Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Assets and Liabilities

v3.23.3
Fair Value of Financial Assets and Liabilities
9 Months Ended
Sep. 30, 2023
Fair Value Disclosures [Abstract]  
Fair Value of Financial Assets and Liabilities

3. Fair Value of Financial Assets and Liabilities

The following table presents information about the Company’s financial assets that were carried at fair value on a recurring basis on the condensed consolidated balance sheet as of September 30, 2023 and December 31, 2022 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial paper

 

$

4,734

 

 

$

 

 

$

4,734

 

 

$

 

  U.S. Treasury and Agency bonds

 

 

26,342

 

 

 

 

 

 

26,342

 

 

 

 

 

 

$

31,076

 

 

$

 

 

$

31,076

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

  Corporate bonds

 

$

7,781

 

 

$

 

 

$

7,781

 

 

$

 

  Commercial paper

 

 

15,232

 

 

 

 

 

 

15,232

 

 

 

 

  U.S. Treasury bonds

 

 

16,699

 

 

 

 

 

 

16,699

 

 

 

 

 

 

$

39,712

 

 

$

 

 

$

39,712

 

 

$

 

 

See Note 4 for details on the short-term investments. The carrying amounts reported in the condensed consolidated balance sheets for prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate their fair value based on the short-term maturity of these instruments.

The following table presents information about the Company’s Exchangeable Notes, derivative liability and RLNs and indicates the fair value hierarchy of the valuation inputs utilized to determine the approximate fair value:

 

September 30, 2023

 

Book

 

 

Approximate

 

 

 

 

 

 

 

 

 

 

Liabilities

 

Value

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Exchangeable Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term exchangeable note

 

$

12,462

 

 

$

12,569

 

 

$

 

 

$

12,569

 

 

$

 

Derivative liability - exchange option and change of control

 

 

75

 

 

 

75

 

 

 

 

 

 

 

 

 

75

 

Revenue Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty-linked notes

 

 

7,131

 

 

 

7,131

 

 

 

 

 

 

 

 

 

7,131

 

Total

 

$

19,668

 

 

$

19,775

 

 

$

 

 

$

12,569

 

 

$

7,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

Book

 

 

Approximate

 

 

 

 

 

 

 

 

 

 

Liabilities

 

Value

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Exchangeable Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term exchangeable note

 

$

10,094

 

 

$

10,827

 

 

$

 

 

$

10,827

 

 

$

 

Derivative liability - exchange option and change of control

 

 

196

 

 

 

196

 

 

 

 

 

 

 

 

 

196

 

Revenue Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty-linked notes

 

 

18,372

 

 

 

18,372

 

 

 

 

 

 

 

 

 

18,372

 

Total

 

$

28,662

 

 

$

29,395

 

 

$

 

 

$

10,827

 

 

$

18,568

 

The fair value of Exchangeable Notes was determined using DCF analysis using the fixed interest rate outlined in the indenture governing the Exchangeable Notes (Exchangeable Notes Indenture), without consideration of transaction costs, which represents a Level 2 basis of fair value measurement.

The Level 3 liabilities held as of September 30, 2023 consist of the embedded exchange option and change of control premium contained in the Exchangeable Notes (see Note 10 - Debt) and a separate financial instrument, that was issued as part of the Units, the RLNs (see Note 11 – Royalty-Linked Notes). The exchange option and change of control premium met the criteria requiring these to be bifurcated and accounted for separately from the host debt in accordance with ASC 815-15, Derivatives and Hedging; Embedded Derivatives. The exchange option and change of control premium were presented as a derivative liability upon issuance of the Exchangeable Notes under the Private Placement and Rights Offering and are subsequently remeasured to fair value at the end of each reporting period. At any time on or after January 21, 2021, subject to specified limitations, the Exchangeable Notes are exchangeable for the Company’s ordinary shares, cash or a combination of ordinary shares and cash, at an exchange rate of 89.8595 shares per $1,000 of principal and interest on the Exchangeable Notes (equivalent to an exchange price of approximately $11.1230 per ordinary share) as of September 30, 2023, which was adjusted from an initial exchange rate of 66.666 shares per $1,000 principal and interest on the Exchangeable Notes (equivalent to an initial exchange price of $15.00 per ordinary share) and is subject to further adjustment pursuant to the terms of the Exchangeable Notes Indenture. Beginning on January 21, 2021 to September 30, 2023, certain noteholders of $39,201 aggregate principal amount of Exchangeable Notes have exchanged their notes for an aggregate of 3,592,555 of the Company’s ordinary shares, which included accrued and unpaid interest relating to such notes. The aggregate principal amount of Exchangeable Notes outstanding as of September 30, 2023 was $12,607. The fair value of the exchange option at September 30, 2023 was $0.

In the event of a fundamental change that is not a liquidation event (Fundamental Change), under the Exchangeable Notes Indenture, the Company will be required to pay each holder of an Exchangeable Note the greater of three times the outstanding principal amount of such Exchangeable Note and the consideration that would be received by the holder of such Exchangeable Note, in connection with such Fundamental Change, if the holder had exchanged its note for ordinary shares immediately prior to the consummation of such Fundamental Change, plus any accrued and unpaid interest. The derivative liability, representing the change of control feature, was recorded at a fair value of $75 at September 30, 2023.

The fair value of each component of the derivative liability was determined using the binomial option pricing model, and in the case of the change of control component, in combination with a DCF analysis, without consideration of transaction costs, which represents a Level 3 basis of fair value measurement. The key inputs to valuing the derivative liability as of September 30, 2023 include the terms of the Exchangeable Notes Indenture, the Company’s share price and market capitalization, the expected annual volatility of the Company’s ordinary shares, management’s assumption regarding the probability of a Fundamental Change pursuant to the terms of the Exchangeable Notes Indenture and the risk-free interest rate. Fair value measurements are highly sensitive to changes in these inputs and significant changes in these inputs could result in a significantly higher or lower fair value.

The following table presents the changes in fair value of the Company's derivative liability for the nine months ended September 30, 2023:

 

 

September 30, 2023

 

Balance at December 31, 2022

 

$

196

 

Conversion of Exchangeable Notes

 

 

 

Adjustment to fair value

 

 

(121

)

Balance at period end

 

$

75

 

The following summary table shows the assumptions used in the binomial option pricing model to estimate the fair value of the derivative liabilities:
 

 

 

September 30, 2023

 

 

December 31, 2022

 

Share price

 

$

0.80

 

 

$

0.84

 

Market capitalization

 

$

10,445,874

 

 

$

10,582,858

 

Volatility

 

 

100

%

 

 

100

%

Risk-free interest rate

 

 

5.34

%

 

 

4.46

%

Dividend rate

 

 

0

%

 

 

0

%

The additional significant assumption used in the DCF model to estimate the fair value of the change of control feature at September 30, 2023 was management’s assumption regarding the probability of a Fundamental Change pursuant to the terms of the Exchangeable Notes Indenture.

The RLN liability is carried at fair value on the condensed consolidated balance sheet (see Note 11 – Royalty-Linked Notes). The total fair value of $7,131 was determined using DCF analysis, without consideration of transaction costs, which represents a Level 3 basis of fair value measurement. The key inputs to valuing the RLNs were the terms of the indenture governing the RLNs (the RLN Indenture), the expected cash flows to be received by holders of the RLNs based on management’s revenue forecasts of U.S. sulopenem sales and a risk-adjusted discount rate to derive the net present value of expected cash flows. The RLNs will be subject to a maximum return amount, including all principal and payments and certain default interest in respect of uncurable defaults, of $160.00 (or 4,000 times the principal amount of such note). The discount rate applied to the model was 22%. Fair value measurements are highly sensitive to changes in these inputs and significant changes in these inputs could result in a significantly higher or lower fair value.

There have been no transfers of assets or liabilities between the fair value measurement levels.