Fair Value Measurements

9 Months Ended

Sep. 30, 2019

7. Fair Value Measurements

The Company is required to disclose information on the fair value of financial instruments and inputs that enable an assessment of the fair value. The three levels of the fair value hierarchy prioritize valuation inputs based upon the observable nature of those inputs as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly;

Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

The following tables present information about the Company’s financial instruments and the related the fair value hierarchy of the valuation techniques utilized to determine such fair value:

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	92,355,167					$	92,355,167
Total Financial Assets	$	92,355,167	$	—	$	—	$	92,355,167
Financial Liabilities:
Term loan facility			$	18,722,321			$	18,722,321
Related party promissory note				7,401,203				7,401,203
Common stock warrant liability*				158,783				158,783
Total Financial Liabilities	$	—	$	26,282,307	$	—	$	26,282,307

	September 30, 2019
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	377,435,123					$	377,435,123
Total Financial Assets	$	377,435,123	$	—	$	—	$	377,435,123
Financial Liabilities:
Convertible senior notes					$	140,614,523	$	140,614,523
Development derivative liability*						130,103,000		130,103,000
Common stock warrant liability*			$	250,000		—		250,000
Total Financial Liabilities	$	—	$	250,000	$	270,717,523	$	270,967,523

These financial liabilities are remeasured and recognized at fair value on the Balance Sheet with the change in fair value recognized in the Statement of Operations.

As of December 31, 2018, the fair value of the Company's promissory note was $7,401,203, based on discounted cash flows, market-based expectations for interest rates, credit risk and the contractual terms of the debt instrument. The term loan facility paid interest at a variable interest rate and accordingly the carrying amount approximated fair value at December 31, 2018. The common stock warrant liability is valued based upon the underlying value of the Company’s stock.

As of September 30, 2019, the fair value of debt component of the Company's convertible notes was $140,614,523, based on the discounted cash flows for comparable straight debt instrument. The convertible notes accrue a semi-annual coupon at an annual rate of 3.5%, which was included in accrued expenses in the consolidated balance sheet at September 30, 2019.

The fair value of the SFJ Agreement is presented as a derivative liability based on level 3 inputs. The derivative is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. The analysis is calibrated such that the value of the derivative as of the date of the SFJ Agreement was consistent with an arm’s-length transaction. Key inputs to the level 3 fair value model include (i) the probability and timing of achieving stated development milestones to receive the next tranches of funding, (ii) the probability and timing of achieving FDA and EMA approval, (iii) SFJ’s cost of borrowing (8.0%), and (iv) the Company’s cost of borrowing (16.49%).

SFJ’s implied cost of borrowing was 8.0% and the Company’s implied cost of borrowing was 16.49% as of the reporting date. These implied costs of borrowing were determined assuming the SFJ Agreement was initially executed with arm’s-length terms. If the SFJ Agreement was instead not determined to be an arm’s-length transaction, then implied discount rates could differ.

- 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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