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DERIVATIVE LIABILITIES
 3 Months Ended
Mar. 31, 2026
DERIVATIVE LIABILITIES  
DERIVATIVE LIABILITIES

8. DERIVATIVE LIABILITIES

 

In accordance with the provisions of ASC 815, derivative liabilities are initially measured at fair value at the commitment date and subsequently remeasured at each reporting period, with any increase or decrease in the fair value recorded in the results of operations included within other income (expense), net in the accompanying consolidated condensed statements of operations and comprehensive loss as the change in fair value of derivative liabilities.

 

As of March 31, 2026 and December 31, 2025, derivative liabilities consist of the contingent milestone payment due to Knight Therapeutics, Inc. (“Knight”), a former lender of the Company, as required by the Debt Conversion Agreement executed between the Company and Knight on January 9, 2023, as subsequently amended (the “Knight Debt Conversion Agreement”). Key points of this agreement were as follows:

 

 

●

The Parties agreed to fix Knight’s cumulative debt to the value as it stood on March 31, 2022, which consisted of principal and accumulated interest. As a result of the completion of the IPO, the cumulative outstanding principal as of March 31, 2022 converted to 4,619 shares of common stock (representing 19.9% ownership of the Company’s common stock after giving effect to the IPO), and the entirety of the accumulated interest as of March 31, 2022 converted into 80,965 shares of Series A Preferred Stock, in full satisfaction of the Company’s obligations with respect to the outstanding principal and accumulated interest.

  

 

●

The Parties agreed that the Company will make a milestone payment of $10 million to Knight if, after the IPO, the Company sells Arakoda™ or if a Change of Control (as per the definition included in the original loan agreement dated on December 10, 2015) occurs, provided that the purchaser of Arakoda™ or individual or entity gaining control of the Borrower is not the Lender or an affiliate of the Lender.

 

 

●

For the period ending upon the earlier of (i) 10 years after the closing of the IPO, or (ii) the conversion or redemption in full of the Series A Preferred Stock, the Company will pay to Knight a royalty equal to 3.5% of the Company’s net sales (the “Royalty”) on a quarterly basis, where “Net Sales” has the same meaning as in the Company’s license agreement with the U.S. Army for tafenoquine.

 

Upon consummation of the IPO, the Company concluded that the contingent milestone payment is a freestanding financial instrument that meets the definition of a derivative under ASC 815, and accordingly, the fair value of the derivative liability is marked to market each reporting period until settled. The Royalty due to Knight was determined to be an embedded component of the Series A Preferred Stock, however, is exempt from derivative accounting under the ASC 815 scope exception for specified volumes of sales or service revenues. Therefore, the Company accrues a royalty expense as sales are made.

 

The Company uses a probability-weighted expected return method to determine the fair value of the contingent milestone payment. The valuation model uses significant unobservable inputs (Level 3), incorporating management’s assumptions regarding the timing and probability of discrete potential exit scenarios, forward interest rate curves, and a weighted average cost of capital based on implied and market yields to discount expected cash flows.

 

The valuation of the contingent milestone payment requires significant judgment and is sensitive to changes in assumptions related to the expected timing of payment, the likelihood of potential exit scenarios, and the selected discount rate. In developing these assumptions, management considers various qualitative and quantitative factors, including the anticipated progression toward clinical, commercial, and profitability milestones and the potential for a strategic transaction following achievement of each milestone. These factors are evaluated collectively to assess the probability‑weighted timing of the contingent payment under each potential exit scenario reflected in the valuation. As of March 31, 2026 and December 31, 2025, the discount rates applied in the valuation were 13.00% and 12.49%, respectively.

 

Changes in any of the assumptions used in the valuation could result in a materially different fair value measurement and, as a result, could lead to materially different gains or losses recognized consolidated condensed statements of operations and comprehensive loss upon recurring remeasurement.

 

A reconciliation of the beginning and ending balances for the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three months ended March 31, 2026:

 

 

 

Contingent Milestone Payment

Derivative liabilities - December 31, 2025

 

$

374,741

Change in fair value

 

 

4,567

Derivative liabilities - March 31, 2026

 

$

379,308

 

A reconciliation of the beginning and ending balances for the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three months ended March 31, 2025:

 

 

 

Contingent Milestone Payment

Derivative liabilities - December 31, 2024

 

$

640,830

Change in fair value

 

 

(5,105)

Derivative liabilities - March 31, 2025

 

$

635,725

 

Changes in the fair value of derivative liabilities are included in other income in the accompanying consolidated condensed statements of operations and comprehensive loss. During the three months ended March 31, 2026 and 2025, the Company recorded a net (loss) gain on the change in the fair value of derivative liabilities of $(4,567) and $5,105, respectively.