Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2021

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 were as follows (in thousands):


	March 31, 2021
	Level 1		Level 2		Level 3		Total
	(unaudited)
Money market funds	$	125,378	$	—	$	—	$	125,378
U.S. Treasury notes	49,130		—		—		49,130
Commercial paper	—		57,067		—		57,067
Corporate bonds	—		27,610		—		27,610

Contingent consideration liabilities	—		—		(32,444)		(32,444)
Total	$	174,508	$	84,677	$	(32,444)	$	226,741

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 were as follows (in thousands):


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Money market funds	$	79,387	$	—	$	—	$	79,387
U.S. Treasury notes	59,389		—		—		59,389
Commercial paper	—		68,018		—		68,018
Corporate bonds	—		48,501		—		48,501
Asset-backed securities	—		3,009		—		3,009
Contingent consideration liabilities	—		—		(31,264)		(31,264)
Total	$	138,776	$	119,528	$	(31,264)	$	227,040

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2021 and 2020.

Convertible Senior Notes

As of March 31, 2021, the estimated fair value of the our convertible senior notes, with aggregate principal totaling $230.0 million, was $391.3 million. We estimate the fair value based on quoted market prices in an inactive market on the last trading day of the reporting period (Level 2). These convertible senior notes are recorded at face value less unamortized debt discount and transaction costs on our consolidated balance sheets. Refer to Note 9 —Convertible Senior Notes for further information.

Level 3 fair value measurements

The Healthfinch acquisition consideration includes an initial estimate for contingent consideration based on certain revenue-based earn-out performance targets for Healthfinch during an earn-out period that ends on July 31, 2021. The Healthfinch contingent consideration will be paid in a combination of cash and shares of our common stock in the same proportion as the initial acquisition consideration. The Vitalware acquisition consideration includes an initial estimate for contingent consideration based on certain revenue-based earn-out performance targets for Vitalware during an earn-out period that ended on March 31, 2021. The Vitalware contingent consideration is capped at $30.0 million and will be paid in a combination of approximately 50% cash and 50% in shares of our common stock.

We value the expected contingent consideration and the corresponding liabilities using the Monte Carlo valuation method based on estimates of potential pay-out scenarios. The resulting contingent consideration liabilities are categorized as Level 3 fair value measurements and are remeasured as of each reporting period.

The aggregate intrinsic value of the revenue-based earn-out contingent consideration liabilities is approximately $32.5 million based on a point estimate of our internal forecasting of the ultimate earn-outs that will be earned and our common stock price as of March 31, 2021. The recurring Level 3 fair value measurements of the contingent consideration liabilities include the other following significant inputs as of March 31, 2021:

Valuation Method

Fair Value

Market Price of Revenue Risk

Revenue Volatility

Stock Price Volatility

(unaudited)

Revenue-based earn-out liabilities

Monte Carlo

32.4

million

10%

41%

The Able Health acquisition consideration included an initial estimate for contingent consideration for shares of our common stock if certain incremental billing targets for Able Health were met during an earn-out period that ended on December 31, 2020. This Able Health earn-out contingent consideration liability was settled during the three months ended March 31, 2021.

The following table sets forth a summary of the changes in the estimated fair value of the contingent consideration liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	(unaudited)
Balance as of December 31, 2020	$	31,264
Settlement of contingent consideration	(1,009)
Change in fair value of contingent consideration liabilities	2,156
Balance as of March 31, 2021	$	32,411

- 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.

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