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Fair Value of Financial Instruments and Contingent Consideration

12 Months Ended

Dec. 31, 2021

Fair Value of Financial Instruments and Contingent Consideration

The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between unrelated market participants.

The Company reports the fair value of assets and liabilities using a three level measurement hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

•Level 1—Inputs are unadjusted quoted prices in active markets for identical assets. The Company has the ability to access these prices as of the measurement date. Level 1 assets include: cash held at banks; certificates of deposit;

money market funds; investment grade corporate debt securities; and U.S. government agency and municipal debt securities.

•Level 2—Level 2 securities are valued using third-party pricing sources that apply relevant inputs and data in their models to estimate fair value. Inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; inputs other than quoted prices, but that are observable for the asset or liability (e.g., interest rates; yield curves); and inputs that are derived principally from or corroborated by observable market data by correlation or by other means (i.e., market corroborated inputs). Level 2 assets include: investment grade corporate debt securities; U.S. government agency and municipal debt securities; other fixed income securities; and SERP (Supplemental Executive Retirement Plan) assets. The fair value of the restricted marketable securities is recorded in Other assets on the consolidated balance sheets.

•Level 3—Unobservable inputs that reflect the Company's own assumptions. These are based on the best information available, including the Company's own data.

There were no level 3 assets as of December 31, 2021, or December 31, 2020.

Financial Assets Recorded at Fair Value

The Company's financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in thousands):


			Fair Value Measurements as of December 31, 2021
	Total Fair Value at December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents
Cash	$	148,863	$	148,863	$	—
Money market funds	54,571		54,571		—
Marketable securities
Corporate debt securities	136,246		251		135,995
Long term marketable securities
Corporate debt securities	119,166		—		119,166
Other noncurrent assets
Marketable securities - restricted (SERP)	630		7		623
Total assets at fair value	$	459,476	$	203,692	$	255,784


			Fair Value Measurements as of December 31, 2020
	Total Fair Value at December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents
Cash	$	218,550	$	218,550	$	—
Money market funds	70,090		70,090		—
Marketable securities
Corporate debt securities	133,893		—		133,893

Long term marketable securities
Corporate debt securities	350,359		256		350,103
U.S. government agency and municipal debt securities	—
Other noncurrent assets
Marketable securities - restricted (SERP)	547		3		544
Total assets at fair value	$	773,439	$	288,899	$	484,540

The carrying amounts of other financial instruments, including accounts receivable, accounts payable, and accrued expenses, approximate fair value due to their short-term maturities.

Financial Liabilities Recorded at Fair Value

Contingent Consideration

The Company's contingent consideration liabilities are measured at fair value on a recurring basis. The Company classifies its contingent consideration liabilities as Level 3 fair value measurements based on the significant unobservable inputs used to estimate fair value. These reflect the inputs and assumptions the Company believes would be made by market participants. Changes in any of those inputs together or in isolation may result in significantly lower or higher fair value measurement. Refer to Note 3, Acquisitions, for further discussion of significant inputs and assumptions used for the valuation of the contingent consideration.

During the measurement period, changes in the fair value of contingent consideration related to the USWM Acquisition and Adamas Acquisition are recorded against goodwill if such changes are related to facts and circumstances that existed at the acquisition date. In each reporting period after the acquisition, the Company remeasures the fair value of contingent consideration liabilities and records in its consolidated statements of earnings the increases or decreases in the fair value of the liabilities.

In the fourth quarter of 2020, the Company recorded a measurement period adjustment of $40.9 million related to the USWM Acquisition. Refer to Note 3, Acquisitions.

The Company recorded a $6.5 million gain due to the change in fair value of the USWM contingent consideration liability during the year-ended December 31, 2021. The change in fair value of $6.5 million was reported on the consolidated statement of earnings in Contingent consideration (gain) expense. The change in fair value was primarily due to the write-down of the sales based contingent consideration liabilities offset by an increase in the estimated fair value of regulatory and developmental milestones due to the passage of time. The Company assessed that these sales-based milestones will not be achieved based on the revised net sales projections. The probability of achieving these milestones were significantly lower compared to prior estimates. The Company updated its projected net sales of the Products based on recent historical sales trend experience.

As mentioned in Note 1, the Company received notice from the FDA on February 18, 2022 of its acceptance for review of the NDA for SPN-830. The regulatory and developmental contingent consideration payments include a $25 million milestone due upon the FDA acceptance of the SPN-830 NDA for review, which was paid in the first quarter of 2022.

The following table provides the reconciliation of the contingent consideration liabilities balance as of December 31, 2021 (dollars in thousands):


	Adamas Acquisition		USWM Acquisition		Total
Balance at December 31, 2020	$	—	$	76,700	$	76,700
Initial estimate of contingent consideration at Closing Date	10,307		—		10,307
Change in fair value recognized in earnings	$	—	$	(6,530)	$	(6,530)
Balance at December 31, 2021	10,307		70,170		80,477

Reported under the following captions in the consolidated balance sheets:			December 31, 2021		December 31, 2020
Contingent consideration, current portion			44,840		30,900
Contingent consideration, long term			35,637		45,800
Total			80,477		76,700


	Adamas Acquisition		USWM Acquisition		Total
Regulatory and developmental contingent consideration liabilities	$	—	$	70,170	$	70,170
Sales-based contingent consideration liabilities	10,307		—		10,307
Balance at December 31, 2021	$	10,307	$	70,170	$	80,477

Financial Liabilities Recorded at Carrying Value

The following table sets forth the carrying value and fair value of the Company's financial liabilities that are not carried at fair value (dollars in thousands):


	December 31, 2021				December 31, 2020
	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)
Convertible notes, net	$	379,252	$	400,236	$	361,751	$	383,381

The fair value has been estimated based on actual trading information, and quoted prices, both provided by bond traders.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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