FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2020

FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company’s financial assets and liabilities are determined in accordance with the fair value hierarchy established in the FASB's ASC Topic 820, Fair Value Measurements and Disclosures, or Topic 820. ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy of Topic 820 requires an entity to maximize the use of observable inputs when measuring fair value and classifies those inputs into three levels:

Level 1—Observable inputs, such as quoted prices in active markets;

Level 2—Inputs, other than the quoted prices in active markets, which are observable either directly or indirectly such as quoted prices for similar assets or liabilities; quoted prices 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 instrument’s anticipated life; and

Level 3—Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Our financial instruments consist primarily of cash and cash equivalents, short-term and long-term investments, accounts payable and the Loan and Security Agreement, or Term Loan, entered into with Hercules Capital Inc., or Hercules.

Cash, cash equivalents and investments are reported at their respective fair values on the Company's condensed balance sheets. Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds as Level 1. When quoted market prices are not available for the specific security, then the Company estimates fair value by using 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, reported trades and broker/dealer quotes. Where applicable the market approach utilizes prices and information from market transactions for similar or identical assets. The Company classifies U.S. government agency securities, commercial paper, corporate debt securities and asset-backed securities as Level 2. The Company's short-term and long-term investments are classified as available-for-sale.

The following tables set forth the value of the Company's financial assets remeasured on a recurring basis based on the three-tier fair value hierarchy by significant investment category as of March 31, 2020 and December 31, 2019.


	March 31, 2020
									Reported as:
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Cash	$	2,257	$	—	$	—	$	2,257	$	2,257	$	—	$	—
Level 1:
Money market fund	8,298		—		—		8,298		8,298		—		—

Level 2:
U.S. government agency securities	24,247		13		—		24,260		—		21,505		2,755
Commercial paper	83,255		300		—		83,555		—		83,555		—
Corporate debt securities	186,137		123		(383)		185,877		—		168,678		17,199

Subtotal	293,639		436		(383)		293,692		—		273,738		19,954
Total assets measured at fair value	$	304,194	$	436	$	(383)	$	304,247	$	10,555	$	273,738	$	19,954


	December 31, 2019
									Reported as:
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cash and Cash Equivalents		Short-Term Investments		Long-Term Investments
Cash	$	1,393	$	—	$	—	$	1,393	$	1,393	$	—	$	—
Level 1:
Money market fund	17,181		—		—		17,181		17,181		—		—

Level 2:
U.S. government agency securities	40,741		6		(14)		40,733		—		19,990		20,743
Commercial paper	108,248		107		(2)		108,353		—		108,353		—
Corporate debt securities	185,569		205		(20)		185,754		—		159,517		26,237
Asset-backed securities	1,561		3		—		1,564		—		1,564		—
Subtotal	336,119		321		(36)		336,404		—		289,424		46,980
Total assets measured at fair value	$	354,693	$	321	$	(36)	$	354,978	$	18,574	$	289,424	$	46,980

Interest income related to the Company's cash, cash equivalents and available-for-sale investments included in other income (expense), net was approximately $1.7 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively. There were no gross realized gains and gross realized losses for the three months ended March 31, 2020 and 2019.

The following table summarizes the Company's available-for-sale investments that were in a continuous unrealized loss position but not deemed credit losses and therefore not required to be charged to earnings against the allowance for expected credit losses, as of March 31, 2020 and December 31, 2019.


	March 31, 2020						December 31, 2019

(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government agency securities	$	—	$	—	$	24,235	$	(14)
Commercial paper	—		—		5,426		(2)
Corporate debt securities	103,083		(383)		38,668		(20)

Total	$	103,083	$	(383)	$	68,329	$	(36)

The Company held a total of 33 and 18 positions which were in an unrealized loss position as of March 31, 2020 and December 31, 2019, respectively. All available-for-sale investments in an unrealized loss position were in a continuous loss position for less than 12 months. The Company determined that there was no allowance for expected credit losses related to our available-for-sale investments as of March 31, 2020 because the Company does not intend to sell these securities nor does the Company believe that it will be required to sell these securities before the recovery of their amortized cost basis.

The following table summarizes the maturities of the Company’s cash equivalents (excluding money market funds) and available-for-sale investments, as of March 31, 2020.


(in thousands)	Amortized Cost		Fair Value
Mature in less than one year	$	273,656	$	273,738
Mature in one to five years	19,983		19,954
Total	$	293,639	$	293,692

The following table presents a reconciliation of financial liabilities related to the compound derivative liability associated with the Term Loan measured at fair value on a recurring basis using Level 3 unobservable inputs for the three months ended March 31, 2020 and 2019.


	Three Months Ended March 31,
	2020		2019
(in thousands)	Compound Derivative Liability		Compound Derivative Liability
Fair value at beginning of period	$	977	$	161

Change in fair value	846		174


Fair value at end of period	$	1,823	$	335

The following table presents information about significant unobservable inputs related to the Company's Level 3 financial liabilities as of March 31, 2020.

March 31, 2020

(in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Input

Compound derivative liability

1,823

Discounted cash flow

Discount rate

16.8

Probability of the occurrence of certain events

20.0

Term Loan

The estimated fair value of the Term Loan was $52.7 million as of March 31, 2020 and is classified as Level 3. The key valuation assumptions used consist of the discount rate of 16.8% and the probability of the occurrence of certain events of 20.0%.

- 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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