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Fair Value Measurements
 3 Months Ended
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