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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2019

9. 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.

The carrying amounts reported in the accompanying 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 cash equivalents, the Mann Group Notes, senior convertible notes, 2020 notes, the MidCap Credit Facility and the Milestone Rights liabilities are disclosed below.

Cash Equivalents and restricted cash— Cash equivalents consist of highly liquid investments with original or remaining maturities of 90 days or less at the time of purchase that are readily convertible into cash. As of September 30, 2019 and December 31, 2018, the Company held $30.2 million and $71.2 million, respectively, of cash and cash equivalents. Restricted cash is held in an escrow account as well as used to collateralize a letter of credit. The Company held $0.3 million and $0.5 million in restricted cash as of September 30, 2019 and December 31, 2018, respectively. Both are comprised of money market funds. The fair value of these money market funds was determined by using quoted prices for identical investments in an active market (Level 1 in the fair value hierarchy).

Short-term investments— Short-term investments consist of highly liquid investments that are intended to facilitate liquidity and capital preservation. As of September 30, 2019 the Company held $19.9 million of short-term investments in U.S. Treasury bills or notes. The fair value of short-term investments approximate their carrying value. The measurement of which is based on a market approach using quoted market values (Level 1 in the fair value hierarchy).

The fair value measurement of debt instruments is based on a discounted cash flow model and is sensitive to the change in yield (Level 3 in the fair value hierarchy):

Mann Group Notes — If the yield increases by approximately 2% from 31% to 33%, the fair value of the notes payable would change from $42.0 million to $40.1 million, or a decrease of $1.9 million or 4.5%; if the yield decreases 2% from 31% to 29%, the fair value of the note payable with conversion feature would change from $42.0 million to $44.1 million, or an increase of $2.1 million or 5.0%. If the yield increases by approximately 4% from 31% to 35%, the fair value of the note payable with the conversion feature would change from $42.0 million to $38.4 million, or a decrease of $3.6 million or 8.6%; if the yield decreases 4% from 31% to 27%, the fair value of the note payable with conversion feature would change from $42.0 million to $46.4 million, or an increase of $4.4 million or 10.5%.

Senior Convertible Notes – If the yield increases by approximately 2% from 31% to 33%, the fair value of the notes payable would change from $7.3 million to $7.1 million, or a decrease of $0.2 million and 2.7%; if the yield decreases 2% from 31% to 29%, the fair value of the note payable with conversion feature would change from 7.3 million to $7.5 million, or an increase of $0.2 million or 2.7%. If the yield increases by approximately 4% from 31% to 35%, the fair value of the note payable with the conversion feature would change from $7.3 million to $7.0 million, or a decrease of $0.3 million or 4.1%; if the yield decreases 4% from 31% to 27%, the fair value of the note payable with conversion feature would change from $7.3 million to $7.7 million, or an increase of 0.4 million and 5.5%.

MidCap credit facility - If the yield increases by approximately 1% from 11.5% to 12.5%, the fair value of the notes payable would change from $38.1 million to $37.1 million, or a decrease of $1.0 million or 2.7%; if the yield decreases 1% from 11.5% to 10.5%, the fair value of the note payable with conversion feature would change from $38.1 million to $39.1 million, or an increase of $1.0 million or 2.6%. If the yield increases by approximately 2% from 11.5% to 13.5%, the fair value of the note payable with the conversion feature would change from $38.1 million to $36.2 million, or a decrease of $1.9 million or 5.0%; if the yield decreases 2% from 11.5% to 9.5%, the fair value of the note payable with conversion feature would change from $38.1 million to $40.2 million, or an increase of $2.1 million or 5.5%.

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

	September 30, 2019
	Carrying Value		Significant Unobservable Inputs (Level 3)		Fair Value
Financial liabilities:
June 2020 Note		2.5		2.1		2.1
December 2020 Note		2.4		1.9		1.9
Senior convertible notes		5.0		3.3		3.3
Mann Group Notes		70.0		42.0		42.0
MidCap Credit Facility		38.8		38.1		38.1
Milestone rights		8.9		19.4		19.4
Total financial liabilities	$	127.6	$	106.8	$	106.8

	December 31, 2018
	Carrying Value		Significant Unobservable Inputs (Level 3)		Fair Value
Financial liabilities:
Deerfield Credit Facility	$	11.3	$	11.4	$	11.4
Senior convertible notes		19.1		17.5		17.5
Mann Group Notes		72.1		55.0		55.0
Milestone rights		8.9		18.1		18.1
Total financial liabilities	$	111.4	$	102.0	$	102.0

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 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.

Embedded Derivatives — The Company identified and evaluated a number of embedded features in the notes issued under the Facility Agreement to determine if they represented embedded derivatives that are required to be separated from the notes and accounted for as freestanding instruments. The Company analyzed the Tranche B notes and identified embedded derivatives, which required separate accounting. All of the embedded derivatives were determined to have a de minimis value at December 31, 2018 and no value as of September 30, 2019 due to the repayment of the Deerfield Credit Facility in full in August 2019.

- 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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