FAIR VALUE

9 Months Ended

Sep. 30, 2021

The following table reflects the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):


September 30, 2021	Financial Statement Classification	Level 1		Level 2		Level 3		Total



Liabilities:
Short-term contingent consideration	Contingent consideration, current portion	$	—	$	—	$	7,200	$	7,200
Long-term contingent consideration	Contingent consideration	—		—		30,759		30,759
Total		$	—	$	—	$	37,959	$	37,959


December 31, 2020	Financial Statement Classification	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	Cash and cash equivalents	$	77	$	—	$	—	$	77
Total		$	77	$	—	$	—	$	77
Liabilities:
Short-term contingent consideration	Contingent consideration, current portion	$	—	$	—	$	6,776	$	6,776
Long-term contingent consideration	Contingent consideration	—		—		31,776		31,776
Total		$	—	$	—	$	38,552	$	38,552

Cash equivalents consisted of money market funds with overnight liquidity and no stated maturities. The Company classified cash equivalents as Level 1, due to their short-term maturity, and measured the fair value based on quoted prices in active markets for identical assets.

Pursuant to the May 2020 Zyla Merger, the Company assumed a contingent consideration obligation which is measured at fair value. The Company has obligations to make contingent consideration payments for future royalties to Iroko based upon annual INDOCIN Product net sales over $20.0 million. The Company classified the acquisition-related contingent consideration liabilities to be settled in cash as Level 3, due to the lack of relevant observable inputs and market activity. As of September 30, 2021 and December 31, 2020, INDOCIN Product contingent consideration was $37.7 million and $38.4 million, respectively, with $7.2 million and $6.8 million classified as short-term and $30.5 million and $31.6 million classified as long-term contingent consideration, respectively, in the Condensed Consolidated Balance Sheet. During the three and nine months ended September 30, 2021 and September 30, 2020, the Company recognized a charge of $0.3 million and $1.9 million, and a charge of $1.9 million and $1.9 million, respectively, for the change in fair value of contingent consideration, which was recognized in Selling, general and administrative expense in the Company’s Condensed Consolidated Statements of Comprehensive Income. The fair value of the contingent consideration is determined using an option pricing model under the income approach based on estimated INDOCIN product revenues through January 2029 and discounted to present value. The significant assumptions used in the calculation of the fair value as of September 30, 2021 included revenue volatility of 40.0%, discount rate of 6.5%, credit spread of 5.1% and updated projections of future INDOCIN Product revenues.

Contingent consideration related to CAMBIA was $0.2 million as of September 30, 2021 and December 31, 2020.

The carrying value of the Company’s debt for the period ended September 30, 2021 approximates its fair value. When determining the estimated fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2021.

- 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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