H.	Fair Value of Financial Instruments

The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as 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, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.

The Company uses a

three

-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The

three

tiers are defined as follows:

	●	Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
	●	Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
	●	Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.

The fair value of the Deerfield Convertible Note was

$6.4

million and

$6.2

million, respectively, as of March

31,

2019

and

December 31,

2018.

The fair value of the

2021

Notes was

$52.8

million and

$51.2

million, respectively, as of March

31,

2019

and

December 31, 2018.

Both the Deerfield Convertible Note and

2021

Notes fall within Level

of the fair value hierarchy as their value is based on the credit worthiness of the Company, which is an unobservable input. The Company used a Tsiveriotis-Fernandes model to value the Deerfield Convertible Note and

2021

Notes as of March

31,

2019

and

December 31, 2018.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The following table summarizes the conclusions reached regarding fair value measurements as of

March 31, 2019

and

December 31, 2018 (

in thousands):

	Balance as of March 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Deerfield Warrant liability	$	1,039	$	—	$	—	$	1,039
Embedded Warrant Put Option		288		—		—		288
Fundamental change and make-whole interest provisions embedded in 2021 Notes		—		—		—		—
Deerfield Note Conversion Feature		94		—		—		94
KVK Warrant liability		244		—		244		—
Total liabilities	$	1,665	$	—	$	244	$	1,421

	Balance as of December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Deerfield Warrant liability	$	1,557	$	—	$	—	$	1,557
Embedded Warrant Put Option		154		—		—		154
Fundamental change and make-whole interest provisions embedded in 2021 Notes		—		—		—		—
Deerfield Note Conversion Feature		134		—		—		134
KVK Warrant liability		273		—		273		—
Total liabilities	$	2,118	$	—	$	273	$	1,845
Trading securities:
Certificates of deposit	$	246	$	246	$	—	$	—
U.S. Treasury securities		3,014		3,014		—		—
Total assets	$	3,260	$	3,260	$	—	$	—

The Company’s Deerfield Warrant liability, embedded Warrant Put Option, the fundamental change and the make-whole interest provisions embedded in the

2021

Notes and the embedded Deerfield Note Put Option, as well as the trading securities are measured at fair value on a recurring basis. As of

March 31, 2019 and December 31, 2018,

the Deerfield Warrant liability, embedded Warrant Put Option, the fundamental change and make-whole interest provisions embedded in the

2021

Notes, and the embedded Deerfield Note Put Option are reported on the condensed balance sheets in derivative and warrant liability. As of December

31,

2018,

the trading securities are reported on the condensed balance sheets in marketable securities.

The Company used a Monte Carlo simulation to value the Deerfield Warrant liability, embedded Warrant Put Option, the fundamental change and make-whole interest provisions embedded in the

2021

Notes, and the embedded Deerfield Note Put Option as of

March 31, 2019 and December 31, 2018.

Significant unobservable inputs used in measuring the fair value of these financial instruments included the Company’s estimated enterprise value, an estimate of the timing of a liquidity or fundamental change event, a present value discount rate and an estimate of the Company’s stock volatility using the volatilities of guideline peer companies. Changes in the fair value of the Deerfield Warrant liability, embedded Warrant Put Option, the fundamental change and make-whole interest provisions embedded in the

2021

Notes, and the embedded Deerfield Note Put Option are reflected in the condensed statements of operations for the

three

months ended

March 31, 2019 and 2018

as a fair value adjustment related to derivative and warrant liability.

The Company’s KVK Warrant liability is measured at fair value on a recurring basis. As of

March 31, 2019

and

December 31, 2018,

the KVK Warrant liability is reported on the balance sheets in derivative and warrant liability. The Company estimates the fair value of the KVK Warrant using a probability-weighted Black-Scholes option-pricing model, which requires the use of subjective assumptions, including the expected term of the warrant, the expected stock price volatility, expected dividend yield and the risk-free interest rate for the expected term of the warrant. The expected term represents the period of time the warrant is expected to be outstanding. For the KVK Warrant, the Company used an expected term equal to the contractual term of the warrant. Expected volatility is based on the Company's historical volatility since the IPO. The Company assumes

dividend yield because dividends are

not

expected to be paid in the near future, which is consistent with the Company’s history of

not

paying dividends. Changes in the fair value of the KVK Warrant liability are reflected in the statements of operations for the

three

months ended

March 31, 2019

as a fair value adjustment related to derivative and warrant liability. The changes in the fair value of the KVK Warrant liability are

not

reflected in the statements of operations for the

three

months ended

March 31, 2018

since it wasn't issued until

October 2018.

A reconciliation of the beginning and ending balances for the derivative and warrant liability measured at fair value on a recurring basis using significant unobservable inputs (Level

) is as follows (in thousands):

	Three months ended March 31,
	2019			2018
Balance as of beginning of period	$	1,845		$	7,709
Adjustment to fair value		(424	)		9,741
Balance as of end of period	$	1,421		$	17,450