Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. Fair Value Measurements

The carrying amounts of certain of Aduro’s financial instruments, including cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance also 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 briefly summarized as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

Aduro’s cash equivalents, which include money market funds, are classified as Level 1 because they are valued using quoted market prices. Aduro’s cash equivalents consisting of corporate debt securities and commercial paper along with Aduro’s marketable securities consisting of available-for-sale securities are generally classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data. When quoted prices in active markets for identical assets or liabilities are not available, Aduro relies on non-binding quotes from its investment managers, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, or historical pricing trends of a security relative to its peers. To validate the fair value determination provided by its investment managers, Aduro reviews the pricing movement in the context of overall market trends and trading information from its investment managers. In addition, Aduro assesses the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.

In certain cases where there is limited activity or less transparency around the inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of the contingent consideration liability.

The following table sets forth Aduro’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

	September 30, 2020
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	23,185	$	—	$	—	$	23,185
U.S. government and agency securities		—		70,952		—		70,952
Corporate debt securities		—		10,429		—		10,429
Commercial paper		—		59,384		—		59,384
Total	$	23,185	$	140,765	$	—	$	163,950
Financial Liabilities:
Contingent consideration related to acquisition	$	—	$	—	$	2,205	$	2,205
Total	$	—	$	—	$	2,205	$	2,205

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	39,994	$	—	$	—	$	39,994
U.S. government and agency securities		—		43,333		—		43,333
Corporate debt securities		—		54,590		—		54,590
Commercial paper		—		67,536		—		67,536
Total	$	39,994	$	165,459	$	—	$	205,453
Financial Liabilities:
Contingent consideration related to acquisition	$	—	$	—	$	1,051	$	1,051
Total	$	—	$	—	$	1,051	$	1,051

The acquisition-date fair value of the contingent consideration liability represents the future consideration that is contingent upon the achievement of specified development milestones for a product candidate. The fair value of the contingent consideration is based on Aduro’s probability-weighted discounted cash flow assessment that considers probability and timing of future payments. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving development milestones, anticipated timelines and discount rate, the values of which as of September 30, 2020 are shown in the table below. Changes in the fair value of the liability for contingent consideration will be recognized in the consolidated statement of operations until settlement.

	Unobservable Input
Probability of attaining milestone		18.8	%
Period of time to achieve milestone (in years)		7.3
Discount rate		10.0	%

Aduro did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2020 and December 31, 2019.

The following table sets forth a summary of the changes in the fair value of Aduro’s Level 3 financial liabilities (in thousands):

	Contingent Consideration
Balance at December 31, 2019	$	1,051
Net change in fair value upon remeasurement		1,107
Foreign currency impact on contingent consideration		47
Balance at September 30, 2020	$	2,205

The following tables summarize the estimated value of Aduro’s cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands):

	September 30, 2020
	Amortized cost		Unrealized gains		Unrealized losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	7,181	$	—	$	—		$	7,181
Money market funds		23,185		—		—			23,185
Commercial paper		42,205		—		(2	)		42,203
Total cash and cash equivalents	$	72,571	$	—	$	(2	)	$	72,569
Marketable securities:
U.S. government and agency securities	$	70,942	$	14	$	(4	)	$	70,952
Corporate debt securities		10,414		15		—			10,429
Commercial paper		17,179		2		—			17,181
Total marketable securities	$	98,535	$	31	$	(4	)	$	98,562

	December 31, 2019
	Amortized cost		Unrealized gains		Unrealized losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	8,149	$	—	$	—		$	8,149
Money market funds		39,994		—		—			39,994
Commercial paper		11,482		—		(1	)		11,481
Total cash and cash equivalents	$	59,625	$	—	$	(1	)	$	59,624
Marketable securities:
U.S. government and agency securities	$	43,295	$	40	$	(2	)	$	43,333
Corporate debt securities		54,563		33		(6	)		54,590
Commercial paper		56,055		7		(7	)		56,055
Total marketable securities	$	153,913	$	80	$	(15	)	$	153,978

The amortized cost and estimated fair value of Aduro’s available-for-sale marketable securities by contractual maturity are summarized below as of September 30, 2020 (in thousands):

	Amortized cost		Unrealized gains		Unrealized losses			Estimated Fair Value
Mature in one year or less	$	90,538	$	28	$	(4	)	$	90,562
Mature after one year through two years		7,997		3		—			8,000
Total available-for-sale marketable securities	$	98,535	$	31	$	(4	)	$	98,562