Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2019

Fair Value of Financial Assets and Liabilities

The Company held no financial assets measured at fair value on a recurring basis as of September 30, 2019, and no financial assets or liabilities measured at fair value on a recurring basis as of December 31, 2018.

The following tables present information about the Company's financial liability measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair value:


	Fair Value Measurement as of September 30, 2019 Using:
	Level 1		Level 2		Level 3		Total
Liabilities:
Derivative liability	$	—	$	—	$	36,795	$	36,795
	$	—	$	—	$	36,795	$	36,795

The following table provides a roll forward from transaction date of the Series A preferred shares (see Note 8) to September 30, 2019 of the aggregate fair value of the Company’s derivative liability for which fair value is determined by Level 3 inputs:


	Derivative Liability
Transaction date balance	$	33,815
Change in fair value	2,980

Balance at September 30, 2019	$	36,795

Valuation of Derivative Liability

The fair value of the derivative liability recognized in connection with the Series A preferred shares agreement with RPI Finance Trust ("RPI"), as described in Note 8, was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative liability relates to certain scenarios outlined in the agreement that would result in accelerated payments as compared to the agreement's host instrument. The with-and-without valuation method was used to determine the fair value of the embedded derivatives within the agreement. As inputs into the valuation, the Company considered the type and probability of occurrence of certain events, the amount of the payments, the expected timing of certain events, and a risk-adjusted discount rate. In accordance with ASC 815, Derivatives and Hedging, the fair value of the derivative was recorded on the balance sheet as a derivative liability with changes in fair

value recorded in other income (expense) in the condensed consolidated statements of operations and comprehensive loss. If factors change and different assumptions are used, the fair value of the derivative liability and related gains or losses could be materially different in the future.

Valuation of Liability Related to Sale of Future Royalties

In June 2018, and as described in Note 7, the Company entered into a funding agreement with RPI, accounted for as a liability financing. As of September 30, 2019, the fair value of the liability related to sale of future royalties, used in determining the effective interest rate of the liability, is based on the Company's current estimates of future royalties expected to be paid to RPI over the life of the arrangement, which is considered Level 3.

- 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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