Fair Value Measurements

9 Months Ended

Sep. 30, 2019

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

•Level 1 – quoted prices in active markets for identical assets or liabilities;

•Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities;

•Level 3 – unobservable inputs.

The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Management believes that borrowings under its term loan bear interest at the prevailing market rates for instruments with similar characteristics (a Level 2 input); accordingly, the carrying value of this instrument approximates its fair value.

In August 2014 through April 2016, the Company issued warrants to purchase 2,672,502 shares of Series C redeemable convertible preferred stock at the exercise price of $6.11 per share. As a derivative liability, the redeemable convertible warrants were initially recorded at fair value and were subject to remeasurement at each balance sheet date through the date of the Company's initial public offering in April 2019. Any change in fair value as a result of a remeasurement was recognized as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The Company’s redeemable convertible warrant liability was classified within Level 3 of the fair value hierarchy.

At December 31, 2018, the fair value of the redeemable convertible warrant liability was determined by using an option pricing model to allocate the total enterprise value to the various securities within the Company's capital structure. As of December 31, 2018, the fair value of the redeemable convertible warrant liability was based on both the estimated fair value of the Company's common stock and on valuation models discounted at current implied market rates which are based on Level 3 inputs. Additionally, the model's inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and included:


						December 31,
						2018
Time to liquidity (years)						0.57
Expected volatility						62.5%
Discounted cash flow rate						12.0%
Risk-free interest rate						2.6%
Marketability discount rate						14%

The final fair value of the redeemable convertible warrants was remeasured on the date of the Company's initial public offering in April 2019. The final fair value of the redeemable convertible warrant liability was based on the estimated fair value of the Company's common stock at the time of its initial public offering. Subsequent to April 2019, there were no changes in fair value.

The following table sets forth the fair value of the Company’s financial liabilities measured on a recurring basis as of December 31, 2018 (in thousands), as of September 30, 2019, there was no redeemable convertible warrant liability:


	December 31, 2018
	Level 1		Level 2		Level 3		Total
Liabilities
Redeemable convertible warrant liability	$	—	$	—	$	16,091	$	16,091

The changes in the redeemable convertible warrant liability are summarized below (in thousands):


Fair Value at December 31, 2018	$	16,091
Change in fair value recorded in other income (expense), net	21,030
Reclassification upon IPO	(37,121)
Fair Value at September 30, 2019	$	—

There were no transfers between fair value hierarchy levels during the three and nine ended September 30, 2019 and 2018.

- 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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