Fair Value Accounting

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Accounting

Note 3 - Fair Value Accounting

The Company accounts for certain assets and liabilities that are required to be recorded at fair value under a framework for measuring fair value that requires enhanced disclosures about fair value measurements. This framework requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped based on significant levels of inputs as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or

Level 3: Unobservable inputs in which there is little or no market data, which requires the reporting entity to develop its own assumptions.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following tables set forth by level, within the fair value hierarchy, the Company's liabilities measured at fair value on a recurring basis (in thousands):

September 30, 2020:
Description	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	403	$	403
Contingent value rights	$	—	$	—	$	—	$	—
Contingent consideration	$	—	$	—	$	30,071	$	30,071
Put option liability	$	—	$	—	$	6,650	$	6,650
December 31, 2019:
Description	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	372	$	372
Contingent value rights	$	—	$	—	$	60	$	60
Contingent consideration	$	—	$	—	$	29,114	$	29,114
Put option liability	$	—	$	—	$	3,261	$	3,261

Due to the unobservable inputs needed to calculate the fair value of these balances, these liabilities are classified as Level 3 liabilities. The following is a reconciliation of the beginning and ending balances for the nine-month period ended September 30, 2020 for assets measured at fair value on a recurring basis using significant unobservable inputs (in thousands):

Warrant liability
Beginning balance	$	372
Issuances		—
Exercises		—
Change in fair value		31
Ending balance	$	403
Contingent value rights
Beginning balance	$	60
Issuances		—
Exercises		—
Change in fair value		(60	)
Ending balance	$	—
Put option liability
Beginning balance	$	3,261
Additions		3,389
Ending balance	$	6,650

Contingent consideration
Beginning balance	$	29,114
Additions		—
Changes in fair value		(1,944	)
Accretion		2,901
Payments		—
Ending balance	$	30,071

There were no changes to the valuation methods during the months presented.

See Note 11 for further discussion of preferred stock warrants.

In addition to the shares of Series F Preferred Stock that were issued in January 2016, investors who purchased more than their pro‑rata amount in the financing described above received a calculated number of contingent value rights ("CVRs"), but only to the extent that the total amount raised in the financing exceeded $20,202,323. One CVR represents 0.00375% of the Company's interest in the drug ficlatuzumab (see Note 8). In connection with the Series F financing, the Company issued 3,999 CVRs originally valued at $0.5 million. The initial estimated value of the CVRs were recorded as a liability and as a reduction to the Series F proceeds. Upon receipt by the Company or a milestone, royalty, or any other type of payment from the Company’s ownership rights in the drug, the Company will make a cash payment to the CVR holders equal to 15% of net proceeds, as defined. In addition, the CVRs will be adjusted to their estimated fair values each reporting period. In September 2020, the Company exercised its opt-out right with AVEO (as defined below) for the of payment of 50% of development and regulatory costs for ficlatuzumab which will be effective December 2, 2020. At September 30, 2020, the Company recorded a liability of $0.3 million for the remainder of these development and regulatory costs. The value of these CVRs was $0 as of September 30, 2020.

The put option liability was valued based on the calculated returns as a result of the various discounts included in the Company’s convertible notes payable and the related probability assessments of the various settlement scenarios that the discounts apply to.  See Note 5 for further disclosure of the discounts and settlement scenarios.

Contingent Consideration

In connection with the transaction with Indi, the Company recorded contingent consideration pertaining to the amounts potentially payable to Indi's selling shareholders pursuant to the Asset Purchase Agreement (See Note 2). Contingent consideration is measured at fair value and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an on-going basis as additional data impacting the assumptions is obtained. Future changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within the statements of operations.

Contingent consideration may change significantly as development progresses and additional data are obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related Milestone used to estimate the fair value of the liability and the timing in which they are expected to be achieved. In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates. The fair value of the Company's contingent consideration liability was estimated using significant unobservable inputs. The fair value of $19.6 million contingent consideration recognized on the acquisition date was estimated by management with the assistance of an independent third party.  

Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets. Contingent consideration is recorded in the balance sheets in long-term liabilities. The change to contingent consideration during the three and nine months ended September 30, 2020 was primarily due to $1.0 million and $2.9 million, respectively, resulting from the accretion of the liability offset by $0 and $1.9 million due to the impact of the deceleration of expected revenue and decreases in expected costs, respectively.  The $3.2 million change to the contingent consideration during the nine months ended September 30, 2019 was primarily due to $0.7 million resulting from the impact of the acceleration of expected revenue and decreases in expected costs as a result of events occurring after the acquisition date, as well as $2.5 million resulting from the from the accretion of the liability. For the three months ended September 30, 2019, there was a $0.9 million change to the contingent consideration resulting from the accretion of the liability.

The significant unobservable inputs used in the measurement of fair value of the Company’s contingent consideration are probabilities of successful achievement of the Milestone, the period in which the Milestone is expected to be achieved and discount rates ranging from 12.2% to 13.5%. Significant increases or decreases in any of these inputs would result in a significantly higher or lower fair value measurement.