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 March 31, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.

The other asset above relates to advance payments made to a supplier that were recorded at fair value using DCF analysis as of March 31, 2020 and December 31, 2019. The fair value measurements of these advance payments were determined based on significant unobservable inputs, including discount rates of 20% and 15%, as of March 31, 2020 and December 31, 2019, respectively, and the expected time to recovery of the payment. Changes to the inputs described above are not expected to have a material impact on the company’s financial position and results of operations in any given period.

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 long-term debt, Exchangeable Notes, Derivative liabilities and RLNs. The Company’s long-term debt was carried at amortized cost on the condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation inputs utilized to determine the approximate fair value:

The book value of the current portion of long-term debt approximates its fair value due to the short-term nature of the balance. The fair value of long-term debt, less current portion was determined based on a DCF analysis using quoted market interest rates, without consideration of transaction costs, which represents a Level 2 basis of fair value measurement. The counterparty to the long-term debt is a major international financial institution.

The fair value of long-term Exchangeable Notes was determined based on a DCF analysis using the fixed interest rate outlined in the Exchangeable Note indenture, without consideration of transaction costs, which represents a Level 2 basis of fair value measurement.

The Level 3 liabilities held as of March 31, 2020 consist of the embedded exchange option contained in the Exchangeable Notes (see Note 8 - Debt) and a separate financial instrument, that was issued during the Private Placement as part of the Units, the RLNs (see Note 9 – Royalty-Linked Notes). The exchange option met the criteria 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 is presented as a derivative liability (the Derivative liability). The Exchangeable Notes are exchangeable for the Company’s ordinary shares, cash or a combination of ordinary shares and cash, at an initial exchange rate of 1,000 shares per $1,000 of principal and interest on the Exchangeable Notes (equivalent to an initial exchange price of approximately $1.00 per ordinary share), at any time beginning on the first anniversary of the issuance of the Exchangeable Notes, subject to specified limitations. The Derivative liability, representing the exchange option was recorded at fair value of $27,038 upon issuance of the Exchangeable Notes and is subsequently remeasured to fair value at the end of each reporting period. The fair value at March 31, 2020 amounted to $25,359.

The fair value of the derivative liability was determined using a valuation techniques applying Black-Scholes and binomial lattice models, 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 January 21, 2020 and March 31, 2020 include the indenture terms of the Exchangeable Notes, the Company’s share price at the exchange date, the expected annual volatility of the Company’s ordinary shares, and a risk-adjusted discount 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 summary table shows the assumptions used in the Black-Scholes and binomial lattice pricing models to estimate the fair value of the exchange option:

 The RLNs liability is carried at amortized cost on the condensed consolidated balance sheet as of March 31, 2020 (see Note 9 – Royalty-Linked Notes). The total fair value of $11,880 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 indenture terms of the RLNs, 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 royalty 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 during the duration of the model was in the range of 18% - 22%. The book value of the current portion of the RLN approximates its fair value due to the short-term nature of the balance. 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.