Note 4 – Fair Value Measurements

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Instruments with primarily unobservable value drivers.

As September 30, 2024, the Company’s financial liability measured at fair value on a recurring basis, which consisted of an embedded derivative, was classified within Level 3 of the fair value hierarchy. The liability associated with embedded derivatives represented the fair value of the change of control provision in the Residual Royalty Agreement. During the three months ended December 31, 2024, the Residual Royalty Agreement was terminated and the embedded derivative was extinguished together with the debt. See Note 8 for additional information. 

The following table provides a reconciliation of the beginning and ending liability balance associated with embedded derivatives measured at fair value using significant unobservable inputs (Level 3) as of December 31, 2024 and 2023:

The gain or loss associated with the change in fair value of the embedded derivatives is included within net loss from discontinued operations on the accompanying unaudited condensed consolidated statements of operations. It is included in discontinued operations because the related debt was required to be repaid as a result of the FC2 Business Sale.

There is no current observable market for these types of derivatives. The Company estimated the fair value of the embedded derivative within the Residual Royalty Agreement by using a scenario-based method, whereby different scenarios were valued and probability weighted. The scenario-based valuation model incorporated transaction details such as the contractual terms of the instrument and assumptions including projected FC2 revenues, expected cash outflows, probability and estimated dates of a change of control, risk-free interest rates and applicable credit risk. A significant increase in projected FC2 revenues or a significant increase in the probability or acceleration of the timing of a change of control event, in isolation, would result in a significantly higher fair value measurement of the liability associated with the embedded derivative. On December 30, 2024, upon the FC2 Business Sale, the Company adjusted the fair value of the embedded derivative to the estimated fair value on that date and included the fair value of the embedded derivative in the carrying amount of debt, used to determine the gain on extinguishment of debt. 

The following tables present quantitative information about the inputs and valuation methodologies used to determine the fair value of the embedded derivatives classified in Level 3 of the fair value hierarchy as of December 30, 2024, the date the Residual Royalty Agreement was terminated, and September 30, 2024:

The Company also had an investment in equity securities consisting of 142,749 shares of common stock of ONCO (the “ONCO Common Stock”), which were sold during the quarter ended December 31, 2024 for net proceeds of $0.4 million. The value of the ONCO Common Stock was $0.7 million as of September 30, 2024, which was included in prepaid expenses and other current assets on the accompanying unaudited condensed consolidated balance sheet. The Company recognized a loss from the change in fair value of equity securities of $0.3 million and $0.4 million during the three months ended December 31, 2024 and 2023, respectively.

The Company received 3,000 shares of Series A Convertible Preferred Stock (the “ONCO Preferred Stock”) of ONCO on October 3, 2023 as part of a settlement of the receivable due on September 30, 2023 related to the sale of ENTADFI. See Note 15 for additional information. The Company elected to measure the ONCO Preferred Stock at fair value in accordance with ASC 825. The investment in the ONCO Preferred Stock was classified within Level 3 of the fair value hierarchy because there is no market for the ONCO Preferred Stock and the fair value was determined using significant unobservable inputs. The fair value of the ONCO Preferred Stock was determined on the date received using a probability-weighted bond plus call option model, which incorporated the stock price of ONCO on the valuation date, expected volatility of 79%, expected term of 3 years, and a discount rate of 35%. The Company also applied a 15% discount for lack of marketability due to the fact that there is no market for the preferred stock and a 60% probability of dissolution. The valuation was determined to be $0.9 million at October 3, 2023. On September 24, 2024, the Company converted all of the shares of ONCO Preferred Stock it held into 142,749 shares of ONCO Common Stock. As of September 30, 2024, the ONCO Common Stock was classified within Level 1 of the fair value hierarchy and the valuation was determined based on the closing price of the ONCO Common Stock.