The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the year ended March 31, 2023:
|  | Level 3 |
|  | Contigent liabilities |  |  | Warrants |  |  | Total |
Balance at January 1, 2023 |  | $ | 1,280 |  |  | $ | — |  |  | $ | 1,280 |
Total change in foreign exchange |  |  | 25 |  |  |  |  |  |  |  | 25 |
Fair value of the warrant liability issued |  |  |  |  |  |  | 4,940 |  |  |  | 4,940 |
Balance at March 31, 2023 |  | $ | 1,305 |  |  | $ | 4,940 |  |  | $ | 6,245 |
Contingent liabilities are re-measured to fair value each reporting period using projected financial targets, discount rates, probabilities of payment, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected financial targets are based on our most recent internal operational budgets and may take into consideration alternate scenarios that could result in more or less profitability for the respective service line. Increases or decreases in projected financial targets and probabilities of payment may result in significant changes in the fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement. As disclosed in Note 9 and Note 10 of the Company’s consolidated financial statements, the Company allocated part of the proceeds of private placement of the Company’s preferred F-1 shares to warrant liability issued in connection with the transaction. The valuations of the warrants were determined using option pricing models. These models use inputs such as the underlying price of the shares issued at the measurement date, volatility, risk free interest rate and expected life of the instrument. The Company has classified the warrants as a long-term liability due to certain provisions relating to the holders’ ability to exercise the warrants beyond twelve months of the reporting date and has accounted for them as derivative instruments in accordance with ASC 815, adjusting the fair value at the end of each reporting period. The fair value of the preferred and common warrants at March 29, 2023 was determined by using option pricing models assuming the following:
|  | March 29, 2023 |
Risk free interest rate |  |  | 3.80% - 4.80 | %
Expected term (years) |  |  | 0.5 - 3.0 |
Expected volatility |  |  | 70% - 75 | %
Expected dividends |  |  | 0.00 | %
Additionally, the Company has determined that the warrant liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820. There are six inputs: closing price of Delcath stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of the Company’s stock over that term; annual rate of dividends; and the risk-free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of Delcath stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10). The risk-free rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820. Since the lowest level input is a Level 3, the Company determined the warrant liability is most appropriately classified within Level 3 of the fair value hierarchy. The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2023 and December 31, 2022 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value. In general, the fair values were determined using Level 3:
|  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | March 31, 2023 |
Description |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent liability |  |  | — |  |  |  | — |  |  | $ | 1,305 |  |  | $ | 1,305 |
Warrant liability |  |  |  |  |  |  |  |  |  |  | 4,940 |  |  |  | 4,940 |
Total liabilities |  | $ | — |  |  | $ | — |  |  | $ | 6,245 |  |  | $ | 6,245 |
|  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | December 31, 2022 |
Description |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent liability |  |  | — |  |  |  | — |  |  | $ | 1,280 |  |  | $ | 1,280 |
Total liabilities |  | $ | — |  |  | $ | — |  |  | $ | 1,280 |  |  | $ | 1,280 |

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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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