Fair Value Measurements

12 Months Ended

Dec. 31, 2021

The following table presents our liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2021 and 2020.


	Fair Value Measurements at Reporting Date Using
Description	Total		(Level 1)		(Level 2)		(Level 3)
As of December 31, 2021:
Contingent consideration	$	4,880,000	$	—	$	—	$	4,880,000
Derivative liabilities related to warrants	$	—	$	—	$	—	$	—

As of December 31, 2020:
Contingent consideration	$	2,570,000	$	—	$	—	$	2,570,000
Derivative liabilities related to warrants	$	11,673	$	—	$	—	$	11,673

The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities- warrants in our consolidated statement of operations. See Note 5 for a rollforward of the derivative liability for the year ended December 31, 2021. The financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we review the assets and liabilities that are subject to ASC 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

Contingent consideration was recorded for the acquisition of Ciclofilin Pharmaceuticals, Inc. (Ciclofilin) on June 10, 2016. The contingent consideration represented the acquisition date fair value of potential future payments, to be paid in cash and our stock, upon the achievement of certain milestones and in 2016 was estimated based on a probability-weighted discounted cash flow model utilizing a discount rate of 6.5% and a stock price of $19.60.

At December 31, 2021 and 2020, the assumptions we used to calculate the fair value were as follows:


	Assumptions
	December 31,
	2021				2020
Discount rate	7.0%				8.0%
Stock price	$1.14				$2.19
Projected milestone achievement dates	December 2021		—	June 2026	June 2021		—	January 2025
Probability of success of milestone achievements	18	%	—	100%	13	%	—	40%

We completed the first segment of our Phase I clinical activities for Rencofilstat in October 2018 wherein we reached a major clinical milestone of positive data from a Phase I trial of Rencofilstat in humans. This achievement triggered the first milestone payment, as stated in the Merger Agreement for the acquisition of Ciclofilin and in the fourth quarter of 2018, we paid a related milestone payment of $1,000,000 and issued 1,439 shares of our common stock with a fair value of $55,398, representing 2.5% of our issued and outstanding common stock as of June 2016, to the Ciclofilin shareholders. As of December 31, 2021, $2,988,284 was classified as a current liability and $1,891,716 as a non-current liability based upon management's best estimate using the latest available information. Management reviewed the assumptions at December 31, 2021 and reduced the discount rate based on comparable companies, increased the probability of success for milestone 2 and extended the projected achievement dates for milestones 3 and 4 based on new information. The Merger Agreement for the acquisition of Ciclofilin was amended on January 14, 2022 (see Note 13).

The following table presents the change in fair value of the contingent consideration for the years ended December 31, 2021.


	Acquisition-related Contingent Consideration
Liabilities:
Balance at December 31, 2019	$	2,430,000
Change in fair value recorded in earnings	140,000
Balance at December 31, 2020	2,570,000
Change in fair value recorded in earnings	2,310,000
Balance at December 31, 2021	$	4,880,000

- 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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