Fair Value Measurements

The carrying value of the Company’s cash, accounts receivable and accounts payable approximate fair value due to the short-term nature of these items. Contingent equity consideration, warrants and embedded derivatives that qualify for liability treatment are carried at fair value and re-measured at each reporting period.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:


▪	Level I Unadjusted quoted prices in active markets for identical assets or liabilities;


▪	Level II Inputs other than quoted prices included within Level I that are observable, unadjusted 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 related assets or liabilities; and


▪	Level III Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy at period end:




	Fair Value Measurements at March 31, 2020
	Total		Level 1		Level 2		Level 3

	(in thousands)
Liabilities
Madryn put option liability	$	5,001	$	—	$	—	$	5,001
Acquisition-related contingent consideration	482		—		—		482
	$	5,483	$	—	$	—	$	5,483




	Fair Value Measurements at December 31, 2019
	Total		Level 1		Level 2		Level 3

	(in thousands)
Liabilities
Madryn put option liability	$	3,072	$	—	$	—	$	3,072
Acquisition-related contingent consideration	922		—		—		922
	$	3,994	$	—	$	—	$	3,994

The fair value measurement of derivatives and contingent consideration related to the business acquisition completed in fiscal 2017 is based on significant inputs not observed in the market and thus represents a Level 3 measurement.

In August 2017 the Company entered into a credit agreement, or the Madryn Credit Agreement, with Madryn Health Partners, LP, or Madryn, as administrative agent, and a syndicate of lenders (see Note 6). The Company determined that the Madryn Credit Agreement contained put options related to early redemption mandatory prepayment terms in case of change in control or an event of default and a call option related to voluntary repayment option. The Company allocated a fair value of $15.1 million for these identified embedded derivatives as a debt discount on the original commitment date. An additional $5.0 million and $1.6 million debt discount was recorded on respective borrowing dates when the Company met the required milestones and borrowed an additional $10.0 million in the fourth quarter of fiscal 2017 and $25.0 million on August 12, 2019 (see Note 6). The Company revalued the options as of each reporting period and recorded the change in the fair value in the consolidated statement of operations as other income or expense.

Valuation of the embedded derivatives is complex and requires interest rate simulation, estimating the resultant bond valuation and the resultant pay-off to the option holder. The Company estimated the fair value of the embedded redemption options based on a “with” and “without” approach using the Black-Derman-Toy model, a form of the Binomial Lattice Model that captures interest rate variability and the prepayment optionality. The Binomial Lattice Model allows for the possibility of exercise before the end of the option’s life and considers future interest rates, volatility and other data with regards to the Company’s credit rating and credit spread. The value of the embedded derivatives was based on the difference between the “with” and “without” analysis. The probability of a change in control occurring was determined to be 50% at March 31, 2020 and December 31, 2019.

The Company used the following assumptions to value Madryn derivatives:

Put Option Liability (Madryn)




	March 31, 2020	December 31, 2019
Interest rate volatility	21.6%	21.4%
Market yield rate	13.4%	10.1%
Term (in years)	5.50	5.75
Dividend yield	—%	—%

On November 17, 2017, the Company and Femiline AB and Johan Anderson, or the Seller, entered into an agreement to purchase certain assets from the Seller. The assets purchased included all existing inventory previously sold by the Company to the Seller, all customer relationships and a covenant not to compete. The aggregate purchase price for the assets purchased was 100,000 Class A Ordinary shares of the Company, contingently issuable upon achievement of specific milestones. Based on the valuation of the Company’s shares performed by a valuation specialist, the contingently issuable shares had an aggregate value of $1.0 million calculated as a product of contingently issuable shares and estimated fair value per share on the date of the agreement. As of March 31, 2020, the Company has issued 66,666 shares to the Seller after the milestones for fiscal 2018 and 2019 were met. As of March 31, 2020, the fair value of the contingently issuable shares was determined using the closing price of the Company’s publicly traded shares.

As of March 31, 2020 and December 31, 2019, the remaining contingent consideration liability was included in “Other liabilities, short term”.

The estimates are based, in part, on subjective assumptions and could differ materially in the future.

During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the three months ended March 31, 2020 or during the year ended December 31, 2019.

The fair value of the debt redemption feature liability includes the estimated volatility and risk-free rate. The higher/lower the estimated volatility, the higher/lower the value of the debt redemption feature liability. The higher/lower the risk-free interest rate, the higher/lower the value of the debt conversion feature liability.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments as follows:




	Acquisition-related Contingent Consideration			Put Option Liability (Madryn)
Balance at December 31, 2018	$	1,828		$	4,768
Change in fair value	(225		)	32
Balance at March 31, 2019	$	1,603		$	4,800

Balance at December 31, 2019	$	922		$	3,072
Change in fair value	(440		)	1,929
Balance at March 31, 2020	$	482		$	5,001