Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair Value Measurements

Fair Value Measurements

3. Fair Value Measurements

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

● Level 1 – Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.

● Level 2 – Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable.

● Level 3 – Unobservable inputs that reflect the reporting entity’s own assumptions.

The following tables set forth the fair value of the Company’s financial instruments that were measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022.

	September 30, 2023
(in thousands)	Level 1		Level 2		Level 3		Total
Iliad	$	—	$	—	$	6,977	$	6,977
Uptown		—		—		6,933		6,933
Streeterville 2		—		—		6,518		6,518
Streeterville Note		—		—		9,544		9,544
Total fair value	$	—	$	—	$	29,972	$	29,972

	December 31, 2022
(in thousands)	Level 1		Level 2		Level 3		Total
Streeterville Note	$	—	$	—	$	7,839	$	7,839
Total fair value	$	—	$	—	$	7,839	$	7,839

The change in the estimated fair value of Level 3 liabilities is summarized below:

	Nine Months Ended
	September 30, 2023
	(unaudited)
(in thousands)	Iliad		Uptown		Streeterville 2		Streeterville Note
Beginning fair value of Level 3 liability	$	—	$	—	$	—	$	7,839
Additions		6,580		7,478		6,154		—
Settlements		—		(1,444)		—		—
Change in fair value		397		899		364		1,705
Ending fair value of Level 3 liability	$	6,977	$	6,933	$	6,518	$	9,544

	Three Months Ended
	September 30, 2023
	(unaudited)
(in thousands)	Iliad		Uptown		Streeterville 2		Streeterville Note
Beginning fair value of Level 3 liability	$	—	$	—	$	—	$	8,960
Additions		6,580		7,478		6,154		—
Settlements		—		(1,444)		—		—
Change in fair value		397		899		364		584
Ending fair value of Level 3 liability	$	6,977	$	6,933	$	6,518	$	9,544

The fair value of the Streeterville Note recognized as a Level 3 liability at the date of issuance and as of September 30, 2023 amounted to $7.8 million and $9.5 million, respectively. The fair value of the remaining Level 3 liabilities at the extinguishment date and as of September 30, 2023 amounted to $20.2 million and $20.4 million. The fair values were based on the weighted average discounted expected future cash flows representing the terms of the notes, discounting them to their present value equivalents. The notes were classified as Level 3 fair values in the fair value hierarchy due to the use of unobservable inputs, including the Company’s own credit risk.

The Company determined and performed the valuations with the assistance of an independent valuation service provider. On a quarterly basis, the Company considers the main Level 3 inputs for hybrid instruments used derived as follows:

● Discount rate which was determined using a comparison of various effective yields on bonds as of the valuation date

● Market indications for vouchers, which affect the Return Bonus from the sale of Tropical Disease Priority Review Voucher (“TDPRV”)

● Weighted probability of cash outflows which was estimated based on the entity's knowledge of the business and how the current economic environment is likely to impact the timing of the cash outflows, attributed to the different repayment features of the notes

The following table summarizes the quantitative information about the significant unobservable inputs used in Level 3 fair value measurement for hybrid instruments:

	Range of Inputs
	(probability-weighted average)		Relationship of unobservable inputs
Unobservable Inputs	2023	2022	to fair value
Risk Adjusted Discount Rate	9.23%-23.80% (23.80%)	11.53%-26.06% (26.06%)	If discount rate is adjusted to total of additional 100 basis points (bps), fair value would have decreased by $401,000. If discount rate is adjusted to total deduction of 100 bps, fair value would have increased by $401,000.
Sales Proceeds: Amount of comparable TDPRV	$67.5 million to $350 million ($100 million)	$67.5 million to $350 million ($100 million)	If expected cash flows by Management considered the lowest amount of market indications for vouchers, FV would have decreased by $1.30 million. If expected cash flows by Management considered the highest amount of market indications for vouchers, FV would have increased by $10.00 million.
Range of Probability for Timing of Cash Flows: Variations of the terms and conditions of the timing of cash flows, including settlement of the note principal, interest, penalties, and acceleration clause.	0.17%-64.76%	0.39%-46.55%	If expected cash flows by Management considered the Scenario with the least amount of indicated value, FV would have decreased by $365,000. If expected cash flows by Management considered the scenario with the greatest amount of indicated value, FV would have increased by $2.99 million.

For the additional notes designated at FVO that are not hybrid, the company considers only the discount rate which was determined using a comparison of various effective yields on bonds as of valuation date.

The following table summarizes the quantitative information about the significant unobservable inputs used in Level 3 fair value measurement for the remaining instruments that are not classified as hybrid instruments:

	Range of Inputs
	(probability-weighted average)		Relationship of unobservable inputs
Unobservable Inputs	2023	2022	to fair value
Risk Adjusted Discount Rate	9.43%-26.00% (26.00%)	—	If discount rate is adjusted to total of additional 100 basis points (bps), fair value would have decreased by ($615,323). If discount rate is adjusted to total deduction of 100 bps, fair value would have increased by $634,963.

Fair Value Option

Beginning January 1, 2021, the Company elected to apply the FVO accounting to selected financial instruments to align the measurement attributes of those instruments under U.S. GAAP and to simplify the accounting model applied to those financial instruments. The Company elected to apply FVO accounting to the entire class of hybrid instruments, including structured notes, of which there are assessed embedded derivatives that would be eligible for bifurcation.

Changes in the fair value of FVO assets and liabilities as well as the mark-to-market adjustment on the entire class of hybrid instruments, including derivatives and the net realized gains or losses on these instruments are reported in the change in fair value of financial instruments and hybrid instrument designated at FVO in the unaudited condensed consolidated comprehensive loss.

As of September 30, 2023, the Company did not note any fair value movement on FVO liabilities attributable to any instrument-specific credit risk, which should be recorded in other comprehensive income (loss).

Hybrid Instruments

The Company elected to apply FVO accounting to all of the hybrid instruments issued, including structured notes. The valuation of the hybrid instruments is predominantly driven by the derivative features embedded within the instruments. The Company determined and performed the valuations of the hybrid instruments with the assistance of an independent valuation service provider. The valuation methodology utilized is consistent with the income approach for estimating the fair value of the interest-bearing portion of the instrument and the related derivatives. Cash flows of the hybrid instruments in their entirety, including the embedded derivatives, are discounted at an appropriate rate for the applicable duration of the instrument. Interest on the interest-bearing portion of the instrument that is held to maturity is aggregated as gain (loss) on instruments designated at fair value and related derivatives in the change in fair value of financial instruments and hybrid instruments designated at FVO of the unaudited condensed consolidated comprehensive loss.

The following table summarizes the fair value and outstanding balance for items the Company accounts for under FVO:

(in thousands)	Fair value		Unpaid Principal Balance		Accrued Interest		Fair Value Over (Under) Outstanding Balance
At September 30, 2023
Iliad	$	6,977	$	8,078	$	3,327	$	(4,428)
Uptown		6,933		7,994		3,754		(4,815)
Streeterville 2		6,518		10,273		680		(4,435)
Streeterville Note		9,544		6,000		546		2,998

(in thousands)	Fair value		Unpaid Principal Balance		Accrued Interest		Fair Value Over (Under) Outstanding Balance
At December 31, 2022
Streeterville Note	$	7,839	$	6,000	$	390	$	1,449