Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

Fair Value of Financial Instruments

Fair Value of Financial Instruments

3. Fair Value of Financial Instruments

The carrying amount of certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses and other payables approximate fair value due to their short maturities.

As a basis for determining the fair value of certain of the Company’s financial instruments, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level I – Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level II – Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, 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 assets or liabilities.

Level III – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability. The Company’s cash equivalents are classified within Level I of the fair value hierarchy.

The Company’s short-term investments consist of Level I securities which are comprised of highly liquid money market funds. The estimated fair value of the short-term investments was based on quoted market prices. There were no transfers between fair value hierarchy levels during the quarters ended September 30, 2022 or 2021.

In January 2020, the Company issued warrants in connection with the public offering of common stock (the “January 2020 Warrants”). Pursuant to the terms of these warrants, the warrants were not considered indexed to the Company’s own stock and therefore are required to be measured at fair value and reported as a liability in the consolidated balance sheets. Additionally, upon the closing of the January 2020 offering, 479,595 outstanding warrants were evaluated for whether they were modified for accounting purposes and it was determined that they were required to be classified as a liability. The fair value of the warrant liability is based on the Monte Carlo methodology. The Company is required to revalue the warrants at each reporting date with any changes in fair value recorded in our consolidated statement of operations and comprehensive loss. The valuation of the warrants is classified under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. In order to calculate the fair value of the warrants, certain assumptions were made, including the selling price or fair market value of the underlying common stock, risk-free interest rate, volatility, and remaining life. Changes to the assumptions could cause significant adjustments to valuation. The Company estimated a volatility factor utilizing its own data. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.

The following table presents quantitative information about the inputs used in the valuation for the Company’s fair value measurement of the warrant liability classified as Level 3:

	September 30, 2022			December 31, 2021
Current stock price	$	1.73		$	3.04
Estimated volatility of future stock price		85.00	%		133.13	%
Risk free interest rate		3.94	%		0.55	%
Contractual term		1.16	years		1.90	years

As of September 30, 2022, there were a total of 9,357 warrants outstanding that were reported as a liability on the consolidated balance sheet.

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

	As of September 30, 2022
Description	Total		Level 1		Level 2	Level 3
Assets:
Short-term investments	$	43,789,736	$	43,789,736	—		—
Liabilities:
Contingent consideration		17,069,114		—	—		17,069,114
Warrant liability		274		—	—		274

	As of December 31, 2021
Description	Total			Level 1	Level 2	Level 3
Assets:
Short-term investments	$	88,324,922	$	88,324,922	—		—
Liabilities:
Contingent consideration		3,342,515		—	—		3,342,515
Warrant liability		11,020		—	—		11,020

The following tables summarize the change in fair value, as determined by Level 3 inputs, for all Pelican assets and liabilities using unobservable Level 3 inputs for the nine months ended September 30, 2022 and 2021:

	Pelican		Elusys		Total
	Contingent		Contingent		Contingent		Warrant
	Consideration		Consideration		Consideration		Liability
Balance at December 31, 2021	$	3,342,515	$	—	$	3,342,515	$	11,020
Change in fair value		(3,342,515)		—		(3,342,515)		(10,746)
Acquisition of Elusys		—		39,853,685		39,853,685		—
Payment of receivable consideration		—		(20,784,571)		(20,784,571)		—
Payment of deferred cash consideration		—		(2,000,000)		(2,000,000)
Balance at September 30, 2022	$	—	$	17,069,114	$	17,069,114	$	274

	Pelican
	Contingent		Warrant
	Consideration		Liability
Balance at December 31, 2020	$	2,912,515	$	33,779
Change in fair value		406,000		(2,808)
Balance at September 30, 2021	$	3,318,515	$	30,971

The change in the fair value of the Pelican contingent consideration for the nine months ended September 30, 2022 was primarily due to the termination of the PTX-35 trial. As described in Note 2, the Company acquired Elusys Therapeutics and subsequently paid out $22.8 million in contingent consideration payments. The change in fair value of the warrant liability for the nine months ended September 30, 2022 was primarily due to a decrease in the fair value of the underlying stock. Adjustments associated with the change in fair value of contingent consideration and warrant liability are included in the Company’s consolidated statement of operations and comprehensive loss.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements of contingent consideration classified as Level 3 as of September 30, 2022 and December 31, 2021:

	As of September 30, 2022
	Valuation	Significant		Weighted Average
	Methodology	Unobservable Input		(range, if applicable)
Elusys Revenue earn-out	Discounted cash flow analysis	Timing of expected payments		2025-2036
		Discount rate		24.5%
		Future revenue projections	$	325.9 million
Elusys Contract deferred consideration	Discounted cash flow analysis	Timing of expected payments		2023
		Discount rate		15%
		Future revenue projections	$	7.6 million

	As of September 30, 2021
	Valuation	Significant	Weighted Average
	Methodology	Unobservable Input	(range, if applicable)
Pelican contingent consideration	Probability weighted income approach	Milestone dates	2022-2031
		Discount rate	7.52
		Probability of occurrence	4.9% to 55%

The Company records certain non-financial assets on a non-recurring basis, including goodwill and in-process R&D. 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.