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Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2015
Fair Value of Financial Instruments

Note 2. Fair Value of Financial Instruments

The Company determines the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:

 

  •   Level 1: Quoted prices in active markets for identical instruments

 

  •   Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)

 

  •   Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)

Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

To estimate the fair value of Level 2 debt securities as of June 30, 2015, the Company’s primary service relies on inputs from multiple industry-recognized pricing sources to determine the price for each investment. Corporate debt and United States government agency securities are systematically priced by this service as of the close of business each business day. If the primary pricing service does not price a specific asset, a secondary pricing service is utilized.

The fair values of the Company’s financial assets and liabilities were determined using the following inputs at June 30, 2015 (in thousands):

 

     Total      Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3)		  

Money market funds (1)

    $ 18,588       $ 18,588       $ —         $ —     

Corporate debt securities (2)

      13,850         —           13,850         —     

United States government agency securities (2)

      62,004         —           62,004         —     

Aduro equity securities (3)

      12,032         12,032         —           —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total financial assets

    $ 106,474       $ 30,620       $ 75,854       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Warrant liability (4)

    $ 3,978       $ —         $ —         $ 3,978   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total financial liabilities

    $ 3,978       $ —         $ —         $ 3,978   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) Included in cash and cash equivalents on the Company’s unaudited condensed consolidated balance sheets.
(2) Included in short-term investments on the Company’s unaudited condensed consolidated balance sheets.
(3) Included in investment in Aduro Biotech, Inc. on the Company’s unaudited condensed consolidated balance sheets.
(4) Included in current liabilities on the Company’s unaudited condensed consolidated balance sheets.

 

The fair values of the Company’s financial assets and liabilities were determined using the following inputs at December 31, 2014 (in thousands):

 

     Total      Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3)		  

Money market funds (1)

    $ 3,912       $ 3,912       $ —         $ —     

Corporate debt securities (2)

      26,088         —           26,088         —     

United States government agency securities (2)

      3,426         —           3,426         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total financial assets

    $ 33,426       $ 3,912       $ 29,514       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Warrant liability (3)

    $ 10,485       $ —         $ —         $ 10,485   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total financial liabilities

    $ 10,485       $ —         $ —         $ 10,485   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) Included in cash and cash equivalents on the Company’s consolidated balance sheets.
(2) Included in short-term investments on the Company’s consolidated balance sheets, except for approximately $1.0 million of corporate debt securities that are included in cash and cash equivalents on the Company’s consolidated balance sheets.
(3) Included in current liabilities on the Company’s consolidated balance sheets.

A reconciliation of the beginning and ending balances for warrant liability using significant unobservable inputs (Level 3) from December 31, 2014 to June 30, 2015, was as follows (in thousands):

 

Balance at December 31, 2014

    $  10,485   

Decrease in fair value of warrants

      (3,589 ) 

Settlement of warrants exercised

      (2,918 ) 
  

 

 

  

Balance at June 30, 2015

    $ 3,978   
  

 

 

  

See Notes 1 and 10 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding the Company’s valuation techniques and unobservable inputs for warrant liability using significant unobservable inputs (Level 3).

The Company did not have any transfers among fair value measurement levels during the three and six months ended June 30, 2015 or the year ended December 31, 2014.