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Fair Value Measurements | 9 Months Ended | 12 Months Ended
--- | --- | ---
Sep. 30, 2022 | Dec. 31, 2021
FAIR VALUE MEASUREMENTS |
4. | Fair Value Measurements
The following table presents the Company’s financial assets and liabilities that are measured at fair value (in thousands):
|  | Fair value measurements at September 30, 2022 |
|  | Balance |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 2,483 |  |  | $ | 2.483 |  |  | $ | — |  |  | $ | — |
Total assets measured at fair value |  | $ | 2,483 |  |  | $ | 2.483 |  |  | $ | — |  |  | $ | — |
|  | Fair value measurements at December 31. 2021 |
| Balance |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 4,338 |  |  | $ | 4,338 |  |  | $ | — |  |  | $ | — |
Total assets measured at fair value |  | $ | 4,338 |  |  | $ | 4,338 |  |  | $ | — |  |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  | $ | 35,700 |  |  | $ | — |  |  | $ | — |  |  | $ | 35,700 |
Total liabilities measured at fair value |  | $ | 35,700 |  |  | $ | — |  |  | $ | — |  |  | $ | 35,700 |
The Company’s financial assets carried at fair value are comprised of cash and cash equivalents. Cash and cash equivalents consist of money market accounts and bank deposits which are highly liquid and readily tradable. These assets are valued using inputs observable in active markets for identical securities. Derivative liabilities The Company recorded a gain of $ 5.3 million and $ 0.1 million on derivative liabilities for the nine months ended September 30 , 2022 and 2021 , respectively, which was attributed to compound derivative liabilities associated with the Scilex Pharma Notes (see Note 6) . The fair value of the derivative liability associated with the Scilex Pharma Notes decreased by $ 30.4 million immediately after the entry into Amendment No . 4 (see Note 6) associated with the Scilex Pharma Notes on June 2 , 2022 (see Note 6) . Amendment No . 4 was accounted for as troubled debt restructuring; therefore, the carrying amount of the Scilex Pharma Notes, net, was adjusted to reflect the aforementioned change in fair value of the derivative liability. The fair value of the derivative liability associated with the Scilex Pharma Notes was estimated using the discounted cash flow method combined with a Monte Carlo simulation model including consideration of the terms of Amendment No. 4. Significant Level 3 assumptions used in the measurement included a 6.1 % risk adjusted net sales forecast and an effective debt yield of 21.5 % as of June 30, 2022. The Scilex Pharma Notes were fully extinguished in September 2022 (see Note 6) and, as such, there were no remaining derivative liabilities as of September 30, 2022. The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2022:
|  | Fair value |
Balance at December 31, 2021 |  | $ | 35,700 |
Change in fair value measurement |  |  | (35,700 | )
Balance at September 30, 2022 |  | $ | — |
5 . | Fair Value Measurements
The following table presents the Company’s financial assets and liabilities that are measured at fair value (in thousands):
|  | Fair value measurements at December 31, 2021 |
| Balance |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 4,338 |  |  | $ | 4,338 |  |  | $ | — |  |  | $ | — |
Total assets measured at fair value |  |  | 4,338 |  |  |  | 4,338 |  |  |  | — |  |  |  | — |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  |  | 35,700 |  |  |  | — |  |  |  | — |  |  |  | 35,700 |
Total liabilities measured at fair value |  | $ | 35,700 |  |  | $ | — |  |  | $ | — |  |  | $ | 35,700 |
|  | Fair value measurements at December 31, 2020 |
|  | Balance |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 4,839 |  |  | $ | 4,839 |  |  | $ | — |  |  | $ | — |
Total assets measured at fair value |  |  | 4,839 |  |  |  | 4,839 |  |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  |  | 35,400 |  |  |  | — |  |  |  | — |  |  |  | 35,400 |
Total liabilities measured at fair value |  | $ | 35,400 |  |  | $ | — |  |  | $ | — |  |  | $ | 35,400 |
The Company’s financial assets carried at fair value are comprised of cash and cash equivalents. Cash and cash equivalents consist of money market accounts and bank deposits which are highly liquid and readily tradable. These assets are valued using inputs observable in active markets for identical securities. Derivative liabilities The Company recorded a loss of $ 0.3 million, a gain of $ 0.8 million and a loss of $ 23.3 million on derivative liabilities for the years ended December 31 , 2021 , 2020 and 2019 , respectively, which was attributed to compound derivative liabilities associated with the Scilex Pharma Notes. The compound derivative liabilities consist of the fair value of various embedded features as further described in Note 8 . The fair value of the derivative liabilities associated with the Scilex Pharma Notes was estimated using the discounted cash flow method under the income approach combined with a Monte Carlo simulation model. This involves significant Level 3 inputs and assumptions. The key assumptions for the compound derivative liabilities associated with the Scilex Pharma Notes for the year ended December 31 , 2021 included a 6.2 % risk-adjusted net sales forecast and an effective debt yield of 15.0 %. The key assumptions for the compound derivative liabilities associated with the Scilex Pharma Notes for the year ended December 31 , 2020 included a 7 % risk-adjusted net sales forecast, an effective debt yield of 15 % and an estimated probability of 100 % of not obtaining marketing approval before March 31 , 2021 . The key assumptions for the compound derivative liabilities associated with the Scilex Pharma Notes for the year ended December 31 , 2019 included an 8 % risk adjusted net sales forecast, an effective debt yield of 19.7 % and estimated probabilities of 100 % and 55 % of not obtaining marketing approval before March 31 , 2021 and July 1 , 2023 , respectively, and an estimated high probability of an initial public offering of the Company that satisfies certain valuation thresholds occurring prior to October 1 , 2020 . The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the years ended December 31, 2021, 2020 and 2019:
|  | Fair value |
Beginning Balance at December 31, 2018 |  | $ | — |
Additions |  |  | 10,100 |
Re-measurement of fair value |  |  | 23,300 |
Ending Balance at December 31, 2019 |  |  | 33,400 |
Additions |  |  | 2,800 |
Re-measurement of fair value |  |  | (800 | )
Ending Balance at December 31, 2020 |  |  | 35,400 |
Additions |  |  | — |
Re-measurement of fair value |  |  | 300 |
Ending Balance at December 31, 2021 |  | $ | 35,700 |
Vicker's Vantage |  |
FAIR VALUE MEASUREMENTS | NOTE 9. FAIR VALUE MEASUREMENTS The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
| Level 2: | Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
| Level 3: | Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.
At September 30, 2022 and December 31, 2021, assets held in the Trust Account were comprised of $101,293,086 and $139,410,739, respectively, in money market funds which are invested primarily in U.S. Treasury Securities. Through September 30, 2022, the Company did not withdraw any interest earned on the Trust Account. The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
Description |  | Level |  |  | September 30, 2022 |  |  | December 31, 2021 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Investments held in Trust Account – U.S. Treasury Securities Money Market Fund |  |  | 1 |  |  | $ | 101,293,086 |  |  | $ | 139,410,739 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Warrant Liability – Private Placement Warrants |  |  | 3 |  |  | $ | 1,162,800 |  |  | $ | 3,351,600 |
Conversion Option Liability (see Note 5) |  |  | 3 |  |  | $ | — |  |  | $ | 6,892 |
The Private Placement Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities on our accompanying September 30, 2022 unaudited condensed consolidated balance sheets. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the unaudited condensed consolidated statements of operations. Warrant Liability Measurement The Company established the initial fair value for the private warrants on January 11, 2021, the date of the Company’s Initial Public Offering, using a Monte Carlo simulation and subsequently implemented the Black-Scholes Option Pricing Model that was modified to capture the redemption features of the public warrants. The underlying assumptions in the Black-Scholes option pricing model include the underlying share price, risk-free interest rate, estimated volatility and the expected term. The primary unobservable inputs utilized in determining the fair value of the private warrants are the expected volatility of the Company’s ordinary shares and the Company’s ordinary share price. The expected volatility of the ordinary shares was determined based on implied volatilities of public warrants issued by selected guideline companies and was estimated to be 10% before the expected business combination and 20% after the expected business combination. The ordinary share price was determined based on an iterative procedure that matched the estimated value of the ordinary shares and fractional warrant price to equate to the observed price of the outstanding units. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of valuation equal to the remaining expected life of the private warrants. The dividend yield percentage is zero because the Company does not currently pay dividends, nor does it intend to do so during the expected term of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. Inputs are re-evaluated each quarterly reporting period to estimate the fair market value of the private placement warrants as of the reporting period. There were no transfers between Levels 1, 2 or 3 during the three and nine months ended September 30, 2022 and 2021. The following table provides quantitative information regarding Level 3 fair value measurements:
|  | As of September 30, 2022 |  |  | As of December 31, 2021 |
Stock price |  | $ | 10.33 |  |  | $ | 10.04 |
Strike price |  | $ | 11.50 |  |  | $ | 11.50 |
Term (in years) |  |  | 5.00 |  |  |  | 5.28 |
Volatility |  |  | 0.0 | % |  |  | 8.3 | %
Risk-free rate |  |  | 4.03 | % |  |  | 1.28 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Fair value of warrants |  | $ | 0.17 |  |  | $ | 0.49 |
The following table presents the changes in the fair value of warrant liabilities:
|  | Private Placement |
Fair value as of January 1, 2021 |  | $ | — |
Initial measurement on January 11, 2021 |  |  | 7,729,200 |
Change in valuation inputs or other assumptions |  |  | (4,104,000 | )
Fair value of as of March 31, 2021 |  |  | 3,625,200 |
Change in valuation inputs or other assumptions |  |  | 68,400 |
Fair value of as of June 30, 2021 |  |  | 3,693,600 |
Change in valuation inputs or other assumptions |  |  | 1,162,800 |
Fair value of as of September 30, 2021 |  |  | 4,856,400 |
Change in valuation inputs or other assumptions |  |  | (1,504,800 | )
Fair value of as of December 31, 2021 |  |  | 3,351,600 |
Change in valuation inputs or other assumptions |  |  | 410,400 |
Fair value as of March 31, 2022 |  |  | 3,762,000 |
Change in valuation inputs or other assumptions |  |  | (2,530,800 | )
Fair value as of June 30, 2022 |  |  | 1,231,200 |
Change in valuation inputs or other assumptions |  |  | (68,400 | )
Fair value as of September 30, 2022 |  | $ | 1,162,800 |
Conversion Option Liability Measurement The Company assessed the provisions of the Convertible Promissory Notes under ASC 470-20. The derivative component of the obligation is initially valued and classified as a derivative liability. The conversion option was valued using the compound option pricing model, which is considered to be a Level 3 fair value measurement (See Note 6).
|  | As of September 30, 2022 |  |  | As of December 31, 2021 |
Underlying warrant value |  | $ | 0.0000 |  |  | $ | 0.0103 |
Exercise price |  | $ | 0.75 |  |  | $ | 0.75 |
Holding period |  |  | 0.50 |  |  |  | 0.28 |
Risk-free rate |  |  | 4.03 | % |  |  | 1.28 | %
Volatility |  |  | 5.3 | % |  |  | 8.3 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
The following table presents the change in the fair value of conversion option liability:
|  | Conversion Option Liability |
Fair value as of January 1, 2021 |  | $ | — |
Initial measurement on December 20, 2021 |  |  | 18,727 |
Change in valuation inputs or other assumptions |  |  | (11,835 | )
Fair value of as of December 31, 2021 |  |  | 6,892 |
Initial measurement on January 10, 2022 |  |  | — |
Initial measurement on January 27, 2022 |  |  | — |
Change in valuation inputs or other assumptions |  |  | 69,896 |
Fair value as of March 31, 2022 |  |  | 76,788 |
Change in valuation inputs or other assumptions |  |  | (76,788 | )
Fair value as of June 30, 2022 and September 30, 2022 |  | $ | — |
| NOTE 9 — FAIR VALUE MEASUREMENTS The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1: |  | Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: |  | Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3: |  | Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.
At December 31, 2021, assets held in the Trust Account were comprised of $139,410,739 in money market funds which are invested primarily in U.S. Treasury Securities. Through December 31, 2021, the Company did not withdraw any of interest earned on the Trust Account. At December 31, 2020, there were no assets in the Trust Account. The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2021 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
Description |  | Level |  |  | December 31, 2021 |
Assets: |  |  |  |  |  |  |  |
Investments held in Trust Account — U.S. Treasury Securities Money Market Fund |  |  | 1 |  |  | $ | 139,410,739 |
Liabilities: |  |  |  |  |  |  |  |
Warrant Liability — Private Placement Warrants |  |  | 3 |  |  | $ | 3,351,600 |
Conversion Option Liability (see Note 5) |  |  | 3 |  |  | $ | 6,892 |
Warrant Liability Measurement The Company established the initial fair value for the private warrants on January 11, 2021, the date of the Company’s Initial Public Offering, using a Monte Carlo simulation and subsequently implemented the Black-Scholes Option Pricing Model that was modified to capture the redemption features of the public warrants. The underlying assumptions in the Black-Scholes option pricing model include the underlying share price, risk-free interest rate, estimated volatility and the expected term. The primary unobservable inputs utilized in determining the fair value of the private warrants are the expected volatility of the Company’s ordinary shares and the Company’s ordinary share price. The expected volatility of the ordinary shares was determined based on implied volatilities of public warrants issued by selected guideline companies and was estimated to be 10% before the expected business combination and 20% after the expected business combination. The ordinary share price was determined based on an iterative procedure that matched the estimated value of the ordinary shares and fractional warrant price to equate to the observed price of the outstanding units. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of valuation equal to the remaining expected life of the private warrants. The dividend yield percentage is zero because the Company does not currently pay dividends, nor does it intend to do so during the expected term of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. Inputs are re-evaluated each quarterly reporting period to estimate the fair market value of the private placement warrants as of the reporting period. There were no transfers between Levels 1, 2 or 3 during the year ended December 31, 2021. The following table provides quantitative information regarding Level 3 fair value measurements:
|  | As of December 31, 2021 |
Stock price |  | $ | 10.04 |
Strike price |  | $ | 11.50 |
Term (in years) |  |  | 5.28 |
Volatility |  |  | 8.3 | %
Risk-free rate |  |  | 1.28 | %
Dividend yield |  |  | 0.0 | %
Fair value of warrants |  | $ | 0.49 |
The following table presents the changes in the fair value of warrant liabilities:
|  | Private Placement |
Fair value as of January 1, 2021 |  | $ | — |
Initial measurement on January 11, 2021 |  |  | 7,729,200 |
Change in valuation inputs or other assumptions |  |  | (4,377,600 | )
Fair value as of December 31, 2021 |  | $ | 3,351,600 |
Conversion Option Liability Measurement The Company assessed the provisions of the Convertible Promissory Notes under ASC 470-20. The derivative component of the obligation is initially valued and classified as a derivative liability. The conversion option was valued using the compound option pricing model, which is considered to be a Level 3 fair value measurement (See Note 6).
|  | December 31, 2021 |  |  | December 20, 2021 (Initial Measurement) |
Underlying warrant value |  | $ | 0.0103 |  |  | $ | 0.0281 |
Exercise price |  | $ | 0.75 |  |  | $ | 0.75 |
Holding period |  |  | 0.28 |  |  |  | 0.31 |
Risk-free rate % |  |  | 1.28 | % |  |  | 1.19 | %
Volatility% |  |  | 8.3 | % |  |  | 9.3 | %
Dividend yield % |  |  | 0.0 | % |  |  | 0.0 | %
The following table presents the change in the fair value of conversion option liability:
Fair value as of January 1, 2021 |  | $ | — |
Initial measurement on December 20, 2021 |  |  | 18,727 |
Change in fair value |  |  | (11,835 | )
Fair value as of December 31, 2021 |  | $ | 6,892 |

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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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