Fair value measurements

9 Months Ended

Sep. 30, 2022

The Company measures certain financial instruments and other items at fair value.

To determine the fair value, the Company uses the fair value hierarchy for inputs used in measuring fair value that maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use to value an asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs based on assumptions about the factors market participants would use to value an asset or liability. The three levels of inputs that may be used to measure fair value are as follows:

•Level 1 inputs are quoted market prices for identical instruments available in active markets.

•Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. If the asset or liability has a contractual term, the input must be observable for substantially the full term. An example includes quoted market prices for similar assets or liabilities in active markets.

•Level 3 inputs are unobservable inputs for the asset or liability and will reflect management’s assumptions about market assumptions that would be used to price the asset or liability.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturity of these financial instruments.

To determine the fair value of the contingent consideration (note 8), the Company uses a probability weighted assessment of the likelihood the milestones would be met and the estimated timing of such payments, and then the potential contingent payments were discounted to their present value using a probability adjusted discount rate that reflects the early stage nature of the development program, the time to complete the program development, and overall biotech indices. The Company determined the fair value of the contingent consideration was $5.9 million as of September 30, 2022 and the increase of $0.6 million from December 31, 2021 has been recorded as a component of total operating expenses in the statement of operations and comprehensive loss for the nine months ended September 30, 2022. The assumptions used in the discounted cash flow model are level 3 inputs as defined above. The Company assessed the sensitivity of the fair value measurement to changes in these unobservable inputs, and determined that changes within a reasonable range would not result in a materially different assessment of fair value.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value:


	Level 1		Level 2		Level 3		Total
As of September 30, 2022	(in thousands)
Assets
Cash and cash equivalents	$	24,004	$	—	$	—	$	24,004
Investments in marketable securities, current	—		110,714		—		110,714
Investments in marketable securities, non-current	—		55,436		—		55,436
Total	$	24,004	$	166,150	$	—	$	190,154
Liabilities
Liability-classified stock options	$	—	$	—	$	1	$	1
Contingent consideration	—		—		5,922		5,922
Total	$	—	$	—	$	5,923	$	5,923


	Level 1		Level 2		Level 3		Total
As of December 31, 2021	(in thousands)
Assets
Cash and cash equivalents	$	109,282	$	—	$	—	$	109,282
Investments in marketable securities, current	—		46,035		—		46,035
Investments in marketable securities, non-current	—		35,688		—		35,688
Total	$	109,282	$	81,723	$	—	$	191,005
Liabilities
Liability-classified stock options	$	—	$	—	$	26	$	26
Contingent consideration	—		—		5,298		5,298
Total	$	—	$	—	$	5,324	$	5,324

The following table presents the changes in fair value of the Company’s liability-classified stock options:


	Liability at beginning of the period		Fair value of liability-classified options exercised in the period		Decrease in fair value of liability		Liability at end of the period
	(in thousands)
Nine Months Ended September 30, 2022	$	26	$	—	$	(25)	$	1
Nine Months Ended September 30, 2021	$	250	$	(96)	$	(117)	$	37

The following table presents the changes in fair value of the Company’s contingent consideration:


	Liability at beginning of the period		Increase in fair value of liability		Liability at end of the period
	(in thousands)
Nine Months Ended September 30, 2022	$	5,298	$	624	$	5,922
Nine Months Ended September 30, 2021	$	3,426	$	1,679	$	5,105

- 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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