Fair Value Measurements

3 Months Ended

Mar. 31, 2024

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 March 31, 2024, and December 31, 2023.

	March 31, 2024
	(unaudited)
(in thousands)	Level 1		Level 2		Level 3		Total
Iliad	$	—	$	—	$	6,721	$	6,721
Uptown		—		—		7,880		7,880
Streeterville 2		—		—		7,118		7,118
Streeterville Note		—		—		10,242		10,242
Total fair value	$	—	$	—	$	31,961	$	31,961

	December 31, 2023
(in thousands)	Level 1		Level 2		Level 3		Total
Iliad	$	—	$	—	$	6,862	$	6,862
Uptown		—		—		7,473		7,473
Streeterville 2		—		—		6,815		6,815
Streeterville Note		—		—		9,793		9,793
Total fair value	$	—	$	—	$	30,943	$	30,943

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

	Three Months Ended
	March 31, 2024
(in thousands)	Iliad		Uptown		Streeterville 2		Streeterville Note
Beginning fair value of Level 3 liability	$	6,862	$	7,473	$	6,814	$	9,792
Additions		—		—		—		—
Exchanges		(836)		—		(165)		—
Settlements		—		—		—		—
Change in fair value		695		407		469		450
Ending fair value of Level 3 liability	$	6,721	$	7,880	$	7,118	$	10,242

	Three Months Ended
	March 31, 2023
(in thousands)	Iliad		Uptown		Streeterville 2		Streeterville Note
Beginning fair value of Level 3 liability	$	—	$	—	$	—	$	7,839
Additions		—		—		—		—
Settlements		—		—		—		—
Change in fair value		—		—		—		359
Ending fair value of Level 3 liability	$	—	$	—	$	—	$	8,198

The fair value of the Streeterville Note recognized as a Level 3 liability at the date of issuance and as of March 31, 2024, amounted to $7.8 million and $10.2 million, respectively. The fair value of the remaining Level 3 liabilities at the extinguishment date and as of March 31, 2024, amounted to $20.2 million and $21.7 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	2024	2023	to fair value
Risk Adjusted Discount Rate	8.57%-25.14% (25.14%)	9.02%-24.59% (24.59%)	If discount rate is adjusted to total of additional 100 basis points (bps), fair value would have decreased by $407,000. If discount rate is adjusted to total deduction of 100 bps, fair value would have increased by $407,000.
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 $1.4 million. If expected cash flows by Management considered the highest amount of market indications for vouchers, FV would have increased by $10.8 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.	0.59%-73.27%	0.10%-73.27%	If expected cash flows by Management considered the Scenario with the least amount of indicated value, FV would have decreased by $216,000. If expected cash flows by Management considered the scenario with the greatest amount of indicated value, FV would have increased by $1.5 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	2024	2023	to fair value
Risk Adjusted Discount Rate	8.57%-27.14% (27.14%)	9.02%-26.59% (26.59%)	If discount rate is adjusted to total of additional 100 basis points (bps), fair value would have decreased by $541,000. If discount rate is adjusted to total deduction of 100 bps, fair value would have increased by $555,000.

Fair Value Option

The Company elected to apply the FVO accounting to certain freestanding instruments and to the entire class of hybrid instruments, including structured notes, of which there are assessed embedded derivatives that would be eligible for bifurcation, to align the measurement attributes of those instruments under US GAAP and to simplify the accounting model applied to these financial instruments.

The valuations of these instruments were predominantly driven by the discount rate and the derivative features embedded within the instruments. The Company determined and performed the valuations of the freestanding and 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 instruments and the related derivatives. Cash flows of the financial instruments in their entirety, including the embedded derivatives, are discounted at an appropriate rate for the applicable duration of the instrument. Interests on the interest-bearing portion of the instruments that are held to maturity and mark-to-market adjustments are aggregated in the change in fair value of freestanding and hybrid financial instruments designated at FVO in the unaudited condensed consolidated statements of operations. As of March 31, 2024, and December 31, 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).

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 March 31, 2024
Iliad	$	6,721	$	6,392	$	3,885	$	(3,556)
Uptown		7,880		7,994		4,366		(4,480)
Streeterville 2		7,118		10,094		1,265		(4,241)
Streeterville Note		10,242		6,000		651		3,591

(in thousands)	Fair value		Unpaid Principal Balance		Accrued Interest		Fair Value Over (Under) Outstanding Balance
At December 31, 2023
Iliad	$	6,862	$	7,292	$	3,621	$	(4,051)
Uptown		7,473		7,994		4,058		(4,579)
Streeterville 2		6,815		10,273		950		(4,408)
Streeterville Note		9,793		6,000		546		3,247