Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2023

Note 4. Fair Value of Financial Instruments

The carrying value of the Company’s cash, cash equivalents and accounts payable, approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

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Level I — Unadjusted quoted prices in active markets for identical assets or liabilities;

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Level II — Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

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Level III — Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):


	Fair Value Measurements at December 31, 2023
	Total		Level 1		Level 2		Level 3
Liabilities
Essentialis purchase price contingency liability	$	11,549	$	-	$	-	$	11,549


	Fair Value Measurements at December 31, 2022
	Total		Level 1		Level 2		Level 3
Liabilities
2018 PIPE Warrant liability	$	1	$	—	$	—	$	1
Essentialis purchase price contingency liability		8,835		—		—		8,835
Total common stock warrant and contingent consideration liability	$	8,836	$	—	$	—	$	8,836

The Company’s estimated fair value of the 2018 PIPE Warrants was calculated using a Black-Scholes pricing model. The Black-Scholes pricing model requires the input of highly subjective assumptions including the expected stock price volatility, the expected term, the expected dividend yield and the risk-free interest rate. The 2018 PIPE Warrants expired on December 21, 2023.

Based on the terms of the completed merger with Essentialis on March 7, 2017, the Company is obligated to make cash earnout payments of up to a maximum of $21.2 million to the former Essentialis stockholders. The fair value of the Essentialis purchase price contingent liability is estimated using scenario-based methods based upon the Company’s analysis of the likelihood of obtaining specified approvals from the FDA as well as achieving two commercial sales milestones of $100 million and $200 million in cumulative revenue. The Level 3 estimates are based, in part, on subjective assumptions. In determining the likelihood of this occurring, the analysis relied on published research relating to clinical development success rates. Based on management’s assessment, an 88% and a 72% probability of achieving all three milestones was determined to be reasonable as of December 31, 2023 and December 31, 2022, respectively. During the periods presented, the Company has not changed the manner in which it values its Essentialis purchase price contingent liability.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the periods presented.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 assets and liabilities (dollars in thousands):


	2018 PIPE Warrants						Purchase Price
	Number of						Contingent
	Warrants			Liability			Liability
Balance at December 31, 2021		34,241		$	31		$	9,547
Change in value of 2018 PIPE Warrants		—			(30	)		-
Change in value of contingent liability		—			—			(712	)
Balance at December 31, 2022		34,241		$	1		$	8,835
Change in value of 2018 PIPE Warrants		—			419			—
Exercise of 2018 PIPE Warrants		(21,789	)		(183	)		—
Expiration of 2018 PIPE Warrants		(12,452	)		(237	)		—
Change in value of contingent liability		—			—			2,714
Balance at December 31, 2023		0		$	-		$	11,549

- 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.

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