FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2023

The tables below present certain assets and liabilities measured at fair value categorized by the level of input used in the valuation of each asset and liability (in thousands):


	June 30, 2023
	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	17,929	$	—	$	—	$	17,929

Long-term liability:
Embedded debt derivative	$	—	$	—	$	760	$	760


	December 31, 2022
	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	52,442	$	—	$	—	$	52,442

Long-term liability:
Embedded debt derivative	$	—	$	—	$	760	$	760

Cash and cash equivalents —Money market funds included within cash and cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

Embedded debt derivative —As described in Note 11, the Company’s Loan Agreement with Pharmakon contains certain provisions that change the underlying cash flows of the debt instrument, including a potential extension to the interest-only period dependent on both (i) no event of default having occurred and continuing and (ii) the Company achieving certain regulatory and revenue conditions. The Company did not meet one of the regulatory conditions and therefore, the Company is no longer eligible for the interest-only extension period and this no longer changes the underlying cash flows of the debt instrument.

The Company concluded the acceleration of the obligations under the Loan Agreement under certain events of default, and under certain circumstances, the application of a default interest rate on all outstanding obligations during the occurrence and continuance of an event of default represent a single compound embedded debt derivative required to be bifurcated from the debt host instrument that is required to be re-measured at fair value on a quarterly basis.

The estimated fair value of the embedded debt derivative on both June 30, 2023 and December 31, 2022 was determined using a scenario-based approach and discounted cash flow model that includes principal and interest payments under various cash flow assumptions. Should the Company’s assessment of the probabilities around these scenarios change, including for changes in market conditions, there could be a change to the fair value of the embedded debt derivative. The determination of the fair value of the embedded debt derivative includes inputs not observable in the market and as such, represents Level 3 measurement. The methodology utilized requires inputs based on certain subjective assumptions, specifically, probabilities of acceleration of the obligations under the Loan Agreement by Pharmakon under certain events of default. The probabilities used in the valuation of the embedded debt derivative included a 95% probability that the obligations under the Loan Agreement will not be accelerated due to an event of default under the Loan Agreement.

The fair value of the embedded debt derivative related to the Company’s Loan Agreement with Pharmakon was $0.8 million as of June 30, 2023 and December 31, 2022.

- 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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