Fair value measurements

9 Months Ended

Sep. 30, 2023

6. Fair value measurements

Financial assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The authoritative guidance establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.

The three-level hierarchy for the inputs to valuation techniques is summarized as follows:

Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.

Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable.

Level 3—Unobservable inputs that reflect the reporting entity’s own assumptions.

The following tables set forth the fair value of our financial instruments that were measured at fair value on a recurring basis (in thousands):


	September 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
									Level 1		Level 2		Level 3
Financial assets:
Money market funds	$	163,424	$	—	$	—	$	163,424	$	163,424	$	—	$	—


U.S. Treasury notes	18,848		—		(1)		18,847		18,847		—		—
U.S. government agency securities	77,707		19		(7)		77,719		—		77,719		—
Total financial assets	$	259,979	$	19	$	(8)	$	259,990	$	182,271	$	77,719	$	—

Financial liabilities:

Convertible senior secured notes							$	196,244	$	—	$	—	$	196,244
Contingent consideration							25		—		—		25
Total financial liabilities							$	196,269	$	—	$	—	$	196,269


	September 30, 2023
Reported as:
Cash equivalents	$	153,324
Restricted cash	10,100
Marketable securities	96,566
Total cash equivalents, restricted cash, and marketable securities	$	259,990



Convertible senior secured notes	$	196,244
Other long-term liabilities	25
Total liabilities	$	196,269


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
									Level 1		Level 2		Level 3
Financial assets:
Money market funds	$	158,931	$	—	$	—	$	158,931	$	158,931	$	—	$	—


U.S. Treasury notes	193,685		1		(123)		193,563		193,563		—		—
U.S. government agency securities	96,006		55		(13)		96,048		—		96,048		—
Total financial assets	$	448,622	$	56	$	(136)	$	448,542	$	352,494	$	96,048	$	—

Financial liabilities:
Stock payable liability							$	744	$	—	$	—	$	744
Contingent consideration							25		—		—		25
Total financial liabilities							$	769	$	—	$	—	$	769


	December 31, 2022
Reported as:
Cash equivalents	$	148,901
Restricted cash	10,030
Marketable securities	289,611
Total cash equivalents, restricted cash, and marketable securities	$	448,542


Other long-term liabilities	$	769

There were no transfers between Level 1, Level 2 and Level 3 during the periods presented. Our debt securities of U.S. government agencies are classified as Level 2 as they are valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third-party data providers, including but not limited to benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data. At September 30, 2023, the remaining contractual maturities of available-for-sale securities ranged from one to five months. Interest income generated from our investments was $2.2 million and $2.0 million during the three months ended September 30, 2023 and 2022, respectively, and $6.5 million and $5.0 million for the nine months ended September 30, 2023 and 2022, respectively, which was included in other income (expense), net in the condensed consolidated statements of operations.

The total fair value of investments with unrealized losses at September 30, 2023 was $36.1 million. None of the available-for-sale securities held as of September 30, 2023 have been in an unrealized loss position for more than one year. The Company evaluates investments that are in an unrealized loss position for impairment as a result of credit loss. It was determined that no credit losses exist as of September 30, 2023, because the change in market value of those securities has resulted from fluctuations in market interest rates since the time of purchase, rather than a deterioration of the credit worthiness of the issuers. For marketable securities in an unrealized loss position, we assess our intent to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. We intend to hold our marketable securities to maturity and it is unlikely that they would be sold before their cost bases are recovered. The cost of securities sold is based on the specific identification method.

The following tables include a rollforward of the stock payable liability, contingent consideration, and Senior Secured 2028 Notes classified within Level 3 of the fair value hierarchy (in thousands):


	Three Months Ended September 30, 2023
	Stock Payable Liability		Contingent Consideration		Convertible Senior Secured Notes
Fair value at June 30, 2023	$	251	$	25	$	249,571
Issuance of convertible senior secured notes at fair value	—		—		100
Changes in fair value	(70)		—		(33,463)
Changes in fair value related to instrument-specific credit risk	—		—		(16,529)
Settlements	(181)		—		—
Cash payments for interest	—		—		(3,435)
Fair value at September 30, 2023	$	—	$	25	$	196,244


	Nine Months Ended September 30, 2023
	Stock Payable Liability		Contingent Consideration		Convertible Senior Secured Notes
Fair value at December 31, 2022	$	744	$	25	$	—
Issuance of convertible senior secured notes at fair value	—		—		301,171
Changes in fair value	(337)		—		(72,386)
Changes in fair value related to instrument-specific credit risk	—		—		(25,366)
Settlements	(407)		—		—
Cash payments for interest	—		—		(7,175)
Fair value at September 30, 2023	$	—	$	25	$	196,244


	Three Months Ended September 30, 2022
	Stock Payable Liability		Contingent Consideration
Fair value at June 30, 2022	$	2,782	$	25

Change in fair value	527		—
Settlements	(2,324)		—
Fair value at September 30, 2022	$	985	$	25


	Nine Months Ended September 30, 2022
	Stock Payable Liability		Contingent Consideration
Fair value at December 31, 2021	$	20,925	$	1,875

Change in fair value	(15,666)		(1,850)
Settlements	(4,274)		—
Fair value at September 30, 2022	$	985	$	25

Stock payable liabilities relate to certain indemnification hold-backs resulting from business combinations that are settled in shares of our common stock. We elected to account for these liabilities using the fair value option due to the inherent nature of the liabilities and the changes in value of the underlying shares that will ultimately be issued to settle the liabilities. The estimated fair value of these liabilities is classified as Level 3 and determined based upon the number of shares that are issuable to the sellers and the quoted closing price of our common stock as of the reporting date. The number of shares that will ultimately be issued is subject to adjustment for indemnified claims that existed as of the closing date for each acquisition. Changes in the number of shares issued and share price can significantly affect the estimated fair value of the liabilities. The change in fair value related to stock payable liabilities was income of $0.1 million and $0.5 million during the three months ended September 30, 2023 and 2022, respectively, and income of $0.4 million and $15.7 million for the nine months ended September 30, 2023 and 2022, respectively, which was recorded in change in fair value of acquisition-related liabilities in the condensed consolidated statements of operations.

Contingent consideration relates to the obligation we may be required to pay in the form of additional shares of our common stock resulting from the acquisition of Genelex in April 2020. The amount of the contingent obligation is dependent upon the achievement of a certain product milestone, at which time we would issue shares of our common stock with a value equal to a portion of the gross revenues actually received by us for a pharmacogenetic product reimbursed through certain payers during an earn-out period of up to four years. The estimated fair value of the contingent consideration is based upon significant inputs not observable in the market and, therefore, represents a Level 3 measurement. The material factors that may impact the fair value of the contingent consideration, and therefore, this liability, are the probabilities and timing of achieving the related milestone, the estimated revenues achieved for a pharmacogenetic product and the discount rate used to estimate the fair value. Significant changes in any of the probabilities of success would result in a significant change in the estimated fair value of the liability. The change in fair value related to contingent consideration recorded to general and administrative expense was zero during both the three months ended September 30, 2023 and 2022, respectively, and zero and a gain of $1.8 million during the nine months ended September 30, 2023 and 2022, respectively.

In March 2023, the Company issued Series A Notes in an aggregate principal amount of $275.3 million, and Series B Notes in an aggregate principal amount of $30.0 million. In August 2023, the Company issued additional Series A Notes in an aggregate principal amount of $0.1 million.

The Company elected the fair value option to account for the Senior Secured 2028 Notes. We utilize the binomial lattice model, specifically a lattice model to estimate the fair value of the Senior Secured 2028 Notes at issuance and subsequent reporting dates. The estimated fair value of the Senior Secured 2028 Notes is determined using Level 3 inputs and assumptions unobservable in the market. This model incorporates the terms and conditions of the Senior Secured 2028 Notes and assumptions related to stock price, expected stock price volatility, risk-free interest rate, market credit spread, and cost of debt. The stock price is based on the publicly traded price of our common stock as of the measurement date. We estimate the volatility of our stock price based on the historical and implied volatilities of our publicly traded common stock. The risk-free interest rate is based on interpolated U.S. Treasury rates, commensurate with a similar term to the Senior Secured 2028 Notes. The most significant assumptions in the binomial lattice model impacting the fair value of the Senior Secured 2028 Notes are (i) the estimated stock price, (ii) the estimated cost of debt, and (iii) the volatility of our common stock. Significant changes in any of these inputs may result in a significant change in the fair value of the Senior Secured 2028 Notes.

Under the fair value election as prescribed by ASC 825, we record changes in fair value, inclusive of related accrued interest, through the condensed consolidated statements of operations as a fair value adjustment of the convertible senior secured debt each reporting period, with the portion of the change that results from a change in the instrument-specific credit risk recorded separately in other comprehensive loss, if applicable. The portion of total changes in fair value of debt attributable to changes in instrument-specific credit risk are determined through specific measurement of periodic changes in the risk-free interest rate, credit spread, and cost of debt assumptions. The initial carrying amount of the Senior Secured 2028 Notes, measured at the estimated fair value on the date of issuance, was $301.1 million. As of September 30, 2023, the estimated fair value was $196.2 million. During the three and nine months ended September 30, 2023, the corresponding change in fair value of the Senior Secured 2028 Notes was a gain of $33.5 million and $72.4 million, respectively, which is included in other income (expense), net in the condensed consolidated statements of operations. The change in fair value related to instrument-specific credit risk was $16.5 million and $25.4 million during the three and nine months ended September 30, 2023, respectively, which is included in the condensed consolidated statements of comprehensive loss. See Note 7, "Commitments and contingencies" under the heading "Convertible senior notes—Convertible senior secured notes due 2028" for a description of the Senior Secured 2028 Notes.

Significant inputs into the binomial lattice model as of September 30, 2023 and March 7, 2023 were as follows:


	September 30, 2023		March 7, 2023
Stock price	$0.61		$1.65
Conversion price	$2.58		$2.58
Volatility	110.0	%	107.5	%
Risk-free interest rate	4.71	%	4.35	%
Credit spread	17.92	%	13.76	%
Cost of debt	22.6	%	18.1	%
Term (years)	4.46		5.02

- 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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