Fair Value of Financial Assets and Liabilities

12 Months Ended

Dec. 31, 2020

Fair Value of Financial Assets and Liabilities

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:


	Fair Value Measurements as of December 31, 2020 Using:
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents—money market funds	$	16,816	$	28,018	$	—	$	44,834
	$	16,816	$	28,018	$	—	$	44,834
Liabilities:
Embedded derivative liability	$	—	$	—	$	455	$	455
	$	—	$	—	$	455	$	455


	Fair Value Measurements as of December 31, 2019 Using:
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents—money market fund	$	23,638	$	39,999	$	—	$	63,637
	$	23,638	$	39,999	$	—	$	63,637
Liabilities:
Embedded derivative liability	$	—	$	—	$	18	$	18
	$	—	$	—	$	18	$	18

The Company’s cash equivalents consisted of money market funds invested in U.S. Treasury securities. The money market funds were valued based on reported market pricing for the identical asset or by using inputs observable in active markets for similar securities, which represents a Level 2 measurement in the fair value hierarchy.

The following table provides a roll-forward of the aggregate fair values of the Company’s warrant liability and derivative liability, for which fair values are determined using Level 3 inputs:


(in thousands)	Preferred Stock Warrant Liability		Embedded Derivative Liability
Balance as of December 31, 2018	$	4,947	$	201
Change in fair value	288		(183)
Conversion of convertible preferred stock warrant into common stock warrant in connection with Merger	(5,235)		—
Balance as of December 31, 2019	—		18
Change in fair value	—		437
Balance at December 31, 2020	$	—	$	455

Valuation of Preferred Stock Warrant Liabilities— The preferred stock warrant liability in the table above consists of the fair values of warrants to purchase shares of convertible preferred stock that were issued prior to the Merger in March 2019 that was recorded at fair value on the dates the warrants were issued and exercisable and was subsequently remeasured to fair value at each reporting date through the closing of the Merger on March 13, 2019, at which point all preferred stock warrants were converted to warrants for Company’s common stock. As a result, the warrants were adjusted to fair value and reclassified to permanent equity. The aggregate fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

Valuation of Embedded Derivative Liabilities— Derivative liabilities consist of:

(1) The fair value of an embedded derivative in the Genzyme Agreement, which was initially recognized in 2015 in connection with the signing of the Genzyme Agreement, was determined based on significant inputs not observable in the market representing a Level 3 measurement within the fair value hierarchy. The fair value of this liability was estimated at each reporting date based, in part, on the results of third-party valuations, which were prepared using the option-pricing method or the hybrid method, each of which considered as inputs the type, timing and probability of occurrence of a change of control event, the potential amount of the payment under potential exit scenarios, the fair value per share of the underlying common stock and the risk-adjusted discount rate. As of December 31, 2018, the fair value of this derivative liability was $183.0 thousand. The Merger qualified as a change of control event, as defined in the Genzyme Agreement, but resulted in no payment being due to Genzyme under the Genzyme Agreement. As a result, on March 13, 2019, the closing date of the Merger with Arsanis, this derivative liability was remeasured to fair value, which was zero, and subsequent changes in fair value are no longer recognized in the consolidated statements of operations and comprehensive loss because the contingent payment obligation to Genzyme expired at that time.

(2) The fair value of the embedded derivative liability recognized in connection with the Company’s loan agreement with Hercules (see Note 7), which is associated with additional fees due to Hercules upon events of default, was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of this embedded derivative liability, which is reported within other non-current liabilities on the consolidated balance sheets, is estimated by the Company at each reporting date based, in part, on the results of third-party valuations, which were prepared based on a discounted cash flow model that considered the timing and probability of occurrence of a redemption upon an event of default, the potential amount of prepayment fees or contingent interest upon an event of default and the Company’s risk-adjusted discount rate of 14%. As of December 31, 2020 and December 31, 2019, the fair value of this derivative liability was $455.0 thousand and $18.0 thousand, respectively.

- 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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