Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.10.0.1
Fair Value Measurements
6 Months Ended
Jun. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

5. Fair Value Measurements

The Company records its financial assets and liabilities at fair value. The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables and accounts payable, approximate their fair value due to their short maturities. Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance for fair value establishes a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs used in valuation techniques. The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 – Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs, either directly or indirectly, other than quoted prices in active markets for identical assets or liabilities, such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities; therefore, requiring an entity to develop its own valuation techniques and assumptions.

The following tables set forth the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as follows (in thousands):

 

 

 

Fair Value Measurements at June 30, 2018 Using

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

 

 

Significant Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term equity securities

 

$

 

 

$

 

 

$

553

 

 

$

553

 

 

 

 

 

Fair Value Measurements at December 31, 2017 Using

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

 

 

Significant Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

34,907

 

 

$

 

 

$

 

 

$

34,907

 

 

 

(1)

Included in cash and cash equivalents

 

During the six-month period ended June 30, 2018, there were no transfers between Level 1, Level 2, or Level 3 assets reported at fair value on a recurring basis and the valuation techniques used did not change compared to the Company’s established practice.

The following table provides a summary of changes in the estimated fair value of the Company’s Level 3 financial assets for the six months ended June 30, 2018 (in thousands):

 

Balance at December 31, 2017

 

$

 

Fair value of long-term equity securities at contract inception

 

 

955

 

Change in fair value

 

 

(402

)

Balance at June 30, 2018

 

$

553

 

 

The equity securities consisted of an investment in Rezolute’s common stock and are classified as long-term assets on the condensed consolidated balance sheet as of June 30, 2018. The long-term equity securities are revalued each reporting period with changes in fair value recorded in other income (expense), net line item of the condensed consolidated statement of operations and comprehensive (loss) income. The Company and its valuation specialist used a probability-weighted expected return model (“PWERM”) to measure the fair value of the securities. The PWERM considers various scenarios for the expected payout of the securities covering the full range of the potential outcomes. The PWERM determines the value of an asset based upon an analysis of future values for the subject asset and full range of its potential values. The asset value is based upon the present value of the probability of each future outcome becoming available to the asset and the economic rights and preferences of each asset. This valuation methodology is based on unobservable estimates and judgements, and therefore is classified as a Level 3 fair value measurement. Scenarios and probabilities were based on Company management estimates and were incorporated into the determination of the fair value of the equity securities.  

The estimated fair value of the equity securities was calculated based on the following assumptions as of the contract inception date of April 3, 2018 and at June 30, 2018:

 

 

 

April 3,

 

 

June 30,

 

 

 

2018

 

 

2018

 

Discount for lack of marketability

 

 

30

%

 

 

32

%

Estimated time to liquidity of shares

 

1.45 years

 

 

1.45 years

 

 

 

 

 

 

 

 

 

 

Scenario probabilities

 

 

 

 

 

 

 

 

Liquidation

 

 

65

%

 

 

75

%

Near-term sale

 

 

5

%

 

 

5

%

Near-term financing

 

 

30

%

 

 

20

%

Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the long-term equity securities.

The estimated fair value of the Company’s outstanding long-term debt is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding long-term debt at June 30, 2018, and December 31, 2017, are as follows (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Novartis note

 

$

14,853

 

 

$

14,460

 

 

$

14,572

 

 

$

14,178