Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2020

Fair Value of Financial Assets and Liabilities

The Company held financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020, and held no financial assets measured at fair value on a recurring basis as of December 31, 2019.

The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, and indicate the level of the fair value hierarchy utilized to determine such fair value:


		Fair Value Measurement as of September 30, 2020 Using:
Balance Sheet Classification	Type of Instrument	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	Money market funds	$	167,343	$	—	$	—	$	167,343
Cash equivalents	U.S. corporate bonds	—		2,639		—		2,639
Marketable securities	U.S. treasury bills	—		79,954		—		79,954
Marketable securities	U.S. corporate bonds	—		133,959		—		133,959
Marketable securities	Foreign corporate bonds	—		16,070		—		16,070
Total assets		$	167,343	$	232,622	$	—	$	399,965

Liabilities:
Series B preferred shares forward contracts		—		—		1,940		1,940
Total liabilities		$	—	$	—	$	1,940	$	1,940


	Fair Value Measurement as of December 31, 2019 Using:
	Level 1		Level 2		Level 3		Total
Liabilities:
Series A preferred shares derivative liability	$	—	$	—	$	37,690	$	37,690
Total liabilities	$	—	$	—	$	37,690	$	37,690

There were no securities transferred between Level 1, 2 and 3 during the nine months ended September 30, 2020.

The fair value of the Company's long-term debt, classified as a Level 2 liability, approximates its carrying value of $264,135 at September 30, 2020.

The Company had no financial assets carried on the condensed consolidated balance sheets at adjusted cost that required an estimated fair value at September 30, 2020 and no financial assets and liabilities carried on the condensed consolidated balance sheets carried at adjusted cost that required an estimated fair value at December 31, 2019.

Valuation of Series A Preferred Shares Derivative Liability

The following table provides a roll forward of the aggregate fair value of the Company’s Series A preferred shares derivative liability (see Note 10) for which fair value is determined by Level 3 inputs for the nine months ended September 30, 2020 and 2019:


	Series A Derivative Liability



Balance at December 31, 2019	$	37,690
Change in fair value	5,131
Settlement of Series A preferred shares derivative liability	(42,821)
Balance at September 30, 2020	$	—

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

Balance at September 30, 2019	$	36,795

The fair value of the derivative liability recognized in connection with the Series A preferred shares agreement with RPI, as described in Note 10, 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 using credit spreads of biopharmaceutical companies in similar stages of development to the Company. In accordance with ASC 815, Derivatives and Hedging, the fair value of the derivative was recorded on the balance sheet as a Series A preferred shares derivative liability with changes in fair value recorded in other income (expense) in the condensed consolidated statements of operations.

Upon the FDA's approval of NURTEC ODT the Company remeasured the derivative using the inputs noted above. In the first quarter of 2020, the Company partially settled the derivative liability associated with this approval of $42,821, which modified the timing of the payment obligation related to the redeemable preferred share liability. During the second quarter of 2020, the Company recorded a $650 gain in other income in its condensed consolidated statement of operations.

Valuation of Liability Related to Sale of Future Royalties

In June 2018, and as described in Note 9, the Company entered into a funding agreement with RPI, accounted for as a liability financing. As of September 30, 2020, 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.

Series B Preferred Shares Forward Contracts

The following table provides a roll forward of the aggregate fair value of the Company's Series B Preferred Shares Forward Contracts for which fair value is determined by Level 3 inputs for the nine months ended September 30, 2020:


	Forward Contracts



Transaction date balance	$	—
Change in fair value	1,940

Balance at September 30, 2020	$	1,940

In August 2020, the Company entered into Series B preferred share agreement, whereby RPI will invest in the Company through the purchase of up to 3,992 Series B preferred shares at a price of $50,100 per share (the "RPI Series B Preferred Share Agreement"). The gross proceeds from the transaction with RPI will be used for the clinical development of zavegepant and other general corporate purposes. The shares will be issued in quarterly increments from March 31, 2021 to December 31, 2024.

The holders of the Company's outstanding Series B Preferred Shares will have the right to require redemption of the shares in certain circumstances. If a Change of Control occurs, as defined in the Company's memorandum and article of association, and the Series B Preferred Shares have not previously been redeemed, the holders of a majority of outstanding Series B Preferred Shares will have an option to redeem outstanding shares in a single payment at a price equal to 1.77 times the original issuance price of the Series B Preferred Shares.

The Company may redeem the Series B Preferred Shares at its option at any time in a single payment at a price equal to 1.77 times the original issuance price of the Series B Preferred Shares.

The Company is required to redeem the Series B Preferred Shares for 1.77 times the original purchase price, payable beginning March 31, 2025 in equal quarterly installments through December 31, 2030. Accordingly, the Company has concluded that the agreement to issue Series B Preferred Shares at a future date represents a forward contract, and classified as a derivative. The Company initially measured the forward contract at a fair value of zero. For detail of the transaction, see Note 9, "Liability Related to Sale of Future Royalties, net."

The Company will subsequently remeasure the fair value and recognize any gains or losses through other income (expense) in its condensed consolidated statement of operations. From the transaction date in August 2020 through September 30, 2020 the Company recognized $1,940 expense in other expense.

The fair value of the derivative recognized in connection with the RPI Series B Preferred Share Agreement was determined based on significant inputs not observable in the market, and therefore represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative primarily relates to the difference between the fair value of the Series B Preferred Shares and the contractual future purchase price. The fair value of the Series B Preferred Shares is calculated based on the cash flows to RPI (1.77 times the original purchase price as scheduled or accelerated upon certain events, as described previously) and the Company's estimated cost of capital for those cash flows. The cash flows to RPI are based on probability adjusted cash flows from certain scenarios outlined in the agreement that would result in accelerated payments modeled using a Monte Carlo simulation. As inputs into the valuation, the Company considered the type and probability of occurrence of certain change of control events, the amount of the payments, the expected timing of certain acceleration of payments, and a risk-adjusted discount rate. Assessing the probability of certain change of control events over a 10-year time period requires significant judgement and the successful completion of a change of control is largely dependent on the outcome of potential negotiations

with a third party. Due to this uncertainty, our expectation of the probability of the timing of a change of control event at the reporting date could reasonably be different than the timing of an actual change of control event, and if so, would mean the estimated fair value could be significantly higher or lower than the fair value determined.

Upon issuance of the Series B Preferred Shares, they will qualify as mandatorily redeemable instruments and will be classified as a preferred shares liabilities. The Company will then measure the liability at fair value, and subsequently accrete the carrying value to the redemption value through interest expense using the effective interest rate method. The Company had no Series B Preferred Shares issued and outstanding as of September 30, 2020 and December 31, 2019.

Any Series B Preferred Shares that are not redeemed on an applicable redemption date described above will accrue interest at 18% per annum, until the shares are redeemed. If Series B Preferred Shares remain unredeemed for a period of one year after the applicable redemption date, the holders of the unredeemed shares will have the right to convert such preferred shares into a number of common shares equal to (a) the redemption price plus any accrued interest, divided by (b) the five day volume-weighted average trading price of the Company's common shares for the five days immediately preceding the conversion date for such unredeemed shares.

- 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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