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Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2024
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is determined based upon assumptions that market participants would use in pricing an asset or liability. Fair value measurements are classified on a three-tier hierarchy as follows:

●Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
●Level 2 inputs: Inputs, other than quoted prices, that are observable either directly or indirectly; and
●Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

The carrying amounts of the Company’s short-term financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities, approximate fair value due to the relatively short period to maturity for these level 1 instruments.

As a result of the acquisition of VCN the Company acquired interest-free or below-market interest rate loans extended by Spanish government. The carrying value of the loans payable approximate fair value and are classified under level 2.

In connection with the Acquisition of VCN, the Company is required to pay up to $70.2 million in additional consideration upon the achievement of certain milestones, including regulatory filings completed. In August 2023, the Company initiated patient dosing in the U.S. in its Phase 2 clinical trial of VCN-01 in PDAC. As a result, payment was made in the fourth quarter 2023 in the amount of $3.25 million. The discounted cash flow method used to value this contingent consideration includes inputs of not readily observable market data, which are Level 3 inputs. The fair value of the contingent consideration was $6.2 million as of June 30, 2024 and is all reflected as non-current contingent consideration liability. During the three months ended June 30, 2024 and 2023, the Company recognized in operating expense a $275,000 decrease and $432,000 increase, respectfully, fair value adjustment to contingent consideration. During the six months ended June 30, 2024 and 2023, the Company recognized in operating expense a $73,000 decrease and $568,000 increase, respectfully, fair value adjustment to contingent consideration There were no transfers in or out of the level 3 liabilities during the six months ended June 30, 2024 and 2023.

The following table summarizes the change in the fair value as determined by Level 3 inputs for the contingent consideration liabilities as of June 30, 2024:

​

​

​

​

​

​

    

(in thousands)

Balance at December 31, 2022

​

$

10,184

Payment of contingent consideration

​

​

(3,250)

Change in fair value

​

 

(660)

Balance at December 31, 2023

​

$

6,274

​

​

​

​

Contingent consideration, current portion

​

$

—

Contingent consideration, net of current portion

​

 

6,274

Balance at December 31, 2023

​

$

6,274

​

5. Fair Value of Financial Instruments – (continued)

​

​

​

​

​

​

    

(in thousands)

Balance at December 31, 2023

​

$

6,274

Change in fair value

​

 

(73)

Balance at June 30, 2024

​

$

6,201

​

​

​

​

Contingent consideration, current portion

​

$

—

Contingent consideration, net of current portion

​

 

6,201

Balance at June 30, 2024

​

$

6,201

​

The fair value of financial instruments measured on a recurring basis is as follows:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

    

As of June 30, 2024

Description

    

Total

    

Level 1

    

Level 2

    

Level 3

Liabilities:

 

​

  

 

​

  

 

​

  

 

​

  

Contingent consideration

​

$

6,201

 

$

—

 

$

—

​

$

6,201

Total liabilities

​

$

6,201

 

$

—

 

$

—

​

$

6,201

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

    

As of December 31, 2023

Description

    

Total

    

Level 1

    

Level 2

    

Level 3

Liabilities:

 

​

  

 

​

  

 

​

  

 

​

  

Contingent consideration

​

$

6,274

 

$

—

 

$

—

​

$

6,274

Total liabilities

​

$

6,274

 

$

—

 

$

—

​

$

6,274

​

The recurring Level 3 fair value measurements of contingent consideration for which a liability is recorded include the following significant unobservable inputs:

​

​

​

​

​

​

​

​

​

​

As of June 30, 2024

​

​

Valuation

​

Significant

​

Weighted Average

​

    

Methodology

    

Unobservable Input

    

(range, if applicable)

Contingent Consideration

 

Discounted Cash Flows

 

Milestone dates

 

2026-2028

​

 

​

​

​

​

​

​

 

  

 

Discount rate

 

14.2% to 14.6%

​

 

  

 

Weighted Average Discount rate

 

14.44%

​

 

  

 

Probability of Occurrence (periodic for each Milestone)

 

11.7% to 92.0%

​

 

  

 

Probability of occurrence (cumulative through each Milestone)

 

5.3% to 48.8%

​

​

​

​

​

​

​

​

​

    

As of December 31, 2023

​

​

Valuation

​

Significant

​

Weighted Average

​

    

Methodology

    

Unobservable Input

    

(range, if applicable)

Contingent Consideration

 

Discounted Cash Flows

 

Milestone dates

 

2025-2028

​

​

​

​

​

​

​

​

 

​

 

Discount rate

​

12.9% to 13.6%

​

​

​

​

Weighted Average Discount rate

​

13.16%

​

​

​

​

Probability of Occurrence (periodic for each Milestone)

​

11.7% to 92.0%

​

 

​

 

Probability of occurrence (cumulative through each Milestone)

​

5.3% to 48.8%

​

The Company measures certain non-financial assets on a non-recurring basis, including goodwill and in-process R&D. As a result of those measurements, during the year ended June 30, 2024, goodwill with a total carrying value of $5.5 million was written down and an impairment charge of $4.0 million was recorded. This analysis requires significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post-launch cash flows and a risk-adjusted weighted average cost of capital.

The fair value of our reporting unit was determined using an income approach that utilizes a discounted cash flow model. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. Our estimates of future cash flows are based on a comprehensive product by product forecast over a period which covers Phase 1 to approval and 15 years of commercialized revenue and involve assumptions concerning (i) future operating performance, including research and development costs through approval of the drug, the future addressable market, future sales, long-term growth rates, operating margins, allocation and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions, all which may differ from actual future cash flows.

Assumptions related to future operating performance are based on management’s annual and ongoing budgeting, forecasting and planning processes and represent our best estimate of the future results of our operations as of a point in time. These estimates are subject to many assumptions, such as the economic environments in which we operate, demand for the products and competitor actions. Estimated future cash flows are discounted to present value using a market participant, weighted average cost of capital, which considers the risk inherent in the probability adjusted future cash flows from each product. The financial and credit market volatility directly impacts certain inputs and assumptions used to develop the weighted average cost of capital such as the risk-free interest rate, industry beta, debt interest rate and our market capital structure. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related goodwill impairments, if any.