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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2023
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 on a recurring basis and the level of inputs used in such measurements (in thousands):
|  | June 30, 2023 |
|  | Balance |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Convertible Debentures |  | $ | 18,440 |  |  | $ | — |  |  | $ | — |  |  | $ | 18,440 |
Derivative liabilities |  |  | 6,566 |  |  |  | — |  |  |  | — |  |  |  | 6,566 |
Other long-term liabilities |  |  | 169 |  |  |  | — |  |  |  | — |  |  |  | 169 |
Total liabilities measured at fair value |  | $ | 25,175 |  |  | $ | — |  |  | $ | — |  |  | $ | 25,175 |
|  | December 31, 2022 |
|  | Balance |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  | $ | 1,231 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,231 |
Other long-term liabilities |  |  | 163 |  |  |  | — |  |  |  | — |  |  |  | 163 |
Total liabilities measured at fair value |  | $ | 1,394 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,394 |
Convertible Debentures In March and April 2023, the Company issued the Convertible Debentures in the principal amount of $25.0 million (see Note 7). The C onvertible Debentures are measured at fair value on a recurring basis using Level 3 inputs. The Company uses the Binomial Lattice Model valuation technique to measure the fair value of the convertible debentures with any changes in the fair value of the convertible debentures recorded in the unaudited condensed consolidated statements of operations. Interest expense related to the Convertible Debentures is included in the changes in fair value. As of June 30, 2023, the Company recorded $3.7 million in change in fair value of the convertible debentures. A summary of inputs used in valuing the Convertible Debentures is as follows:
|  | June 30, |
|  | 2023 |
Risk -Free Rate |  |  | 5.29 | %
Corporate Bond Yield |  |  | 16.33 | %
Coupon Interest Rate |  |  | 7.0 | %
Volatility |  |  | 42.0 | %
Dividend Yield |  |  | 0.0 | %
Conversion Price |  | $ | 8.00 |
Derivative Liabilities The Company recorded a loss of $0.1 million and $2.7 million for the three months ended June 30, 2023 and 2022, respectively, and a loss of $5.3 million and a gain of $4.8 million for the six months ended June 30, 2023 and 2022, respectively, on derivative liabilities which was attributed to the private placement warrants that the Company assumed from Vickers in November 2022 in connection with the Business Combination (“Private Warrants”), and compound derivative liabilities associated with the senior secured notes issued by Scilex Pharma in September 2018 (the “Scilex Pharma Notes”), respectively. At the closing of the Business Combination in November 2022, the Company assumed a derivative warrant liability of $2.5 million related to Private Warrants. The fair value of derivative warrant liability related to Private Warrants was $6.6 million as of June 30, 2023. The following table includes a summary of the derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the six months ended June 30, 2023 (in thousands):
|  | Fair Value |
Ending Balance as of December 31, 2022 |  | $ | 1,231 |
Change in fair value measurement |  |  | 5,335 |
Ending Balance as of June 30, 2023 |  | $ | 6,566 |
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, described in Note 8 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K. A su mmary of the inputs used in valuing the derivative warrant liabilities is as follows:
|  | June 30, |  |  | December 31, |
|  | 2023 |  |  | 2022 |
Equity value |  | $ | 5.57 |  |  | $ | 3.99 |
Exercise price |  | $ | 11.50 |  |  | $ | 11.50 |
Term, in years |  |  | 4.36 |  |  |  | 4.86 |
Volatility |  |  | 55.0 | % |  |  | 35.0 | %
Risk-free rate |  |  | 4.20 | % |  |  | 3.94 | %
Dividend yield |  |  | 0.0 | % |  |  | 0.0 | %
Call option value |  | $ | 1.60 |  |  | $ | 0.30 |
Contingent Consideration Related to SP-104 Acquisition The Development Milestone Payment related to the SP-104 Assets represents an obligation to potentially settle a fixed value in a variable number of shares of Common Stock and requires remeasurement at fair value through settlement. 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 unobservable inputs assu mptions 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 10.6%. As of June 30, 2023 and December 31, 2022, the fair value of contingent consideration related to the Development Milestone Payment was $0.2 million.

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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