XML 20 R10.htm IDEA: XBRL DOCUMENT v3.23.2
Fair Value Measurements
 6 Months Ended
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 Convertible 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 summary 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 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 10.6%. 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.