Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.21.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2021
Fair Value Measurements  
Fair Value Measurements

6. 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, trade receivables, net 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 March 31, 2021 Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

Equity securities

$

$

$

1,021

$

1,021

Liabilities:

Contingent consideration

$

$

$

75

$

75

Fair Value Measurements at December 31, 2020 Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

  

  

  

  

Equity securities

$

$

$

1,693

$

1,693

Liabilities:

Contingent consideration

$

$

$

75

$

75

During the three months ended March 31, 2021 and 2020, there were no transfers between Level 1, Level 2, or Level 3 assets reported at fair value on a recurring basis.

Equity Securities

The following table provides a summary of changes in the estimated fair value of the Company’s Level 3 financial assets for the three months ended March 31, 2021 (in thousands):

Three Months Ended

March 31, 

Balance at December 31, 2020

$

1,693

Change in fair value

 

(672)

Balance at March 31, 2021

$

1,021

The equity securities consisted of an investment in Rezolute’s common stock and are classified as long-term assets on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020. The equity securities are revalued each reporting period with changes in fair value recorded in the other income (expense), net line item of the condensed consolidated statements of operations and comprehensive loss.

As of March 31, 2021, the Company and its valuation specialist valued the equity securities using the closing price for Rezolute’s common stock traded on the Nasdaq Stock Market and adjusted for an illiquidity discount. The inputs used to calculate the illiquidity discount are based on observable and unobservable estimates and judgments and therefore is classified as a Level 3 fair value measurement. As the Company has the right and option to sell up to 100,000 shares of Rezolute’s common stock back to Rezolute after December 31, 2019 (Note 4), the fair value of the equity securities was determined by dividing the total shares of Rezolute’s common stock held by the Company into two tranches based on the estimated time to a potential liquidity event.

The estimated fair value of the equity securities was calculated based on the following assumptions as of March 31, 2021 and December 31, 2020:

March 31, 

December 31, 

2021

2020

 

Closing common stock price (1)

$

7.06

$

11.99

Tranche 1:

Discount for lack of marketability

 

10.5

%  

12

%

Estimated time to liquidity of shares

 

0.25 year

0.25 year

Tranche 2:

Discount for lack of marketability

11

%

14

%

Estimated time to liquidity of shares

0.53 year

0.67 years

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

Contingent Consideration

The estimated fair value of the contingent consideration liability at the inception of the Bioasis Royalty Purchase Agreement represents the future consideration that is contingent upon the achievement of specified development milestones for a product candidate. The fair value measurement is based on significant Level 3 inputs such as anticipated timelines and probability of achieving development milestones of each licensed product candidate. Changes in the fair value of the liability for contingent consideration will be recorded in the other income (expense), net line item of the condensed consolidated statements of operations and comprehensive loss until settlement. As of March 31, 2021, there were no changes in the estimated fair value of the contingent consideration from its initial value of $0.1 million.

Debt

The estimated fair value of the Company’s outstanding 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 (Note 8). The carrying amount and the estimated fair value of the Company’s outstanding long-term debt at March 31, 2021 and December 31, 2020, are as follows (in thousands):

March 31, 2021

December 31, 2020

    

Carrying Amount

    

Fair Value

    

Carrying Amount

    

Fair Value

SVB Loans

$

9,762

$

9,752

$

11,759

$

11,747

Novartis note

9,093

9,092

9,093

9,055

Total

$

18,855

$

18,844

$

20,852

$

20,802