PALVELLA THERAPEUTICS, INC. Fair Value Disclosure
Note 4. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
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December 31, 2024 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Current assets: |
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Money market funds |
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$ |
66,720 |
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$ |
— |
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$ |
— |
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|
$ |
66,720 |
|
Total assets measured at fair value |
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$ |
66,720 |
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$ |
— |
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|
$ |
— |
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|
$ |
66,720 |
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Liabilities: |
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Derivative liabilities – royalty agreement |
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$ |
— |
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|
$ |
— |
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|
$ |
1,647 |
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$ |
1,647 |
|
Derivative liabilities – contingent value right liability |
|
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— |
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|
|
— |
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|
|
1,978 |
|
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|
1,978 |
|
Total liabilities measured at fair value |
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$ |
— |
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|
$ |
— |
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|
$ |
3,625 |
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$ |
3,625 |
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December 31, 2023 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Current assets: |
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Money market funds |
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$ |
7,203 |
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$ |
— |
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$ |
— |
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$ |
7,203 |
|
Total assets measured at fair value |
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$ |
7,203 |
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|
$ |
— |
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|
$ |
— |
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|
$ |
7,203 |
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Liabilities: |
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Derivative liabilities – royalty agreement |
|
$ |
— |
|
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$ |
— |
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|
$ |
1,014 |
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$ |
1,014 |
|
Total liabilities measured at fair value |
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$ |
— |
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|
$ |
— |
|
|
$ |
1,014 |
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$ |
1,014 |
|
Money market funds are highly liquid investments and are actively traded. The pricing information on the Company’s money market funds is based on quoted prices in active markets for identical securities. This approach results in a classification of these securities as Level 1 of the fair value hierarchy. Money market funds are cash equivalents and are included in cash and cash equivalents on the Company’s consolidated balance sheets as of December 31, 2024 and 2023.
Assumptions Used in Determining Fair Value of Derivative Liabilities
The key assumptions used to determine the fair value of the derivative liabilities – royalty agreement at December 31, 2024 and 2023 are as follows:
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December 31, |
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2024 |
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2023 |
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Discount rate |
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20.0 |
% |
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25.0 |
% |
Probability rate of achieving FDA approval of a product |
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56.6 |
% |
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50.0 |
% |
Expected term to FDA regulatory approval of a product |
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2.5 years |
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3.5 years |
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Changes in Level 3 Liabilities Measured at Fair Value on a Recurring Basis
The following table provides a reconciliation of the liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
Derivative Liabilities – Royalty Agreement
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2024 |
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2023 |
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Derivative liabilities - royalty agreement |
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Balance at January 1 |
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$ |
1,014 |
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$ |
1,499 |
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|
633 |
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|
(485 |
) |
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Balance at December 31 |
|
$ |
1,647 |
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$ |
1,014 |
|
The derivative liabilities – royalty agreement is classified as long term on the Company’s consolidated balance sheets according to the estimated timing of the occurrence of the potential payments.
As discussed in Note 5 below, the Amended Ligand Agreement was initially measured at its estimated fair value. This nonrecurring fair value measurement was based upon Level 3 inputs. The Company estimated the fair value of the royalty agreement liability on the amendment date using a Monte Carlo valuation model. The Company derived risk-adjusted quarterly net sales forecasts by applying a net sales discount rate of 21% to its forecasted net sales over the royalty term, and then simulated the risk-adjusted net sales using a Monte Carlo simulation. Based on the simulated net sales, the Company estimated the royalty payments within each simulation path based on the contractual royalty rates, and then present valued the royalty payments using a discount rate of 22%, which was based on its estimated discrete weighted average cost of capital of 24.5% as of the amendment date, adjusted to reflect the continuously compounded nature of the analysis. The Company then averaged across all simulation paths to derive the fair value of the royalty agreement liability on the date of amendment of $7.8 million.
Derivative Liabilities – Contingent Value Right Liability
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2024 |
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2023 |
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Derivative liabilities - contingent value rights |
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Balance at January 1 |
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$ |
— |
|
|
$ |
— |
|
|
|
1,978 |
|
|
|
— |
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Balance at December 31 |
|
$ |
1,978 |
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|
$ |
— |
|
The derivative liabilities – contingent value rights is classified as short term on the Company’s consolidated balance sheets according to the estimated timing of the occurrence of the potential payments.
The Company applies a scenario-based method and weighs them based on the possible likelihood of certain contingencies triggering payments due under the CVR for the liability recognized. The fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement. The estimated value of the CVR is based upon available information and certain assumptions, which the Company's management believes are reasonable under the circumstances.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.