Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 7. Fair Value Measurements

The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.

Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2	Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in inactive markets.
Level 3	Unobservable inputs are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources.

Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfers occurred. There were no transfers between any levels during the nine months ended September 30, 2022. 

The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments, other than investment in affiliates.

Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.

Cash and cash equivalents 

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

Marketable Investments

Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices).

Finance Receivables

The fair values of finance receivables are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the finance receivables. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. These receivables are classified as Level 3. Finance receivables are not measured at fair value on a recurring basis, but estimates of fair value are reflected below.

Contingent Consideration

The Company recorded contingent consideration related to the 2019 acquisition of Enteris and sharing of certain milestone and royalties due to Enteris pursuant to the License Agreement.

The fair value measurements of contingent consideration obligations arising from business combinations are classified as Level 3 estimates under the fair value hierarchy as these items have been valued using unobservable inputs. These inputs include: (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.

Marketable Investments and Derivative Securities  

Marketable Investments

If active market prices are available, fair value measurement is based on quoted active market prices and, accordingly, these securities would be classified as Level 1. If active market prices are not available, fair value measurement is based on observable inputs other than quoted prices included within Level 1, such as prices for similar assets or broker quotes utilizing observable inputs, and accordingly these securities would be classified as Level 2. If market prices are not available and there are no observable inputs, then fair value would be estimated by using valuation models including discounted cash flow methodologies, commonly used option-pricing models and broker quotes. Such securities would be classified as Level 3, if the valuation models and broker quotes are based on inputs that are unobservable in the market. If fair value is based on broker quotes, the Company checks the validity of received prices based on comparison to prices of other similar assets and market data such as relevant bench mark indices. Available-for-sale securities are measured at fair value on a recurring basis, while securities with no readily available fair market value are not, but estimates of fair value are reflected below.

Derivative Securities

For exchange-traded derivatives, fair value is based on quoted market prices, and accordingly, would be classified as Level 1. For non-exchange traded derivatives, fair value is based on option pricing models and are classified as Level 3.

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 (in thousands):

	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Warrant assets	$	5,140	$	—	$	—	$	5,140
Marketable investments		588		500		—		88
Financial Liabilities
Contingent consideration payable	$	8,530	$	—	$	—	$	8,530

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 (in thousands):

	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Warrant assets	$	3,419	$	—	$	—	$	3,419
Marketable investments		1,153		1,034		—		119
Financial Liabilities
Contingent consideration payable	$	8,530	$	—	$	—	$	8,530

The changes in fair value of the warrant assets during the nine months ended September 30, 2022 and 2021 were as follows (in thousands):

September 30, 2022			September 30, 2021
Fair value - December 31, 2021	$	3,419	Fair value - December 31, 2020	$	2,972
Issued		1,098	Issued		—
Canceled		—	Canceled		—
Change in fair value		623	Change in fair value		678
Fair value - September 30, 2022	$	5,140	Fair value - September 30, 2021	$	3,650

The Company holds warrants issued to the Company in conjunction with certain term loan investments. These warrants meet the definition of a derivative and are included in the unaudited condensed consolidated balance sheets. The fair values for warrants outstanding, which do not have a readily determinable value, are measured using the Black-Scholes option pricing model. The following ranges of assumptions were used in the models to determine fair value:

	September 30, 2022	December 31, 2021
Dividend rate range	—	—
Risk-free rate range	4.0% to 4.3%	0.97% to 1.44%
Expected life (years) range	1.8 to 6.9	2.6 to 7.0
Expected volatility range	54.8% to 139.4%	60.2% to 142.0%

As of September 30, 2022 and December 31, 2021, the Company had two royalties, Best and Cambia®, that were deemed to be impaired based on reductions in carrying values in prior periods. The following table presents these royalties measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021 (in thousands):

	Total Carrying Value in Consolidated Balance Sheets		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2022	$	4,071	$	—	$	—	$	4,071
December 31, 2021	$	5,612	$	—	$	—	$	5,612

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021.

The following information is provided to help readers gain an understanding of the relationship between amounts reported in the accompanying unaudited condensed consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivative financial instruments measured at fair value on a recurring and non-recurring basis.

As of September 30, 2022 (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	19,399	$	19,399	$	19,399	$	—	$	—
Finance receivables		212,959		212,959		—		—		212,959
Marketable investments		588		588		500		—		88
Warrant assets		5,140		5,140		—		—		5,140
Financial Liabilities
Contingent consideration payable	$	8,530	$	8,530	$	—	$	—	$	8,530

As of December 31, 2021 (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	42,863	$	42,863	$	42,863	$	—	$	—
Finance receivables		181,553		181,553		—		—		181,553
Marketable investments		1,153		1,153		1,034		—		119
Warrant assets		3,419		3,419		—		—		3,419
Financial Liabilities
Contingent consideration payable	$	8,530	$	8,530	$	—	$	—	$	8,530