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Fair Value Measurements
6 Months Ended
Jun. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements

4. Fair Value Measurements

 

The following table presents information about the Company’s assets that are measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

 

(in thousands)  Level   June 30, 2022  

December 31, 2021

 
             
Liabilities:               
Contingent Consideration   3   $4,300   $6,200 
Warrant liability – 2021 Common warrant   3   $1,743   $12,854 
Warrant liability - 2022 Common warrant   3   $3,385   $- 
Warrant liability- 2022 Common warrant (Pre-funded)   2   $2,918   $- 

 

 

Contingent Consideration

 

Contingent consideration, which relates to the estimated profits from the sale of Cutanea products to be shared equally with Maruho, is reflected at fair value within acquisition contract liabilities, net on the balance sheets. The fair value is based on significant inputs not observable in the market, which represent a Level 3 measurement within the fair value hierarchy. The valuation of the contingent consideration utilizes a scenario-based method under which a set of payoffs are calculated using the term of the earnout, projections, and an appropriate metric risk premium. These payoffs are then discounted back from the payment date to the valuation date using a payment discount rate. Finally, the discounted payments are summed together to arrive at the value of the contingent consideration. The scenario-based method incorporates the following key assumptions: (i) the forecasted product profit amounts, (ii) the remaining contractual term, (iii) a metric risk premium, and (iv) a payment discount rate. The Company re-measures contingent consideration and re-assesses the underlying assumptions and estimates at each reporting period.

 

The following table provides a roll forward of the fair value of the contingent consideration:

 

(in thousands)     
Balance at December 31, 2020  $7,602 
Change in fair value of contingent consideration   998
Balance at June 30, 2021  $

8,600

 
      
Balance at December 31, 2021  $6,200 
Change in fair value of contingent consideration   (1,900)
Balance at June 30, 2022  $4,300 

 

Warrant Liability

 

Warrants issued on May 16, 2022 in conjunction with the private placement to an institutional shareholder were accounted for as liabilities in accordance with ASC 815-40. Pre-funded common stock purchase warrants to purchase up to 1,569,000 shares of our common stock at a nominal exercise price of $0.001 per share (the “2022 Pre-funded Warrants”) and common stock purchase warrants to purchase up to 3,419,000 shares of our common stock at an exercise price of $2.77 per share (the “2022 Purchase Warrants”) are presented within warrant liability in the accompanying balance sheets. The warrant liability is measured at fair value at inception and on a recurring basis, with changes in fair value presented within the statements of operations.

 

Warrants issued in conjunction with the private placement to an institutional shareholder which closed on December 2, 2021 were accounted for as liabilities in accordance with ASC 815-40. Pre-funded common stock purchase warrants to purchase up to 1,507,143 shares of our common stock at a nominal exercise price (the “2021 Pre-funded Warrants”) were exercised in 2021 and the common stock purchase warrants to purchase up to 2,857,143 shares of our common stock at an exercise price of $5.25 per share (the “2021 Purchase Warrants”) are presented within warrant liability in the accompanying balance sheets. The warrant liability is measured at fair value at inception and on a recurring basis, with changes in fair value presented within the statements of operations.

 

The Company utilizes a Black-Scholes option pricing model to estimate the fair value of the 2022 Purchase Warrants and 2021 Purchase Warrants which is considered a Level 3 fair value measurement. Certain inputs utilized in our Black-Scholes pricing model may fluctuate in future periods based upon factors which are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of fair value may cause a significant change to the fair value of our warrant liability which could also result in material non-cash gain or loss being reported in our statements of operations.

 

The value of the 2022 Pre-funded Warrants is assumed to be equal to the per share value of the underlying common stock, given that the strike price is nominal, and is therefore classified as Level 2.

 

The following table presents the changes in the warrant liability measured at fair value (in thousands):

 

(in thousands)     
Fair value at December 31, 2021  $12,854 
Issuance of new derivative liabilities   9,274 
Change in fair value of warrant liability   (14,082)
Fair value at June 30, 2022  $8,046