Financial Instruments

3 Months Ended

Mar. 31, 2022

NOTE 5. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value hierarchy established under GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

Level 1: quoted prices in active markets for identical assets or liabilities;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities 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 assets or liabilities; and

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We consider an active market as one in which transactions for the asset or liability occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. Conversely, we view an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our non-performance risk, or that of our counterparty, is considered in determining the fair values of liabilities and assets, respectively.

We classify our cash deposits and money market funds within Level 1 of the fair value hierarchy because they are valued using bank balances or quoted market prices. We classify our investments as Level 2 instruments based on market pricing and other observable inputs. We did not classify any of our investments within Level 3 of the fair value hierarchy.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.

The carrying amount of our accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses and other liabilities, current, approximate fair value due to their short maturities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table sets forth the fair value of our financial assets and liabilities that were measured on a recurring basis as of March 31, 2022 and December 31, 2021 respectively:



	March 31, 2022								December 31, 2021
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents:
Cash and money market funds	$	227,251	$	—	$	—	$	227,251	$	327,315	$	—	$	—	$	327,315
Commercial paper		—		143,958		—		143,958		—		133,185		—		133,185
U.S. government & agency securities		—		32,377		—		32,377		—		225		—		225
U.S. Treasury securities		—		24,988		—		24,988		—		—		—		—
Total cash and cash equivalents		227,251		201,323		—		428,574		327,315		133,410		—		460,725
Investments:
Commercial paper		—		141,976		—		141,976		—		187,632		—		187,632
Corporate debt securities		—		5,313		—		5,313		—		8,968		—		8,968
U.S. government & agency securities		—		386,912		—		386,912		—		387,075		—		387,075
Total investments		—		534,201		—		534,201		—		583,675		—		583,675
Short-term restricted cash:
Cash		500		—		—		500		500		—		—		500
Long-term restricted cash:
Cash		4,982		—		—		4,982		4,592		—		—		4,592
Total assets measured at fair value	$	232,733	$	735,524	$	—	$	968,257	$	332,407	$	717,085	$	—	$	1,049,492

Liabilities
Contingent consideration	$	—	$	—	$	168,654	$	168,654	$	—	$	—	$	169,717	$	169,717
Total liabilities measured at fair value	$	—	$	—	$	168,654	$	168,654	$	—	$	—	$	169,717	$	169,717

We classify contingent consideration, which was incurred in connection with the acquisition of Omniome, within Level 3 as factors used to develop the estimate of fair value include unobservable inputs that are not supported by market activity and are significant to the fair value.

On a quarterly basis, we estimate the fair value of the contingent consideration liability by discounting the probability-weighted outcomes to present value using an estimate of our borrowing rate and the risk-free rate. The potential outcomes of milestone achievement dates are within the period from December 31, 2022 to June 30, 2025. A decrease in the probability of an earlier scenario within this range would result in a decrease in the fair value of the liability. The discount rates used are the sum of the U.S. risk-free rate and the estimated subordinated credit spread for B- and B credit rating, which range from 5.7% to 6.7%. An increase in the discount rates used can also result in the decrease in the fair value of liability, which was the primary factor in the $1.1 million decrease in liability at March 31, 2022. Changes in our estimated subordinated credit spread can result in changes in the fair value of the contingent consideration liability, where a lower credit spread may result in an increased liability valuation.

Changes in the estimated fair value of the contingent consideration liability for the three months ended March 31, 2022 were as follows:


(in thousands)		Level 3
Beginning balance as of December 31, 2021	$	169,717
Change in estimated fair value		(1,063)
Ending balance as of March 31, 2022	$	168,654

Changes to the fair value are recorded as the Change in fair value of contingent consideration in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

For the three months ended March 31, 2022, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis, and our valuation techniques did not change compared to the prior year.

The following tables summarize our cash, cash equivalents and investments as of March 31, 2022 and December 31, 2021 (in thousands):



	As of March 31, 2022
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(in thousands)	Cost		gains		losses		Value
Cash and cash equivalents:
Cash and money market funds	$	227,251	$	—	$	—	$	227,251
Commercial paper		143,964		2		(8)		143,958
U.S. government & agency securities		32,386		—		(9)		32,377
U.S. Treasury securities		24,989		—		(1)		24,988
Total cash and cash equivalents		428,590		2		(18)		428,574
Investments:
Commercial paper		142,266		1		(291)		141,976
Corporate debt securities		5,322		—		(9)		5,313
U.S. government & agency securities		390,682		7		(3,777)		386,912
Total investments		538,270		8		(4,077)		534,201
Total cash, cash equivalents and investments	$	966,860	$	10	$	(4,095)	$	962,775
Short-term restricted cash:
Cash	$	500	$	—	$	—	$	500
Long-term restricted cash:
Cash	$	4,982	$	—	$	—	$	4,982

	As of December 31, 2021
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(in thousands)	Cost		gains		losses		Value
Cash and cash equivalents:
Cash and money market funds	$	327,316	$	—	$	—	$	327,316
Commercial paper		133,190		—		(5)		133,185
U.S. government & agency securities		225		—		—		224
Total cash and cash equivalents		460,731		—		(5)		460,725
Investments:
Commercial paper		187,705		—		(73)		187,632
Corporate debt securities		8,964		9		(5)		8,968
U.S. government & agency securities		388,088		1		(1,014)		387,075
Total investments		584,757		10		(1,092)		583,675
Total cash, cash equivalents and investments	$	1,045,488	$	10	$	(1,097)	$	1,044,400
Short-term restricted cash:
Cash	$	500	$	—	$	—	$	500
Long-term restricted cash:
Cash	$	4,592	$	—	$	—	$	4,592

The following table summarizes the contractual maturities of our cash equivalents and available-for-sale investments, excluding money market funds, as of March 31, 2022:



(in thousands)	Fair Value
Due in one year or less	$	651,213
Due after one year through five years		84,311
Total investments	$	735,524

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.