Fair Value

9 Months Ended

Sep. 30, 2022

The Company has contingent consideration associated with the EPI Health Acquisition that is required to be measured at fair value on a recurring basis, presented within the condensed consolidated balance sheets as both current and long-term liabilities, beginning as of March 11, 2022.

ASC 820-10, Fair Value Measurement Disclosure, requires use of a three-tiered hierarchy, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent uncertainties in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

The carrying values of accounts receivable, prepaid expenses and other current assets, accounts payable, and certain accrued expenses as of September 30, 2022 and December 31, 2021 approximate their fair values due to the short-term nature of these items.

The Company’s contingent consideration liability is measured on a recurring basis using level 3 inputs. The estimated fair value of the contingent consideration related to the EPI Health Acquisition requires significant management judgment and estimation, is calculated using a probability-weighted valuation model that measures the present value of the probable cash payments based upon the future milestone events of EPI Health at a discount rate that captures the risk associated with the liability, and is also based on a Monte Carlo simulation, whereby EPI Health’s forecasted net sales from the EPI Health legacy products were simulated over the measurement period to calculate the contingent consideration.

The following table summarizes the change in fair value, as determined by Level 3 inputs for the contingent consideration liabilities for the three and nine months ended September 30, 2022:


Balance at March 31, 2022	$	3,773
Change in fair value	(454)
Balance at June 30, 2022	$	3,319
Change in fair value	186
Measurement period adjustment (see Note 2)	(125)
Balance at September 30, 2022	$	3,380

Contingent consideration liability, current portion	$	438
Contingent consideration liability, net of current portion	2,942
Balance at September 30, 2022	$	3,380

The following tables present the significant inputs and valuation methodologies used for the Company’s fair value of the contingent consideration liabilities, in addition to EPI Health’s forecasted net sales from the EPI Health legacy products:


	Transition Services Agreement		Sitavig Milestones (Regulatory)
Valuation methodology	Probability-Weighted		Probability-Weighted
Term	0.25		1.34
Payment term	0.5		1.59
Adjusted discount rate	22.30	%	20.66	%


	First Sales Based Legacy Milestone	Wynzora Milestone	Second Sales Based Legacy Milestone	Sitavig Milestones (Commercial)
Valuation methodology	Monte Carlo	Monte Carlo	Monte Carlo	Monte Carlo
Risk-adjusted discount rates (minimum)	7.78%	7.78%	7.78%	8.79%
Risk-adjusted discount rates (maximum)	9.23%	8.61%	9.23%	9.20%
Net sales volatility (per annum)	14.0%	13.0%	14.0%	14.0%
Credit spread (continuous)	18.32%	14.67%	18.32%	17.65%

For the three and nine months ended September 30, 2022, there was a $186 increase and a $268 decrease, respectively, in fair value related to contingent consideration related to the EPI Health Acquisition recorded in the accompanying condensed consolidated statements of operations and comprehensive loss related primarily to changes in market assumptions and discount rates since the transaction date.

Significant increases or decreases in any of the probabilities of success or changes in expected achievement of any of the milestones underlying the contingent consideration would result in a significantly higher or lower fair value of the contingent consideration liability. The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the condensed consolidated statements of operations and comprehensive loss until settlement.

The following table presents information about the classification and potential earnout periods for the Company’s contingent consideration liabilities as of September 30, 2022:

Classification

Earnout Period

Transition Services Agreement

Current portion

11-Mar-2022 to 10-Mar-2023

First Sales Based Legacy Milestone

Current portion

1-Apr-2022 to 31-Mar-2023

Wynzora Milestone

Current portion

1-Apr-2022 to 31-Mar-2023

Second Sales Based Legacy Milestone

Non-current portion

1-Apr-2023 to 31-Mar-2026

Sitavig Milestones

Non-current portion

1-Feb-2024 to 30-Apr-2034

See Note 2—“Acquisition of EPI Health” for additional detail regarding contingent consideration related to the transaction.

- 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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