Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2023

11. Fair Value of Financial Instruments

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement. The Company uses the exit price method for estimating the fair value of loans for disclosure purposes. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Significant inputs to the valuation model are unobservable.

The carrying amounts reported in the condensed consolidated financial statements for cash, accounts receivable, accounts payable, and accrued expenses and other current liabilities (excluding the Milestone Rights liability) approximate their fair value due to their relatively short maturities. The fair value of the Senior convertible notes, MidCap credit facility, Mann Group convertible note, Milestone Rights liability and Financing liability are disclosed below.

Financial Liabilities — The following tables set forth the fair value of the Company’s financial instruments (in thousands):


	March 31, 2023
			Fair Value
	Carrying Amount		Significant Unobservable Inputs (Level 3)
Financial liabilities:
Senior convertible notes(1)	$	225,761	$	239,283
MidCap credit facility(2)		39,371		41,394
Mann Group convertible note(3)		8,829		16,354
Milestone rights(4)		4,838		12,700
Contingent milestone liability(4)		610		1,010
Financing liability(5)		104,067		103,221

_________________________

(1)

Fair value was determined by applying a discounted cash flow analysis to the straight note with a hypothetical yield of 11%, volatility of 74.3% and a Monte Carlo simulation for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $230.2 million and $249.0 million, respectively.

(2)

Fair value was determined by applying a discounted cash flow analysis with a hypothetical yield of 12%. A change in yield of + or – 2% would result in a fair value of $40.3 million and $42.4 million, respectively.

(3)

The fair value was determined by applying a discounted cash flow analysis with a hypothetical yield of 13% and volatility of 73.6% to the straight note and a binomial option pricing model for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $16.0 million and $16.7 million, respectively.

(4)

Fair value was determined by applying a Monte Carlo simulation.

(5)

Fair value was determined by applying a discounted cash flow analysis with a hypothetical yield of 10%.


	December 31, 2022
			Fair Value
	Carrying Value		Significant Unobservable Inputs (Level 3)
Financial liabilities:
Senior convertible notes(1)	$	225,761	$	253,864
MidCap credit facility(2)		39,371		41,070
Mann Group convertible note(3)		8,829		20,836
Milestone rights(4)		4,838		12,600
Contingent milestone liability(4)		610		960
Financing liability(5)		104,077		103,239

_________________________

(1)

Fair value was determined by applying a discounted cash flow analysis to the straight note with a hypothetical yield of 13%, volatility of 75.8% and a Monte Carlo simulation for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $245.0 million and $263.4 million, respectively.

(2)

Fair value was determined by applying a discounted cash flow analysis with a hypothetical yield of 12%. A change in yield of + or – 2% would result in a fair value of $40.0 million and $42.4 million, respectively.

(3)

Fair value was determined by applying a discounted cash flow analysis with a hypothetical yield of 13% and volatility of 77.8% to the straight note and a binomial option pricing model for the value of the conversion feature. A change in yield of + or – 2% would result in a fair value of $20.5 million and $21.2 million, respectively.

(4)

Fair value was determined by applying a Monte Carlo simulation.

(5)

Fair value was determined by applying a discounted cash flow analysis with a hypothetical yield of 10%.

Milestone Rights Liability — The fair value measurement of the Milestone Rights liability is sensitive to the discount rate and the timing of achievement of milestones. The Company utilized Monte-Carlo Simulation Method to simulate the Afrezza net sales under a neutral framework to estimate the payment. The Company then discounted the future expected payments at cost of debt with a term equal to the simulated time to payout based on cumulative sales. See Note 9 – Borrowings.

Contingent milestone liability — The acquisition of V-Go in May 2022 resulted in a contingent milestone liability which could result in obligations to the seller if certain revenue thresholds are met. The initial fair value of the contingent milestone liability was recorded as an adjustment to the purchase price. Subsequent changes in the fair value are reported in selling, general and administrative expenses. See Note 3 – Acquisition.

Financing Liability — The Sale-Leaseback Transaction in November 2021 resulted in a financing liability. See Note 15 – Commitments and Contingencies.

- 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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