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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2024
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 6. FAIR VALUE MEASUREMENTS Assets and liabilities recorded at fair value in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. For certain of our financial instruments including amounts receivable and accounts payable the carrying values approximate fair value due to their short-term nature. ASC 820 “Fair Value Measurements and Disclosures” specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820, these inputs are summarized in the three broad levels listed below: • Level 1 – Quoted prices in active markets for identical securities. • Level 2 – Other significant inputs that are observable through corroboration with market data (including quoted prices in active markets for similar securities). • Level 3 – Significant unobservable input that reflects management’s best estimate of what market participants would use in pricing the asset or liability. As quoted prices in active markets are not readily available for certain financial instruments, we obtain estimates for the fair value of financial instruments through third-party pricing service providers. In determining the appropriate levels, we performed a detailed analysis of the assets and liabilities that are subject to ASC 820. We invest our excess cash in accordance with investment guidelines that limit the credit exposure to any one financial institution other than securities issued by the U.S. Government. These securities are not collateralized and mature within one year. A description of the valuation techniques applied to our financial instruments measured at fair value on a recurring basis follows. Financial Instruments The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):
June 30, 2024 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Money market securities (cash equivalents) |  | $ | 14,466 |  |  | $ | — |  |  | $ | — |  |  | $ | 14,466 |
Restricted cash |  |  | 20 |  |  |  | — |  |  |  | — |  |  |  | 20 |
US government securities |  |  | — |  |  |  | 27,093 |  |  |  | — |  |  |  | 27,093 |
Corporate bonds |  |  | — |  |  |  | 18,478 |  |  |  | — |  |  |  | 18,478 |
Commercial paper |  |  | — |  |  |  | 986 |  |  |  | — |  |  |  | 986 |
Total assets |  | $ | 14,486 |  |  | $ | 46,557 |  |  | $ | — |  |  | $ | 61,043 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Convertible debt |  | $ | — |  |  |  | 17,585 |  |  | $ | — |  |  | $ | 17,585 |
Contingent consideration |  |  | — |  |  |  | — |  |  |  | 637 |  |  |  | 637 |
Total liabilities |  | $ | — |  |  | $ | 17,585 |  |  | $ | 637 |  |  | $ | 18,222 |
Money Market Securities Money market securities are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities. Cash equivalents consist of the following (in thousands):
|  |  |  |  | Gross |  |  | Gross |  |  |  |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Estimated |
June 30, 2024 |  | Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |
Money market securities |  | $ | 14,466 |  |  | $ | — |  |  | $ | — |  |  | $ | 14,466 |
Total cash equivalents |  | $ | 14,466 |  |  | $ | — |  |  | $ | — |  |  | $ | 14,466 |
Money market securities (restricted cash) |  | $ | 20 |  |  | $ | — |  |  | $ | — |  |  | $ | 20 |
Total restricted cash |  | $ | 20 |  |  | $ | — |  |  | $ | — |  |  | $ | 20 |
We only invest in A (or equivalent) rated securities. All securities included in cash and cash equivalents had maturities of 90 days or less at the time of purchase. Corporate and Other Debt Corporate Bonds and Commercial Paper The fair value of corporate bonds and commercial paper is estimated using recently executed transactions, market price quotations (where observable), bond spreads or credit default swap spreads adjusted for any basis difference between cash and derivative instruments. The spread data used are for the same maturity as the bond. If the spread data does not reference the issuer, then data that reference a comparable issuer are used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swap spreads and recovery rates based on collateral values as significant inputs. Corporate bonds and commercial paper are generally categorized in Level 2 of the fair value hierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable, they are categorized in Level 3 of the hierarchy.
|  |  |  |  | Gross |  |  | Gross |  |  |  |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Estimated |
June 30, 2024 |  | Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |
US government securities |  | $ | 27,100 |  |  | $ | — |  |  | $ | (7 | ) |  | $ | 27,093 |
Corporate bonds |  |  | 18,482 |  |  |  | — |  |  |  | (4 | ) |  |  | 18,478 |
Commercial paper |  |  | 986 |  |  |  | — |  |  |  | — |  |  |  | 986 |
Total short term investments |  | $ | 46,568 |  |  | $ | — |  |  | $ | (11 | ) |  | $ | 46,557 |
Concentration of Cash and Cash Equivalents Risk We place our cash in a custodial account and in commercial checking and sweep accounts with various financial institutions. As of June 30, 2024, approximately $58.8 million in cash equivalents and short-term investments is held in a custodial account with U.S. Bank, for which SVB Asset Management is the advisor; and approximately $0.1 million of our cash and $1.7 million of our cash equivalents is held in a single financial institution, SVB, as required by the covenants of the Debt Agreement (Note 7 – Convertible Debt). Our commercial bank balances exceed federal insurance limits. We have not experienced any losses in our cash and cash equivalents for the six months ended June 30, 2024 and 2023. Fair Value of Debt December 2021 Convertible Debt The principal amount, carrying value and related estimated fair value of our convertible debt reported in the consolidated balance sheets as of June 30, 2024 and December 31, 2023 was as follows (in thousands). The aggregate fair value of the principal amount of the convertible debt is a Level 2 fair value measurement.
|  | June 30, 2024 |  |  | December 31, 2023 |
|  | Principal |  |  | Carrying |  |  | Fair |  |  | Principal |  |  | Carrying |  |  | Fair |
|  | Amount |  |  | Value |  |  | Value |  |  | Amount |  |  | Value |  |  | Value |
December 2021 Convertible Debt |  | $ | 15,000 |  |  | $ | 17,608 |  |  | $ | 17,585 |  |  | $ | 15,000 |  |  | $ | 16,662 |  |  | $ | 16,652 |
Fair Value of Sopharma Share Purchase Agreement Contingent Consideration We determine the fair value of the contingent consideration using a probability based discounted cash flow model whereby we forecast the timing of the cash flow of the related future payment based on cytisinicline’s current clinical development phase and the remaining requirements for regulatory approval. We then discount the expected payment amount to calculate the present value and then apply a probability of success in obtaining regulatory approval as of the valuation date. We evaluate the underlying projection used in determining the fair value each period and make updates as necessary. The significant assumptions we use to value the contingent consideration are the forecasted timing of the future payment, the risk-adjusted discount rate and the probability of success which are all considered significant unobservable inputs, and as such, the liability is classified as a Level 3 measurement. The risk-adjusted discount rate is adjusted for credit risk. An increase in the discount rate and decrease in the probability of success will result in a decrease in the fair value of the contingent consideration. Conversely, a decrease in the discount rate and increase in the probability of success will result in an increase in the fair value of the contingent consideration. At June 30, 2024 the risk adjusted discount rate was 38.0% and the probability of success was 67.2%. Adjustments to the fair value of the contingent liabilities, other than payments, are recorded as a gain or loss in the Consolidated Statements of Loss and Comprehensive Loss. The following table presents the changes in fair value of our total Level 3 financial liabilities for the six months ended June 30, 2024:
|  | Balance at |  |  | Change in |  |  | Balance at |
(in thousands) |  | December 31, 2023 |  |  | Fair Value |  |  | June 30, 2024 |
Contingent consideration |  | $ | 528 |  |  | $ | 109 |  |  | $ | 637 |

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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/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 107 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-107 Reference 2: http://www.xbrl.org/2003/role/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 100 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-100 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (c)(3) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2E -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2E Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (e) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (d) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 11: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (g) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 12: http://www.xbrl.org/2003/role/disclosureRef -Topic 940 -SubTopic 820 -Name Accounting Standards Codification -Section 50 -Paragraph 1 -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147478119/940-820-50-1 + Details
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