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Fair Value Measurements
 12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
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 December 31, 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

 

$

2,184

 

 

$

2,184

 

 

$

—

 

 

$

—

 

Total assets measured at fair value

 

$

2,184

 

 

$

2,184

 

 

$

—

 

 

$

—

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

1,231

 

 

$

—

 

 

$

—

 

 

$

1,231

 

Other long-term liabilities

 

 

163

 

 

 

—

 

 

 

—

 

 

 

163

 

Total liabilities measured at fair value

 

$

1,394

 

 

$

—

 

 

$

—

 

 

$

1,394

 

 

 

 

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

 

 

Cash and cash equivalents

 

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 $8.3 million, loss of $0.3 million, and gain of $0.8 million on derivative liabilities for the years ended December 31, 2022, 2021, and 2020, respectively, which was attributed to compound derivative liabilities associated with the Scilex Pharma Notes (see Note 7) and Private Warrants. The fair value of the derivative liability associated with the Scilex Pharma Notes decreased by $30.4 million immediately after entry into Amendment No. 4 (see Note 7) associated with the Scilex Pharma Notes on June 2, 2022. 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%. The Scilex Pharma Notes were fully extinguished in September 2022 (see Note 7) and, as such, there were no remaining loan derivative liabilities associated with the Scilex Pharma Notes as of December 31, 2022. At the closing of the Business Combination, the Company assumed a derivative warrant liability of $2.5 million related to Private Warrants (See Note 8). The fair value of derivative warrant liability related to Private Warrants was $1.2 million as of December 31, 2022.

 

The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the year ended December 31, 2022:

 

 

 

Fair value

 

Ending Balance at December 31, 2019

 

$

33,400

 

Loan derivative liability

 

 

2,800

 

Re-measurement of fair value

 

 

(800

)

Ending Balance at December 31, 2020

 

$

35,400

 

Re-measurement of fair value

 

 

300

 

Balance at December 31, 2021

 

$

35,700

 

Private Warrant liability acquired as part of the Business Combination

 

 

2,545

 

Forfeiture of Private Warrants

 

 

1,696

 

Change in fair value measurement

 

 

(38,710

)

Balance at December 31, 2022

 

$

1,231

 

 

Warrant Liability Measurement

 

The derivative warrant liability was valued using the Black-Scholes option pricing model, which is considered to be Level 3 fair value measurement. The primary unobservable input utilized in determining the fair value of the warrant is the expected volatility of the Common Stock. The expected volatility assumption is based on historical volatilities of comparable companies whose share prices are publicly available as well as the implied volatility of the Public Warrants. A summary of the inputs used in valuing the derivative warrant liabilities is as follows:

 

 

 

December 31, 2022

 

 

November 10, 2022

 

 

 

Fair value

 

 

Fair Value

 

Equity Value

 

$

3.99

 

 

$

9.01

 

Exercise Price

 

$

11.50

 

 

$

11.50

 

Term (in years)

 

 

4.86

 

 

 

5.00

 

Volatility

 

 

35.0

%

 

 

10.0

%

Risk-free rate

 

 

3.94

%

 

 

3.91

%

Dividend yield

 

 

0.00

%

 

 

0.00

%

Call option value

 

$

0.30

 

 

$

0.62

 

 

 

Contingent Consideration

 

The Development Milestone Payment represents a liability under the scope of ASC Topic 480, Distinguishing Liabilities from Equity, as it pertains to a potential contractual obligation to settle a fixed value in a variable number of shares of Common Stock. Upon the achievement of FDA approval for a new drug application for SP-104, the Company will transfer $3.0 million in cash or shares of Common Stock, at the discretion of the Company. The fair value of the contingent consideration liability associated with Development Milestone Payment was estimated using a probability-weighted discounted cash flow method. Significant Level 3 assumptions included the likelihood of receiving FDA approval for SP-104, expected timing for receipt of FDA approval for SP-104, and a discount rate of 10.0%. As of December 31, 2022, the fair value of contingent consideration related to the Development Milestone Payment was $0.2 million.

 

There were no transfers between fair value measurement levels during the years ended December 31, 2022, 2021, and 2020.