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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2023

Note 8. Fair Value of Financial Instruments

In connection with the Acquisition, the Company pays royalty on net sales of Sunosi to Jazz. The discounted cash flow method used to value this contingent consideration includes inputs of not readily observable market data, which are Level 3 inputs. The fair value of the contingent consideration is reflected as current accrued contingent consideration of $6.4 million and non-current contingent consideration liability of $73.3 million in the consolidated balance sheet as of December 31, 2023.

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


	December 31, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents - money market funds	$	251,768	$	—	$	—	$	251,768
Liabilities:
Contingent consideration	$	—	$	—	$	79,707	$	79,707


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents - money market funds	$	195,475	$	—	$	—	$	195,475
Liabilities:
Contingent consideration	$	—	$	—	$	37,000	$	37,000

Contingent Consideration Liabilities

The fair value of the contingent consideration liabilities is marked-to-market each reporting period and was remeasured at December 31, 2023. Changes in fair value of the contingent consideration liabilities as of December 31, 2023 are as follows:


	Contingent consideration
Balance at December 31, 2022	$	37,000
Adjustment to fair value		48,918
Payments		(6,211	)
Balance at December 31, 2023 (Level 3)	$	79,707

The recurring Level 3 fair value measurements of contingent consideration for which a liability is recorded include the following significant unobservable inputs:


			As of December 31, 2023	As of December 31, 2022
	Valuation methodology	Significant unobservable input	Weighted average (range, if applicable)	Weighted average (range, if applicable)
Contingent consideration	Probability weighted income approach	Discount rate	13.2%	12.0%
		Revenue discount rate	16.4% - 19.4%	20.9%

The Company's fair value measurement of contingent consideration liabilities has been classified as level 3 as its valuation requires substantial judgment and estimation of factors which requires use of unobservable inputs. The fair value of contingent consideration liabilities are estimated by using the probability weighted income approach using significant assumptions including estimated future sales of Sunosi in current and future indications, timing of regulatory and commercial milestone achievements, probability of technical and regulatory success rates, and discount rates. If significant changes are made to one or more of these assumptions, the estimated fair value of contingent consideration liabilities may result in a significantly higher or lower fair value measurement.

- 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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