Disc Medicine, Inc. - 10-K filing on 2022-03-10

Fair Value Measurements

12 Months Ended

Dec. 31, 2021

4. Fair value measurements

The following tables present information about the Company’s financial assets and liabilities measured at fair value (in thousands) on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:


December 31, 2021	Level 1		Level 2		Level 3		Total
Assets
Money market funds in cash and cash equivalents	$	135,631	$	—	$	—	$	135,631


December 31, 2020	Level 1		Level 2		Level 3		Total
Assets
Money market funds in cash and cash equivalents	$	4,015	$	—	$	—	$	4,015

Liabilities
Warrant liability	$	—	$	—	$	76	$	76

The values of cash equivalents are classified as Level 1 measurements under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. As of December 31, 2021 and 2020, cash equivalents were comprised of funds in money market accounts. There were no transfers or reclassifications between Level 1, Level 2 and Level 3 during the year ended December 31, 2021.

The value of the warrant liability was classified as a Level 3 measurement under the fair value hierarchy, as this liability was valued based on significant inputs not observable in the market.

Warrants to purchase Series A Preferred Stock

In February 2019, concurrent with the Company’s Term Loan agreement, the Company issued warrants to purchase 15,257 shares of Old Gemini’s Series A preferred stock. The warrants had an exercise price of $5.46 per share and expired in February 2029, representing a contractual term of ten years from issuance. At the closing of the Business Combination, the warrants were automatically exercised for 15,257 shares of the Company’s common stock.

The fair value of the warrants was recorded as a liability on the date of issuance and was revalued at the end of each reporting period until being exercised upon the closing of the Business Combination.

The following table provides a roll-forward of the activity of the Company’s Series A preferred stock warrant liability, which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy wherein fair value is estimated using significant unobservable inputs (in thousands):


Balance at December 31, 2019	$	68
Change in fair value		8
Balance at December 31, 2020	$	76
Warrant exercise		(76	)
Balance at December 31, 2021	$	—

The fair value of the warrants to purchase shares of the Company’s Series A preferred stock at an exercise price of $5.46 per share, including subsequent remeasurements, was estimated using the Black-Scholes Option Pricing Model using the following assumptions:


	Year Ended December 31,
	2021			2020
Fair value of the underlying instrument	$	—		$5.87 - $6.47
Risk-free interest rate		—	%	0.57% - 0.75%
Expected term (in years)		—		8.1 - 8.9
Expected volatility		—	%	73.8% - 79.2%
Expected dividend yield		—	%		0.0	%

The risk-free interest rate used is the rate for a U.S. Treasury zero coupon issue with a term consistent with the remaining contractual term of the warrant on the date of measurement. The Company has not paid, and does not expect to pay, any cash dividends in the foreseeable future. The Company based the expected term assumption on the actual remaining contractual term of the respective warrants as of the date of measurement. The expected volatility is based on historical volatilities from guideline companies since there is no active market for the Company’s common stock. The fair value on the date of measurement of the Series A preferred stock, the underlying instrument, was estimated by management with the assistance of a third-party valuation specialist.