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Fair Value of Financial Instruments

6 Months Ended

Jun. 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, note payable to related party (also referred to as The Mann Group Loan Arrangement), senior convertible notes, the Facility Financing Obligation and the Milestone Rights liability 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 June 30, 2019 and December 31, 2018, the Company held $8.0 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 $5.3 million and $0.5 million in restricted cash as of June 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 June 30, 2019 the Company held $24.9 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).

Note Payable to Related Party — The fair value measurement of the note payable is based on discounted cash flow model and it is sensitive to the change in yield (Level 3 in the fair value hierarchy). If the yield increases by approximately 2% from 23% to 25%, the fair value of the note payable with the conversion feature would change from $59.5 million to $57.9 million, or a decrease of $1.6 million and 2.7%; if the yield decreases 2% from 23% to 21%, the fair value of the note payable with conversion feature would change from $59.5 million to $61.2 million, or an increase of $1.7 million or 2.9%. If the yield increases by approximately 4% from 23% to 27%, the fair value of the note payable with the conversion feature would change from $59.5 million to $56.3 million, or a decrease of $3.2 million and 5.4%; if the yield decreases 4% from 23% to 19%, the fair value of the note payable with conversion feature would change from $59.5 million to $62.9 million, or an increase of $3.4 million and 5.7%.

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

	June 30, 2019
	Carrying Amount		Significant Unobservable Inputs (Level 3)		Fair Value
Financial liabilities:
Facility financing obligation	$	9.0	$	9.0	$	9.0
Senior convertible notes		19.0		18.0		18.0
Note payable to related party		72.0		59.5		59.5
Milestone rights		8.9		18.5		18.5
Total financial liabilities	$	108.9	$	105.0	$	105.0

	December 31, 2018
	Carrying Value		Significant Unobservable Inputs (Level 3)		Fair Value
Financial liabilities:
Facility financing obligation	$	11.3	$	11.4	$	11.4
Senior convertible notes		19.1		17.5		17.5
Note payable to related party		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 and probability of making milestone payments. If the achievement of each of the milestones which require payments were to be six months later than in the current forecast, the fair value of the liability would decrease by 6%. If the probabilities of meeting the $50.0 million to $200.0 million milestones were to decrease by 5% or 10%, the fair value of the liability would decrease by 13% and 24%, respectively. Over the long term, these inputs are interrelated because if the Company’s performance improves, the timing of meeting the milestones would likely be earlier, the probability of making payments on the milestones would likely be higher and the discount rate would likely decrease, all of which would increase the fair value of the liability. The inverse is also true.

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 June 30, 2019 due to the repayment of the Tranche B notes in full in May 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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