XML 25 R14.htm IDEA: XBRL DOCUMENT v3.25.3
DERIVATIVE LIABILITIES
 9 Months Ended
Sep. 30, 2025
DERIVATIVE LIABILITIES  
DERIVATIVE LIABILITIES

8. DERIVATIVE LIABILITIES

 

In accordance with the provisions of ASC 815, derivative liabilities are initially measured at fair value at the commitment date and subsequently remeasured at each reporting period, with any increase or decrease in the fair value recorded in the results of operations within other income/expense as the change in fair value of derivative liabilities.

 

As of September 30, 2025 and December 31, 2024, derivative liabilities consist of the contingent milestone payment due to Knight Therapeutics, Inc. (“Knight”), a former lender of the Company, as required by the Debt Conversion Agreement executed between the Company and Knight on January 9, 2023, as subsequently amended (the “Knight Debt Conversion Agreement”). Key points of this agreement were as follows:

 

 

●

The Parties agreed to fix Knight’s cumulative debt to the value as it stood on March 31, 2022, which consisted of principal and accumulated interest. As a result of the completion of the IPO, the cumulative outstanding principal as of March 31, 2022 converted to 18,473 shares of common stock (representing 19.9% ownership of the Company’s common stock after giving effect to the IPO), and the entirety of the accumulated interest as of March 31, 2022 converted into 80,965 shares of Series A Preferred Stock, in full satisfaction of the Company’s obligations with respect to the outstanding principal and accumulated interest.

  

 

●

The Parties agreed that the Company will make a milestone payment of $10 million to Knight if, after the IPO, the Company sells Arakoda™ or if a Change of Control (as per the definition included in the original loan agreement dated on December 10, 2015) occurs, provided that the purchaser of Arakoda™ or individual or entity gaining control of the Borrower is not the Lender or an affiliate of the Lender.

 

 

●

For the period ending upon the earlier of (i) 10 years after the closing of the IPO, or (ii) the conversion or redemption in full of the Series A Preferred Stock, the Company will pay to Knight a royalty equal to 3.5% of the Company’s net sales (the “Royalty”) on a quarterly basis, where “Net Sales” has the same meaning as in the Company’s license agreement with the U.S. Army for tafenoquine.

 

Upon consummation of the IPO, the Company concluded that the contingent milestone payment is a freestanding financial instrument that meets the definition of a derivative under ASC 815, and accordingly, the fair value of the derivative liability is marked to market each reporting period until settled. The Royalty due to Knight was determined to be an embedded component of the Series A Preferred Stock, however, is exempt from derivative accounting under the ASC 815 scope exception for specified volumes of sales or service revenues. Therefore, the Company accrues a royalty expense as sales are made.

 

The valuation of the contingent milestone payment includes significant unobservable inputs such as the timing and probability of discrete potential exit scenarios, forward interest rate curves, and discount rates based on implied and market yields.

 

A reconciliation of the beginning and ending balances for the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three and nine months ended September 30, 2025:

 

 

 

Contingent Milestone Payment

Derivative liabilities - December 31, 2024

 

$

640,830

Change in fair value

 

 

(5,105)

Derivative liabilities - March 31, 2025

 

 

635,725

Change in fair value

 

 

140,447

Derivative liabilities - June 30, 2025

 

 

776,172

Change in fair value

 

 

21,103

Derivative liabilities - September 30, 2025

 

$

797,275

 

A reconciliation of the beginning and ending balances for the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three and nine months ended September 30, 2024:

 

 

 

Contingent Milestone Payment

Derivative liabilities - December 31, 2023

 

$

2,306,796

Change in fair value

 

 

(1,740,847)

Derivative liabilities - March 31, 2024

 

 

565,949

Change in fair value

 

 

1,101

Derivative liabilities - June 30, 2024

 

 

567,050

Change in fair value

 

 

56,712

Derivative liabilities - September 30, 2024

 

$

623,762

 

Changes in the fair value of derivative liabilities are included in other income (expense) in the accompanying consolidated condensed statements of operations and comprehensive loss. During the nine months ended September 30, 2025 and 2024, the Company recorded a net (loss) gain on the change in the fair value of derivative liabilities of ($156,445) and $1,683,034, respectively.