Annual report pursuant to Section 13 and 15(d)

DERIVATIVE LIABILITY

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DERIVATIVE LIABILITY
12 Months Ended
Dec. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE LIABILITY

 

14. DERIVATIVE LIABILITY

 

On July 28, 2020, the Company, with its subsidiary, Corbus Pharmaceuticals, Inc., as borrower, entered into a $50,000,000 secured Loan and Security Agreement with K2HV, an unrelated third party (the “Loan Agreement”) and received the first $20,000,000 tranche upon signing. The Company has determined that a prepayment feature and default feature needed to be separately valued and mark to market each reporting period after assessing the agreement under ASC 815.

 

The value of these features are determined each reporting period by taking the present value of net cash flows with and without the prepayment features. The significant assumption used to determine the fair value of the debt without any features is the discount rate which has been estimated by using published market rates of triple CCC rated public companies. All other inputs are taken from the Loan Agreement. The additional significant assumptions used when valuing the prepayment feature is the probability of a change of control event. The Company has determined the probability increased from July 28, 2020 to December 31, 2020 as a result of SSc-002 phase 3 and CF-002 phase 2 trial results. The additional significant assumption used when valuing the default feature is the probability of defaulting on the repayment of loan. The Company has determined the probability increased from July 28, 2020 to December 30, 2020. As the probability of both features increased the fair value of the derivative liability has increased at December 31, 2020. The value of these features was determined to be approximately $546,000 at July 28, 2020 and $797,000 at December 31, 2020 which resulted in $251,000 of other expense. The Company considers the fair value of the derivative liability to be Level 3 under the three-tier fair value hierarchy.

 

A roll forward of the fair value of the derivative liability for the year ended December 31, 2020 is presented below.

 

    December 31, 2020  
Beginning balance, December 31, 2019   $  
Initial measurement of fair value     546,000  
Change in fair value of derivative liability     251,000  
Ending balance, December 31, 2020   $ 797,000