Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2021

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Note 8. Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk, the carrying value of the debt approximates fair value.  

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 1	Unadjusted quoted prices in active markets for identical assets or liabilities;
•     Level 2	Inputs other than quoted prices included within Level 1 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 3	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:

	Fair Value Measurements at June 30, 2021
	Total		Level 1		Level 2		Level 3
Liabilities
2020 Warrant liability	$	244,824	$	—	$	—	$	244,824
Total common stock warrant liability	$	244,824	$	—	$	—	$	244,824

The fair value measurement of the warrants issued by the Company in February 2020 (the "2020 Warrants") are based on significant inputs that are unobservable and thus represents a Level 3 measurement. The Company’s estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions at June 30, 2021 include the expected volatility of the Company’s stock of approximately 70%, the Company’s stock price at valuation date of $1.10, expected dividend yield of 0.0% and average risk-free interest rate of approximately 0.726%. 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 liabilities that are measured at fair value using Level 3 inputs. 

	Fair Value Measurements at December 31, 2020
	Total		Level 1		Level 2		Level 3
Liabilities
2019 Warrant liability	$	2,484,000	$	—	$	—	$	2,484,000
2020 Warrant liability		2,001,000		—		—		2,001,000
Total common stock warrant liability	$	4,485,000	$	—	$	—	$	4,485,000

The fair value measurement of the warrants issued by the Company in August 2019 (the "2019 Warrants") and the 2020 Warrants are based on significant inputs that are unobservable and thus represents a Level 3 measurement. The Company’s estimated fair value of the Warrant liability is calculated using the Black Scholes Option Pricing Model. Key assumptions December 31, 2020 include the expected volatility of the Company’s stock of approximately 80% and 70% for 2019 and 2020 Warrants, respectively; the Company’s stock price at valuation date of $0.49; expected dividend yield of 0.0% and; average risk-free interest rate of approximately 0.26% and 0.36% for 2019 and 2020 Warrants, respectively. 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 liabilities that are measured at fair value using Level 3 inputs.  

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments, which are treated as liabilities, as follows:

	2019 Warrant						2020 Warrant
	Number of Warrants			Liability			Number of Warrants			Liability
Balance at December 31, 2020		13,800,000		$	2,484,000			8,700,000		$	2,001,000
Adoption of ASC 2020-06		(13,800,000	)		(2,484,000	)		—			—
Change in Fair Value of Warrants at date of exercise		—			—			—			7,521,150
Exercise of Warrants		—			—			(8,350,000	)		(9,441,650	)
Change in Fair Value, March 31, 2021		—			—			—			120,750
Change in Fair Value, June 30, 2021		—			—			—			43,574
Balance at June 30, 2021		—		$	—			350,000		$	244,824

The Company has certain assets, such as goodwill, that are measured at fair value on a non-recurring basis and are adjusted to fair value only when the carrying values are more than the fair values. Based on market data of companies operating in the compounding and generic drug manufacturing industry, for the March 31, 2020 and December 31, 2020 goodwill impairment analysis, the Company used a discount rate of 26.5% and 17.3%, respectively, for the income approach calculation which includes a Company specific risk premium to account for the increased risk to future cash flows in the current environment. The categorization of the framework used to price the assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. 

As discussed in Note 5, Intangible Assets And Goodwill, the Company performed an interim impairment assessment to test the carrying value of goodwill, all of which is related to the Compounded Pharmaceuticals reporting unit, as of March 31, 2020. As a result of the analysis, the carrying value of our reporting unit exceeded the fair value by approximately $3,143,000, which was recorded as goodwill impairment expense as of March 31, 2020. On December 31, 2020, the Company performed its annual impairment assessment and as a result of the analysis, the carrying value of our reporting unit exceeded the fair value by approximately $3,629,000, which was recorded as goodwill impairment expense on December 31, 2020.  Refer to Note 5 for more information.