Transcode Therapeutics, Inc. Fair Value Disclosure
(3) Fair Value Measurements
ASC 820, “Fair Value Measurements”, provides guidance on the development and disclosure of fair value measurements. The Company follows this guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs which are supported by little or no market activity with values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of the dates of the Company’s balance sheets herein. The carrying amount of cash, grant receivable, prepaid expenses and other current assets, right-of-use asset, accounts payable and accrued expenses, deferred grant income, and current and long-term portion of lease liability approximated their fair value due to their short-term or fixed arrangements nature. Warrant liabilities are recorded based on their fair value.
The Company records it warrant liability at fair value and is considered a Level 3 measurement on the fair value hierarchy due to the significant unobservable imputs used in their valuation such as the probability weighted outcomes regarding the shareholder approval date and the potential de-listing date. The fair value of the warrant liability was determined using a Monte Carlo simulation model within a risk-neutral framework. This widely accepted financial modeling approach is employed to value complex instruments, including warrants with strike price reset and anti-dilution provisions. The model simulates multiple potential future paths for the Company’s stock price, accounting for the reset provision by adjusting the strike price if the stock price falls below a specified level, but not lower than the specified Floor Price. Upon each reset of the strike price, the warrants are also adjusted for quantity, based on the anti-dilution provisions. For each simulated path, the warrant’s payoff is calculated using the final stock price and the potentially adjusted strike price and quantity, then discounted to present value. The fair value is estimated as the average of these discounted payoffs across all simulated paths. This method ensures the valuation reflects the impact of the strike price reset provision and anti-dilution provision on the warrants’ potential values.
The following key assumptions were used in the valuation of the warrant liability as of the issuance date of November 26, 2024, and as of December 31, 2024:
Assumptions | November 26, 2024 | December 31, 2024 |
Risk-free rate | 4.53% | 4.33% |
Volatility | 165.00% | 150.00% |
Expiration date of Series C | November 29, 2029 | November 29, 2029 |
Expiration date of Series D | May 29, 2027 | May 29, 2027 |
Shareholder approval date | February 25, 2025 | February 25, 2025 |
Potential de-listing date | June 30, 2025 | June 30, 2025 |
The fair value of the warrant liability is as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||
Warrant liabilities | ||||||||||||
PIPE warrants - Series C | $ | — | — | $ | 517,871 | $ | 517,871 | |||||
PIPE warrants - Series D | — | — | 6,023,526 | 6,023,526 | ||||||||
Total warrant liabilities, at fair value | $ | — | $ | — | $ | 6,541,397 | $ | 6,541,397 | ||||
PIPE Warrants | PIPE Warrants | Total Warrant | |||||||
Level 3 Rollforward: |
| Series C |
| Series D |
| Liability | |||
Balance, December 31, 2022 | $ | — | $ | — | $ | — | |||
Additions | — | — | — | ||||||
— | — | — | |||||||
Balance, December 31, 2023 | $ | — | $ | — | $ | — | |||
Additions | 501,961 | 5,100,746 | 5,602,707 | ||||||
15,910 | 922,780 | 938,690 | |||||||
Balance, December 31, 2024 | $ | 517,871 | $ | 6,023,526 | $ | 6,541,397 | |||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.