Financial Instruments

6 Months Ended

Jun. 30, 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 June 30, 2022 and December 31, 2021 respectively:



	June 30, 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		102,612		207,833		—		310,445		327,315		133,410		—		460,725
Investments:
Commercial paper		—		120,495		—		120,495		—		187,632		—		187,632
Corporate debt securities		—		46,810		—		46,810		—		8,968		—		8,968
U.S. government & agency securities		—		421,401		—		421,401		—		387,075		—		387,075
Total investments		—		588,706		—		588,706		—		583,675		—		583,675

Short-term restricted cash		300		—		—		300		500		—		—		500
Long-term restricted cash		2,922		—		—		2,922		4,592		—		—		4,592
Total assets measured at fair value	$	105,834	$	796,539	$	—	$	902,373	$	332,407	$	717,085	$	—	$	1,049,492

Liabilities
Contingent consideration	$	—	$	—	$	163,216	$	163,216	$	—	$	—	$	169,717	$	169,717
Total liabilities measured at fair value	$	—	$	—	$	163,216	$	163,216	$	—	$	—	$	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.

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 10.0% to 10.2%. 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 $6.5 million decrease in liability at June 30, 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 six months ended June 30, 2022 were as follows:


(in thousands)		Level 3
Beginning balance as of December 31, 2021	$	169,717
Change in estimated fair value		(6,501)
Ending balance as of June 30, 2022	$	163,216

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 six months ended June 30, 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 June 30, 2022 and December 31, 2021:



	As of June 30, 2022
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(in thousands)	Cost		gains		losses		Value

Cash and cash equivalents		310,508		8		(71)		310,445
Investments:
Commercial paper		120,899		—		(404)		120,495
Corporate debt securities		47,083		—		(273)		46,810
U.S. government & agency securities		426,118		70		(4,787)		421,401
Total investments		594,100		70		(5,464)		588,706
Total cash, cash equivalents and investments	$	904,608	$	78	$	(5,535)	$	899,151

Short-term restricted cash	$	300	$	—	$	—	$	300

Long-term restricted cash	$	2,922	$	—	$	—	$	2,922

	As of December 31, 2021
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(in thousands)	Cost		gains		losses		Value

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	$	500	$	—	$	—	$	500

Long-term restricted 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 June 30, 2022:



(in thousands)	Fair Value
Due in one year or less	$	687,193
Due after one year through five years		109,346
Total investments	$	796,539

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