Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2021

4. fair value of financial instruments

The Company’s financial instruments that are measured at fair value on a recurring basis consist of cash equivalents, marketable securities, contingent consideration liabilities related to the Guide Merger Agreement, equity securities of Verve Therapeutics, Inc., or Verve, and success payment derivative liabilities pursuant to the license agreement, or the Harvard License Agreement, between

President and Fellows of Harvard University, or Harvard, and the Company, and the license agreement, or the Broad License Agreement, between The Broad Institute, Inc., or Broad Institute, and Blink Therapeutics, Inc., or Blink.

The Company also holds investments in privately issued corporate equity securities, which are accounted for as investments in equity securities. These investments do not have readily determinable fair values and the Company values such investments based on the cost of the equity securities adjusted for observable market transactions or impairments, if any, and records any changes in value through earnings.

The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy at June 30, 2021 (in thousands):


	Carrying amount		Fair value		Level 1		Level 2		Level 3
Assets
Cash equivalents:
Money market funds	$	203,399	$	203,399	$	203,399	$	—	$	—
Commercial paper		7,498		7,498		—		7,498		—
Marketable securities:
Commercial paper		375,699		375,699		—		375,699		—
Corporate notes		27,565		27,565		—		27,565		—
Equity securities included in other long-term investments:
Corporate equity securities		29,330		29,330		—		29,330		—
Total assets	$	643,491	$	643,491	$	203,399	$	440,092	$	—

Liabilities
Success payment liability – Harvard	$	42,600	$	42,600	$	—	$	—	$	42,600
Success payment liability – Broad Institute		42,800		42,800		—		—		42,800
Contingent consideration liability - Technology		30,348		30,348	$	—	$	—	$	30,348
Contingent consideration liability - Product		7,211		7,211		—		—		7,211
Total liabilities	$	122,959	$	122,959	$	—	$	—	$	122,959

The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy at December 31, 2020 (in thousands):


	Carrying amount		Fair value		Level 1		Level 2		Level 3
Assets
Cash equivalents:
Money market funds	$	88,259	$	88,259	$	88,259	$	—	$	—
Commercial paper		60,494		60,497		—		60,497		—
Corporate notes		12,314		12,308		—		12,308		—
Marketable securities:
Commercial paper		113,622		113,622		—		113,622		—
Corporate notes		7,836		7,836		—		7,836		—
U.S. Treasury securities		11,009		11,009		—		11,009		—
Government securities		5,033		5,033		—		5,033		—
Total assets	$	298,567	$	298,564	$	88,259	$	210,305	$	—

Liabilities
Success payment liability – Harvard	$	35,500	$	35,500	$	—	$	—	$	35,500
Success payment liability – Broad Institute		35,700		35,700		—		—		35,700
Total liabilities	$	71,200	$	71,200	$	—	$	—	$	71,200

Cash equivalents – Money market funds included within cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. Commercial paper and corporate notes are classified within Level 2 of the fair value hierarchy because pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

Marketable securities – The Company measures its marketable securities at fair value on a recurring basis and classifies those instruments within Level 2 of the fair value hierarchy. Marketable securities are classified within Level 2 of the fair value hierarchy because pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined using models or other valuation methodologies.

During the six months ended June 30, 2021, the Company held an investment in Verve consisting of shares of Verve’s common and preferred stock. Prior to Verve's initial public offering in June 2021, the Company valued such investment based on the cost of the equity securities adjusted for any observable market transactions. Following the initial public offering, the equity securities have a readily determinable fair value; however, they are subject to transfer restrictions. Following the initial public offering the Company owned 546,970 shares of Verve's common stock, the value of which is included in long-term investments in the condensed consolidated balance sheet. The Company recorded the investment at fair value of $29.3 million as of June 30, 2021, which resulted in the recognition of $25.8 million and $26.9 million of other income for the three and six months ended June 30, 2021, respectively.

Success payment liabilities – As discussed further in Note 9, License agreements, the Company is required to make payments determined based upon the achievement of specified multiples of the initial weighted average value of the Company’s redeemable convertible Series A-1 Preferred Stock and the Company's redeemable convertible Series A-2 Preferred Stock, or collectively the Series A Preferred Stock, or, subsequent to the IPO, the market value of Beam’s common stock, at specified valuation dates. The Company’s liability for success payments under the Harvard License Agreement and Broad License Agreement are carried at fair value. To determine the estimated fair value of the success payment liability, the Company uses a Monte Carlo simulation methodology, which models the future movement of stock prices based on several key variables.

The following variables were incorporated in the calculation of the estimated fair value of the Harvard and Broad Institute success payment liabilities:


	Harvard						Broad Institute
	June 30, 2021			December 31, 2020			June 30, 2021			December 31, 2020
Fair value of common stock (per share)	$	128.71		$	81.64		$	128.71		$	81.64
Expected volatility		77	%		74	%		76	%		74	%
Expected term (years)	0.11-8.00			0.35-8.49			0.11-8.86			0.35-9.36

The computation of expected volatility was estimated using available information about the historical volatility of stocks of similar publicly traded companies for a period matching the expected term assumption. In addition, the Company incorporated the estimated number, timing, and probability of valuation measurement dates in the calculation of the success payment liability.

The following table reconciles the change in the fair value of success payment liabilities based on Level 3 inputs (in thousands):


	Six Months Ended June 30, 2021
	Harvard			Broad Institute			Total
Balance at December 31, 2020	$	35,500		$	35,700		$	71,200
Payments		(15,000	)		(15,000	)		(30,000	)
Change in fair value		22,100			22,100			44,200
Balance at June 30, 2021	$	42,600		$	42,800		$	85,400

Contingent consideration liabilities – As discussed further in Note 8, Guide Acquisition, under the Guide Merger Agreement, Guide’s former stockholders and optionholders are eligible to receive up to an additional $100.0 million in technology milestone payments and $220.0 million in product milestone payments, payable in the Company’s common stock valued using the volume-weighted average price of the Company’s stock over the ten-day trading period ending two trading days prior to the date on which the applicable milestone is achieved. As these milestones are payable in the Company’s common stock, the milestone payments result in liability classification under ASC 480, Distinguishing Liabilities from Equity. These contingent consideration liabilities are carried at fair value which was estimated by applying a probability-based model, which utilized inputs that were unobservable in the market. These contingent consideration liabilities are classified within Level 3 of the fair value hierarchy. The fair value of the contingent consideration liabilities as of June 30, 2021 is $37.6 million.

The following table reconciles the change in fair value of the contingent consideration liabilities based on level 3 inputs (in thousands):


	Six Months Ended June 30, 2021
	Technology Milestones		Product Milestones		Total
Balance at February 23, 2021 (inception)	$	29,403	$	7,110	$	36,513
Change in fair value		945		101		1,046
Balance at June 30, 2021	$	30,348	$	7,211	$	37,559

The following variables were incorporated in the calculation of the estimated fair value of the Guide technology and product contingent consideration liabilities:


	Technology Milestones			Product Milestones
	June 30, 2021			June 30, 2021
Discount Rate		7.50	%		7.50	%
Probability of Payment	10-60%			2-15%
Projected Year of Payment	2021-2022			2023-2028

- 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.

+ References + Details