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Fair Value | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value | 16. Fair Value Cash is carried at fair value. Financial instruments, including accounts receivable, accounts payable, and accrued expenses are carried at cost, which approximates fair value given their short-term nature. The 2019 MD Loan, the 2019 Cecil Loan, the derivative instruments associated with the 2021 Avenue Loan, and the derivative instruments associated with the Contingent Earn-outs are carried at fair value. The 2021 Avenue Loan, related convertible notes payable, and Conversion Feature are carried at amortized cost, which approximate fair value due to our credit risk and market interest rates. Liabilities with Fair Value Measurements on a Recurring Basis The following tables present our fair value hierarchy for liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:
|  | Fair Value Measurements on a Recurring Basis September 30, 2021 |
(in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Notes payable |  | $ | 983 |  |  | $ | - |  |  | $ | - |  |  | $ | 983 |
Warrant liability |  |  | - |  |  |  | - |  |  |  | 910 |  |  |  | 910 |
Clene Nanomedicine contingent earn-out |  |  | - |  |  |  | - |  |  |  | 33,981 |  |  |  | 33,981 |
Initial Shareholders contingent earn-out |  |  | - |  |  |  | - |  |  |  | 4,196 |  |  |  | 4,196 |
|  | Fair Value Measurements on a Recurring Basis December 31, 2020 |
(in thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Notes payable |  | $ | 1,296 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,296 |
Clene Nanomedicine contingent earn-out |  |  | - |  |  |  | - |  |  |  | 52,053 |  |  |  | 52,053 |
Initial Shareholders contingent earn-out |  |  | - |  |  |  | - |  |  |  | 5,906 |  |  |  | 5,906 |
There were no transfers between levels in the fair value hierarchy as of September 30, 2021 and December 31, 2020. Valuation of Notes Payable and Convertible Notes Payable The carrying value of notes payable and convertible notes payable includes certain notes carried at amortized cost, and certain notes remeasured at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020. In order to value the notes, we considered the amount of simple interest expense that would be due and the value of our Common Stock. As of September 30, 2021 and December 31, 2020, the fair value of the 2019 MD Loan and the 2019 Cecil Loan was determined based on the closing prices of $6.83 and $9.01 per share, respectively, as reported by Nasdaq. As of September 30, 2021, the amortized cost of the 2021 Avenue Loan was $18.2 million, which includes the notes payable, carried at $13.6 million; and the convertible notes payable and embedded Conversion Feature, carried at $4.6 million. The valuation of the Conversion Feature is discussed below. The 2021 Avenue Loan was not outstanding as of December 31, 2020. Valuation of Conversion Feature The Conversion Feature of the convertible notes payable from the 2021 Avenue Loan is carried at amortized cost and did not meet the requirements for separate accounting and is not accounted for as a derivative instrument. The estimated fair value of the Conversion Feature was $2.0 million and was determined using a Black-Scholes valuation model, with a Monte Carlo analysis performed in order to simulate the Next Round Price as an input in the Black-Scholes valuation model. The unobservable inputs to the model were as follows: Black-Scholes Valuation Model
|  | September 30, 2021 |  |  | December 31, 2020
Expected stock price volatility |  |  | 85.00 | % |  | N/A
Risk-free interest rate |  |  | 0.50 | % |  | N/A
Expected dividend yield |  |  | 0.00 | % |  | N/A
Expected term |  |  | 2.56 years |  |  | N/A
Monte Carlo Simulation
|  | September 30, 2021 |  |  | December 31, 2020
Expected stock price volatility |  |  | 35.00 | % |  | N/A
Risk-free interest rate |  |  | 0.07 | % |  | N/A
Expected dividend yield |  |  | 0.00 | % |  | N/A
Expected term |  |  | 0.09 years |  |  | N/A
Valuation of Warrants to Purchase Preferred Stock Our Preferred Stock warrant liabilities contain unobservable inputs that reflect our own assumptions. Accordingly, the Preferred Stock warrant liabilities were measured at fair value on a recurring basis using unobservable inputs. Prior to the extinguishment of the Preferred Stock warrant liabilities on December 30, 2020, the Preferred Stock warrant liability was valued using a Black-Scholes valuation model. The Board of Directors determined the fair value of the Preferred Stock by considering a number of objective and subjective factors, including third-party valuations, valuations of comparable companies, sales of redeemable convertible Preferred Stock, sales of common stock to unrelated third parties, operating and financial performance, the lack of liquidity of our capital stock, and general and industry-specific economic outlook. We estimated the volatility of our Preferred Stock based on comparable peer companies’ historical volatility. The risk-free interest rate for periods within the contractual life of the warrants was based on the U.S. Treasury yield curve in effect at the valuation date. We have no plans to declare any future dividends. The determination of the fair value of the Preferred Stock warrant liability could change in future periods based upon changes in the value of our Preferred Stock and other assumptions as presented above. We record any such change in fair value to the change in fair value of Preferred Stock warrant liability expense line in the condensed consolidated statements of operations and comprehensive income (loss). Upon the closing of the Reverse Recapitalization (see Note 3), all of the outstanding Clene Nanomedicine Preferred Stock was converted to Clene Inc. Common Stock and the Clene Nanomedicine Preferred Stock warrants were converted to warrants for the purchase of Clene Inc. Common Stock. Accordingly, the Preferred Stock warrant liabilities were extinguished in connection with the conversion of Clene Nanomedicine Preferred Stock on December 30, 2020 (see Note 9). Valuation of the Warrant Liability Pursuant to the 2021 Avenue Loan, we issued the Avenue Warrants to purchase 115,851 shares of Common Stock pursuant to Tranche 1 of the 2021 Avenue Loan. In accordance with ASC 815, we recognized an additional warrant to purchase an estimated 86,679 shares of Common Stock that will be issued pursuant to the draw of Tranche 2 of the 2021 Avenue Loan (see Note 10). The warrants were recorded at fair value at the closing of the 2021 Avenue Loan on May 21, 2021, and the fair value and issuable shares will be remeasured at each reporting period. The estimated fair value of the warrant liability was determined using a Black-Scholes valuation model, with a Monte Carlo analysis performed in order to simulate the Next Round Price as an input in the Black-Scholes valuation model. The carrying amount of the liability may fluctuate significantly and actual amounts may be materially different from the liabilities’ estimated value. As of September 30, 2021, the warrant was revalued using a similar Black-Scholes valuation model. The unobservable inputs to the model were as follows: Black-Scholes Valuation Model
|  | September 30, 2021 |  |  | December 31, 2020 |
Expected stock price volatility |  |  | 95.00 | % |  | N/A |
Risk-free interest rate |  |  | 0.90 | % |  | N/A |
Expected dividend yield |  |  | 0.00 | % |  | N/A |
Expected term |  |  | 3.89 years – 4.56 years |  |  | N/A |
Monte Carlo Simulation
|  | September 30, 2021 |  |  | December 31, 2020 |
Expected stock price volatility |  |  | 40.00 – 70.00 | % |  | N/A |
Risk-free interest rate |  |  | 0.07 | % |  | N/A |
Expected dividend yield |  |  | 0.00 | % |  | N/A |
Expected term |  |  | 0.09 years – 0.66 years |  |  | N/A |
Valuation of the Contingent Earn-Outs Pursuant to the Merger Agreement, Clene Nanomedicine’s common shareholders immediately prior to the Reverse Recapitalization and Initial Shareholders of Tottenham were entitled to receive additional shares of up to 8,333,333 shares and 750,000 shares of Common Stock, respectively, upon us achieving certain milestones (see Note 3). Upon the consummation of the Reverse Recapitalization, Clene Nanomedicine and the Initial Shareholders are entitled to receive up to 8,346,185 additional shares as a result of the exercise of the stock options in November 2020, and 750,000 shares of Common Stock. The Contingent Earn-outs were recorded at fair value on the closing of the Reverse Recapitalization on December 30, 2020 and will be remeasured at each reporting period. As of September 30, 2021 and December 31, 2020, no milestone has been achieved. The estimated fair value of the initial Contingent Earn-outs was determined using a Monte Carlo analysis in order to simulate the future path of our stock price over the earn-out periods. The carrying amount of the liabilities may fluctuate significantly and actual amounts paid may be materially different from the liabilities’ estimated value. As of September 30, 2021 and December 31, 2020, the Contingent Earn-outs were revalued using a similar Monte Carlo analysis. The unobservable inputs to the models were as follows:
|  | September 30, 2021 |  |  | December 31, 2020 |
Expected stock price volatility |  |  | 95.00 | % |  |  | 85.00 | %
Risk-free interest rate |  |  | 0.80 | % |  |  | 0.40 | %
Expected dividend yield |  |  | 0.00 | % |  |  | 0.00 | %
Expected term |  |  | 4.2 years |  |  |  | 5.00 years |
The following is a summary of changes in the fair value of our financial liabilities related to the notes payable, the derivative instrument, the Preferred Stock warrants, the warrant liability, and the Contingent Earn-outs measured at fair value for the nine months ended September 30, 2021 and 2020:
(in thousands) |  | Notes Payable |  |  | Clene Nanomedicine Contingent Earn-out |  |  | Initial Shareholders Contingent Earn-out |  |  | Warrant Liability |
Balance - December 31, 2020 |  | $ | 1,296 |  |  | $ | 52,053 |  |  | $ | 5,906 |  |  | $ | - |
Initial fair value of instrument |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,457 |
Change in fair value |  |  | (313 | ) |  |  | (18,072 | ) |  |  | (1,710 | ) |  |  | (547 | )
Balance - September 30, 2021 |  | $ | 983 |  |  | $ | 33,981 |  |  | $ | 4,196 |  |  | $ | 910 |
(in thousands) |  | Notes Payable |  |  | Derivative Instrument |  |  | Preferred Stock Warrants |
Balance - December 31, 2019 |  | $ | 640 |  |  | $ | - |  |  | $ | 3,213 |
Issuance of convertible promissory notes |  |  | - |  |  |  | 705 |  |  |  | - |
Change in fair value |  |  | 323 |  |  |  | (29 | ) |  |  | 7,378 |
Extinguishment of derivative liability in connection with extinguishment of convertible promissory notes |  |  | - |  |  |  | (676 | ) |  |  | - |
Balance - September 30, 2020 |  | $ | 963 |  |  | $ | - |  |  | $ | 10,591 |

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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 http://asc.fasb.org/extlink&oid=123874694&loc=d3e19207-110258 + Details
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