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Investments and Fair Value Measurements

12 Months Ended

Dec. 31, 2023

The Company holds investment securities that consist of highly liquid, investment grade debt securities. The Company determines the fair value of its investment securities based upon one or more valuations reported by its investment accounting and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curves, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, and broker and dealer quotes, as well as other relevant economic measures.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis in the Consolidated Balance Sheets:


	December 31, 2023
	Total Fair Value and Carrying Value on Balance Sheet		Fair Value Measurement Category
			Level 1		Level 2		Level 3
Assets:
Corporate notes/bonds	14,360,000		—		14,360,000		—
U.S. treasuries	34,463,000		—		34,463,000		—
Total investments:	$	48,823,000	$	—	$	48,823,000	$	—
Money market funds	$	9,752,000	$	9,752,000	$	—	$	—
Commercial paper classified as restricted investments	5,432,000		—		5,432,000		—
U.S. treasuries classified as restricted investments	29,685,000		—		29,685,000		—
Total restricted investments:	$	35,117,000	$	—	$	35,117,000	$	—
Liabilities:
Contingent consideration	10,890,000		—		—		10,890,000
Convertible notes payable	69,803,000		—		—		69,803,000
Purchase option liability	8,534,000		—		—		8,534,000


	December 31, 2022
	Total Fair Value and Carrying Value on Balance Sheet		Fair Value Measurement Category
			Level 1		Level 2		Level 3
Assets:
Commercial paper	$	20,020,000	$	—	$	20,020,000	$	—
Corporate notes/bonds	86,094,000		—		86,094,000		—
U.S. treasuries	1,981,000		—		1,981,000		—
Total investments:	$	108,095,000	$	—	$	108,095,000	$	—
Money market funds	$	1,868,000	$	1,868,000	$	—	$	—
Liabilities:
Contingent consideration	22,352,000		—		—		22,352,000

Money market funds are classified as cash equivalents on the consolidated balance sheets.

Contingent Consideration

Contingent consideration relates to the acquisitions of BioDiscovery and Purigen. The outcome of the milestone consideration for all contingent consideration liabilities is binary, meaning the milestones are either achieved or not achieved, and the only other variable factor is the timing of when the milestones are achieved. The fair value measurement of the contingent consideration liabilities is based on significant inputs not observed in the market (Level 3 inputs). These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect the Company’s assumptions in measuring fair value.

The fair value of the BioDiscovery contingent consideration liability is reassessed on a quarterly basis using a probability weighted model. Assumptions used to estimate the fair value of the contingent consideration related to the acquisition of BioDiscovery include the probability of achieving, or changes in timing of certain milestones, and a discount rate of 3%. The Company determined the fair value of the BioDiscovery milestone consideration using a scenario-based technique, as the trigger for payment is event driven. The fair value of the contingent consideration as of December 31, 2022 was $9.4 million. On October 2, 2023, the $10.0 million milestone consideration was paid in full. Any change in fair value of the contingent consideration during the years ended December 31, 2023 and December 31, 2022 was due to the passage of time.

Contingent consideration liabilities related to the Purigen milestones are related to the achievement of two independent milestones with aggregate possible milestone payments totaling $32.0 million.

The fair value of the Purigen milestones are reassessed on a quarterly basis using a probability weighted model and a Monte Carlo Simulation. Assumptions used to estimate the fair value of the milestones using a probability weighted model include the probability of achieving independent milestones, anticipated payment date and a discount rate of 13.2% and 15.3% as of December 31, 2023 and 2022, respectively. The Company determined the fair value of this milestone consideration using a scenario-based technique, as the trigger for payment is event driven. The Company determined the likelihood of each independent milestone and used probability factors ranging from 9% to 49% which were applied to the individual payments over the five year milestone term. The probability factors as of December 31, 2022 ranged from 20% to 80%. For one milestone a Monte Carlo Simulation was performed to determine the likelihood that the milestone will be achieved to determine the milestone consideration payment. Assumptions include the projected units, revenue discount rate of 7.0% and 6.5% and a discount rate of 13.2% and 15.3% as of December 31, 2023 and 2022, respectively. The fair value of the Purigen contingent consideration as of December 31, 2023 and 2022 were $10.9 million and $13.0 million, respectively.

Convertible notes payable and purchase option liability

The estimated fair value of the convertible notes payable (or “Notes”, refer to Note 9 - High Trail Agreement) was based on a lattice model. Assumptions used to estimate the fair value of the Notes are as follows:


	December 31, 2023		October 13, 2023
Expected volatility	80.20	%	74.30	%
Risk-free interest rate	4.92	%	5.17	%
Term to maturity (years)	0.80		1.47
Debt discount rate	17.11	%	18.00	%
Equity discount rate	4.92	%	5.17	%

The table above uses a weighted average of assumptions based on the fair value of the Notes.

The volatility is based on an analysis of the Company, the risk-free rate is based on US treasury yields, the equity discount rate is based on term-specific US treasury yields, and the debt discount rate is based on the Company’s credit rating.

In connection with the Notes, the Purchaser was granted an option which expires on the maturity date of the Notes to purchase up to an additional $25.0 million aggregate principal amount of private placement notes and warrants (refer to Note 9 - High Trail Agreement). The estimated fair value of the Option as of the valuation date was assessed as the difference in the aggregate indicated value of the Subsequently Purchased Notes and the consideration to be paid upon exercising the option which was estimated to be $9.8 million at inception of the agreement and $8.5 million at December 31, 2023.

The terms used to estimate the fair value of the Subsequently Purchased Notes and Subsequently Purchased Warrant underlying the Purchase Option Liability are as follows:


	Subsequently Purchased Notes				Subsequently Purchased Warrants
	December 31, 2023		October 13, 2023		December 31, 2023		October 13, 2023
Expected volatility	80.20	%	74.30	%	66.20	%	59.60	%
Risk-free interest rate	4.46	%	5.17	%	3.80	%	4.60	%
Term to maturity (years)	1.50		1.47		5.00		5.00
Dividend yield	—	%	—	%	—	%	—	%
Exercise price	—		—		$3.19		$3.19
Debt discount rate	16.60	%	18.00	%	—	%	—	%
Equity discount rate	4.46	%	5.17	%	—	%	—	%

Changes in estimated fair value of contingent consideration liability, convertible notes payable and option liability in the year ended December 31, 2023 are as follows:


	Contingent Consideration Liability (Level 3 Measurement)		Convertible Notes Payable (Level 3 Measurement)		Option Liability (Level 3 Measurement)
Balance as of December 31, 2022	$	22,352,000	$	—	$	—
Issuance of convertible notes payable and option	—		89,063,000		9,763,000
Change in estimated fair value, recorded in selling, general and administrative expenses	(1,462,000)		—		—
Changes in estimated fair value, recorded in other income (expense), net	—		(3,718,000)		(1,229,000)

Conversions to common stock	—		(6,542,000)		—
Cash payments or redemptions	(10,000,000)		(9,000,000)		—
Balance as of December 31, 2023	$	10,890,000	$	69,803,000	$	8,534,000

Changes in estimated fair value of contingent consideration liability in the year ended December 31, 2022 is as follows:


	Contingent Consideration Liability (Level 3 Measurement)
Balance as of December 31, 2021	$	9,066,000
Liability recorded as a result of current period acquisition	12,970,000
Change in estimated fair value, recorded in selling, general and administrative expenses	316,000
Cash payments	—
Balance as of December 31, 2022	$	22,352,000

As of December 31, 2023, the following table summarizes the amortized cost and the unrealized gains (losses) of the available for sale securities presented within investments:


	Remaining Contractual Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses		Aggregate Estimated Fair Value
Corporate notes/bonds	Less than 1	14,369,000		—		(9,000)		14,360,000
U.S. treasuries	Less than 1	34,459,000		4,000		—		34,463,000
Total maturity less than 1 year		$	48,828,000	$	4,000	$	(9,000)	$	48,823,000

As of December 31, 2023, the following table summarizes the amortized cost and the unrealized gains (losses) of the available for sale securities listed as restricted investments:


	Remaining Contractual Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses		Aggregate Estimated Fair Value
Commercial paper	Less than 1	$	5,435,000	$	—	$	(3,000)	$	5,432,000
U.S. treasuries	Less than 1	29,682,000		5,000		(2,000)		29,685,000
Total maturity less than 1 year		$	35,117,000	$	5,000	$	(5,000)	$	35,117,000

As of December 31, 2022, there were no available for sale securities listed as restricted investments.

As of December 31, 2022, the following table summarizes the amortized cost and the unrealized gains (losses) of the available for sale securities:


	Remaining Contractual Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses		Aggregate Estimated Fair Value
Commercial paper	Less than 1	$	20,093,000	$	—	$	(73,000)	$	20,020,000
Corporate notes/bonds	Less than 1	72,823,000		—		(910,000)		71,913,000
U.S. treasuries	Less than 1	1,998,000		—		(16,000)		1,982,000
Total maturity less than 1 year		$	94,914,000	$	—	$	(999,000)	$	93,915,000
Corporate notes/bonds	1 to 5	14,268,000		—		(88,000)		14,180,000
Total		$	109,182,000	$	—	$	(1,087,000)	$	108,095,000

As of December 31, 2023, the following table summarizes available-for-sale securities in an unrealized loss position:


	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Corporate notes/bonds	2,362,000		(5,000)		10,001,000		(4,000)		12,363,000		(9,000)
Total	$	2,362,000	$	(5,000)	$	10,001,000	$	(4,000)	$	12,363,000	$	(9,000)

As of December 31, 2023, the following table summarizes available-for-sale securities listed as restricted investments in an unrealized loss position:


	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Commercial paper	$	5,432,000	$	(3,000)	$	—	$	—	$	5,432,000	$	(3,000)
U.S. treasuries	11,789,000		(2,000)		—		—		11,789,000		(2,000)
Total	$	17,221,000	$	(5,000)	$	—	$	—	$	17,221,000	$	(5,000)

As of December 31, 2022, the following table summarizes available-for-sale securities in an unrealized loss position:


	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Commercial paper	$	20,020,000	$	(73,000)	$	—	$	—	$	20,020,000	$	(73,000)
Corporate notes/bonds	9,661,000		(27,000)		74,452,000		(971,000)		84,113,000		(998,000)
U.S. treasuries	1,981,000		(16,000)		—		—		1,981,000		(16,000)
Total	$	31,662,000	$	(116,000)	$	74,452,000	$	(971,000)	$	106,114,000	$	(1,087,000)

As of December 31, 2023, the Company held 15 securities which have been in an unrealized loss position for a period of less than 12 months. As of December 31, 2023, the Company held 2 securities which have been in an unrealized loss position for a period of greater than 12 months. As of December 31, 2022, the Company held 16 securities which had been in an unrealized loss position for a period of less than 12 months. As of December 31, 2022, the company held 24 securities which had been in an unrealized loss position for a period greater than 12 months.

As of December 31, 2023 and December 31, 2022, the Company did not intend to sell these investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis. The Company does not believe the unrealized losses incurred during the period are due to credit-related factors. The credit ratings of the securities held remain of high quality, and the Company continues to receive payments of interest and principal as they become due, and our expectation is that those payments will continue to be received timely. As such, the Company has not recognized any credit losses in its financial statements related to its available for sale investment securities.

During the year ended December 31, 2023, there were no sales of the Company’s available for sale securities. During the year ended December 31, 2022, the Company received proceeds of $22.8 million relating to sales of its available for sale securities, and recognized a loss of $0.1 million in other income relating to the maturity of its securities. Amounts are reclassified out of accumulated other comprehensive income into earnings using the specific identification method.

Included in interest income for the year ended December 31, 2023 was interest income related to the Company’s available for sale securities of $3.3 million. Included in interest income for the year ended December 31, 2022 was interest income related to the Company’s available for sale securities of $1.5 million. All available-for-sale securities are classified as current assets, even if the maturity when acquired by the Company is greater than one year due to the ability to liquidate within the next 12 months.

- 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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