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FAIR VALUE OF FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2022
FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract] |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
4) | FAIR VALUE OF FINANCIAL INSTRUMENTS
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. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
| ● | Level 1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
| ● | Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
| ● | Level 3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions.
There were no liabilities measured at fair value as of December 31, 2021. The following tables summarize the liabilities that are measured at fair value as of September 30, 2022 (in thousands):
|  | As of September 30, 2022 |
Description |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Liabilities: |  |  |  |  |  |  |  |  |
Warrant liabilities - Common Warrants |  | $ | - |  |  | $ | - |  |  | $ | 633 |
Total |  | $ | - |  |  | $ | - |  |  | $ | 633 |
On March 9, 2022, the Company issued pre-funded warrants exercisable for approximately 68,000 shares of common stock (the “Pre-Funded Warrants”) and warrants exercisable for approximately 343,000 shares of common stock (the “Common Warrants”) to the PIPE Investor in connection with the PIPE Transaction (as each such term is defined in Note 12). On July 12, 2022, the PIPE Investor exercised its 68,000 Pre-Funded Warrants at an exercise price of $0.10 per share for an aggregate exercise price of approximately $7,000 in cash. The Company issued 68,000 shares of common stock to the PIPE Investor on July 14, 2022 upon receipt of the cash proceeds. Following the exercise, no Pre-Funded Warrants remained outstanding. See Note 12 for more information related to the PIPE Transaction. The Common Warrants and Pre-Funded Warrants were accounted for as liabilities under ASC 815-40, Derivatives and Hedging, Contracts in Entity’s Own Equity (“ASC 815-40”), as these warrants provide for a cashless settlement provision that does not meet the requirements of the indexation guidance under ASC 815-40. These warrant liabilities were measured at fair value at inception and are then subsequently measured on a recurring basis, with changes in fair value presented within the Company’s statements of operations. The Company uses a Black-Scholes option pricing model to estimate the fair value of the Common Warrants, which is considered a Level 3 fair value measurement. Certain inputs used in this Black-Scholes pricing model may fluctuate in future periods based upon factors that are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the Company’s warrant liabilities, which could also result in material non-cash gains or losses being reported in the Company’s consolidated statement of operations. The estimated fair value of the Pre-Funded Warrants was deemed a Level 2 measurement as all significant inputs to the valuation model used to estimate the fair value of the Pre-Funded Warrants were directly observable from the Company’s publicly-traded common stock. Upon exercise of the Pre-Funded Warrants on July 12, 2022, the Company reclassified the fair value of the Pre-Funded Warrants to equity as of such date. The fair values of the Common Warrants and the Pre-Funded Warrants at the issuance date totaled $12.6 million in the aggregate, which was $0.6 million more than the $12.0 million proceeds received in the PIPE Transaction. The excess $0.6 million represents an inducement to the purchaser to enter into the PIPE Transaction and was recorded in warrant liabilities expense in the accompanying consolidated statement of operations. Given the Company’s capital requirements and market conditions, the Company consummated this financing on market terms available at the time of the transaction. The Company remeasured the fair value of the Common Warrants as of September 30, 2022. The following table presents the changes in the warrant liabilities from the issuance date (in thousands):
|  | Pre-Funded Warrants (Level 2) |  |  | Common Warrants (Level 3) |  |  | Total Warrant Liabilities |
Fair value at January 1, 2022 |  | $ | - |  |  | $ | - |  |  | $ | - |
Fair value at March 9, 2022 (issuance date) |  |  | 2,646 |  |  |  | 9,943 |  |  |  | 12,589 |
Change in fair value of warrant liabilities |  |  | (1,779 | ) |  |  | (9,310 | ) |  |  | (11,089 | )
Exercise of pre-funded warrants |  |  | (867 | ) |  |  | - |  |  |  | (867 | )
Fair value at September 30, 2022 |  | $ | - |  |  | $ | 633 |  |  | $ | 633 |

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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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