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FAIR VALUE OF FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2021
FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
 4)
FAIR VALUE OF FINANCIAL INSTRUMENTS
 

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
 

 •
Level 1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 

 •
Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
 

 •
Level 3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions.
 
The following tables summarize the liabilities that are measured at fair value as of June 30, 2021 and December 31, 2020:
 
   
As of June 30, 2021
  
Description
  
Level 1
    
Level 2
    
Level 3
  
Liabilities:
                  
Contingent consideration
    
-
      
-
    
$
19,290,000
  
Total
  
$
-
    
$
-
    
$
19,290,000
  

   
As of December 31, 2020
  
Description
  
Level 1
    
Level 2
    
Level 3
  
Liabilities:
                  
Contingent consideration
    
-
      
-
    
$
20,110,000
  
Total
  
$
-
    
$
-
    
$
20,110,000
  
 

The contingent consideration is related to an asset purchase agreement entered into between Brooklyn LLC and IRX Therapeutics (“IRX”) for the acquisition of substantially all of the net assets of IRX, according to which, Brooklyn LLC is obligated to pay royalties to certain noteholders and shareholders of IRX based on future revenues from any future IRX-2 product sales.
 

Contingent consideration was initially valued at the transaction price and is subsequently valued at the end of each reporting period using third-party valuation services or other market observable data. The third-party valuation services use industry standard valuation models, including discounted cash flow analysis, to determine the value. After completing its validation procedures as of June 30, 2021, the Company deemed there was no adjustment to record to the carrying amount of the contingent consideration for the three months ended June 30, 2021.  During the six months ended June 30, 2021, the Company adjusted the carrying amount of its contingent consideration liabilities as follows:
 
   
Other Liabilities:
Contingent
Consideration
  
Balance as of December 31, 2020
  
$
20,110,000
  
Fair value adjustments included in operating expenses
    
(820,000
)
Balance as of June 30, 2021
  
$
19,290,000
  
 

Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained. Future changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the statements of operations.
 

Contingent consideration may change significantly as development progresses and additional data are obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability and the timing in which the milestones are expected to be achieved. In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange.  Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates.

For purposes of this calculation, a royalty equal to 13% of revenue (consisting of the royalty due to University of South Florida and the royalty due to the collaborator) is assumed until 2029 and a royalty of 7% of revenues is assumed from 2030 to 2038. The post patent decline is 50% in the first year and 10% thereafter. Income taxes were projected to be 26% of net royalty savings. The cash flows were discounted by the liability specific weighted average cost of capital of 26% using the mid-point convention.