Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

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:

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

• 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

• 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 September 30, 2020
	Total		Level 1		Level 2		Level 3
Liabilities
2017 PIPE warrant liability	$	4,777	$	—	$	—	$	4,777
2018 PIPE warrant liability		867		—		—		867
Essentialis purchase price contingency liability		10,138		—		—		10,138
Total common stock warrant and contingent    consideration liability	$	15,782	$	—	$	—	$	15,782

	Fair Value Measurements at December 31, 2019
	Total		Level 1		Level 2		Level 3
Liabilities
2017 PIPE warrant liability	$	10,822	$	—	$	—	$	10,822
2018 PIPE warrant liability		1,354		—		—		1,354
Essentialis purchase price contingency liability		5,938		—		—		5,938
Total common stock warrant and contingent    consideration liability	$	18,114	$	—	$	—	$	18,114

The Company’s estimated fair value of the 2017 PIPE Warrants and 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. Through March 31, 2020 the Company had previously used the Monte Carlo simulation of a geometric Brownian motion model to estimate the fair value of the 2017 PIPE Warrants and the 2018 PIPE Warrant as this model allows for determining path-dependent outcomes. The difference in valuation as a result of using the Black-Scholes pricing model compared to the Monte Carlo simulation model is not significant.

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 Federal Drug Administration as well as reaching cumulative revenue milestones. The Level 3 estimates are based, in part, on subjective assumptions. During the periods presented, the Company has not changed the manner in which it values its Essentialis purchase price contingent liability.

There were no transfers between levels 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 liabilities (dollars in thousands).

	Series C Warrants					2017 PIPE Warrants					2018 PIPE Warrants					Purchase Price
	Number of Warrants			Liability		Number of Warrants		Liability			Number of Warrants		Liability			Contingent Liability
Balance at December 31, 2019		118,083		$	—		6,024,425	$	10,822			513,617	$	1,354		$	5,938
Expiration of Series C Warrants		(118,083	)		—		—		—			—		—			—
Change in value of 2017 PIPE Warrants		—			—		—		(6,045	)		—		—			—
Change in value of 2018 PIPE Warrants		—			—		—		—			—		(487	)		—
Change in value of contingent liability		—			—		—		—			—		—			4,200
Balance at September 30, 2020		—		$	—		6,024,425	$	4,777			513,617	$	867		$	10,138