Note 9 - Fair Value Measurements

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of June 30, 2023 and December 31, 2022:

For the six months ended June 30, 2023 there was an increase of approximately $1.6 million in Level 3 liabilities measured at fair value.

The fair value of the convertible notes may change significantly as additional data is obtained, impacting the Company’s assumptions used to estimate the fair value of the liabilities. In evaluating this information, considerable judgment is required to interpret the data used to develop the assumptions and estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.

The following table presents changes in Level 3 liabilities measured at fair value for the six months ended June 30, 2023. Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

Convertible Notes

During the year ended December 31, 2022, the Company issued convertible promissory notes (the “2022 Notes”). The fair value of the 2022 Notes on the issuance dates, and as of December 31, 2022 were estimated using a Monte Carlo simulation to capture the path dependencies intrinsic to their terms. The significant unobservable inputs used in the fair value measurement of the Company’s convertible notes are the common stock price, volatility, and risk-free interest rates. Significant changes in these inputs may result in significantly lower or higher fair value measurement. The Company elected the fair value option when recording its 2022 Notes and the 2022 Notes were classified as liabilities and measured at fair value on the issuance date, with changes in fair value recognized as other income (expense) on the statements of operations and disclosed in the condensed consolidated financial statements.

During the six months ended June 30, 2023, seven noteholders converted a portion of their 2022 Notes into 248,981 shares of the Company’s commons stock (See Note 11). The fair value of the converted notes totaled $2.2 million.

February Waiver Agreement

On February 28, 2023, the Company entered into waiver agreements with holders of the 2022 Notes (See Note 11). In connection with this waiver agreement, the 2022 Notes were revalued as of the amendment date.

March Waiver Agreement

On March 24, 2023, the Company entered into the second waiver agreements with holders of the 2022 Notes (See Note 11). A select number of holders elected to increase the principal balance of their notes. The Company revalued the respective notes on the date prior to the amendment date, and again on the amendment date. The change in fair value related to the amendment of these 2022 Notes was approximately $0.4 million.

On June 4, the Company entered into an Exchange Agreement where the 2022 Notes balance with a fair value of $0.2 million was exchanged for Series F Preferred stock. As of June 30, 2023, there was no outstanding balance related to the 2022 Notes.

Line of Credit

On February 3, 2023 the Company drew down $2.0 million from the Line of Credit and in accordance with the terms of the agreement issued the 2023 Note of $2.0 million. The 2023 Note had fair value at issuance of $1.9 million and the Company recorded a gain on issuance of approximately $0.1 million, which is included in other income (expense) on the accompanying condensed statement of operations.

Between May 17, 2023 and May 30, 2023 the Company drew down $0.4 million from the Line of Credit and in accordance with the terms of the agreement issued the 2^nd and 3^rd Notes.

As of June 30, 2023, the fair value of the 2023 Note was approximately $0.3 million.

Warrants

Senior Secured Notes

In connection with the issuance of its senior secured notes on January 3, 2023 (See Note 11), the Company issued 41,667 warrants to purchase shares of the Company’s common stock. The warrants had a fair value at issuance of $157,000, and as of June 30, 2023 have a fair value of $35,000.

Line of Credit

On February 2, 2023, in connection with the issuance of its Line of Credit, the Company issued 45,000 warrants to purchase shares of its Series E preferred stock (See Note 13). The warrants had a fair value at issuance of approximately $5.6 million, and as of June 30, 2023 have a fair value of approximately $0.4 million.

Warrant Inducement and Exercise Agreement

During the year ended December 31, 2022, in connection with the 2022 Notes, the Company issued 362,657 warrants to purchase shares of the Company’s common stock.

During the six months ended June 30, 2023, in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain holders. Under the terms of the agreement, the holders exercised 106,764 warrants with a fair value of approximately $0.76 million and the Company issued 106,764 new warrants to purchase shares of its common stock with a fair value of $1.26 million. The Company recognized a loss on extinguishment of the warrants of approximately $0.5 million which is included in other income (expense) on the accompanying condensed statement of operations.

February Waiver Agreement

As consideration for the February waiver agreement, the Company issued 96,890 warrants to purchase shares of the Company’s common stock with a fair value of $0.7 million on issuance date.

As of June 30, 2023, there are 459,547 warrants outstanding issued in connection with the 2022 Notes, with a fair value of approximately $0.4 million.

The warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income (expense) on the statements of operations and disclosed in the condensed consolidated financial statements.

Exchange Agreements

As part of the Exchange Agreements, the Company issued 592,129 warrants to purchase shares of the Company’s common stock. The Company concluded that the Exchange Warrants are liability classified with a fair value of $1.3 million as of June 4, 2023 issuance date. As of June 30, 2023, the fair value of the Exchange Warrants is $1.0 million.

Series F-1 and F-2 Issuances

As part of the Series F-1 and F-2 Preferred Stock issuances, the Company issued 523,323 warrants to purchase shares of the Company’s common stock. The Company concluded that the Series F-1 and Series F-2 Warrants are liability classified with a fair value of $1.2 million as of the issuance date. As of June 30, 2023, the fair value of the Series F-1 and Series F-2 Warrants is $0.9 million.

A summary of significant unobservable inputs (Level 3 inputs) used in measuring warrants on the issuance dates and as of June 30, 2023 and December 31, 2022 is as follows:

Significant changes in the expected price volatility and expected term would result in significantly lower or higher fair value measurement of the warrants, respectively.