Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2019

Fair Value of Financial Instruments

Fair Value of Financial Instruments

3.           Fair Value of Financial Instruments

The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for such measurements were as follows:

	September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	59,820	$	—	$	—	$	59,820
U.S. Treasury securities		34,894		—		—		34,894
	$	94,714	$	—	$	—	$	94,714
	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	109,630	$	—	$	—	$	109,630
Total	$	109,630	$	—	$	—	$	109,630
Liabilities
Warrant liability	$	—	$	—	$	380	$	380
Total	$	—	$	—	$	380	$	380

The Company utilized the market approach and Level 1 valuation inputs to value its money market funds and U.S. government treasury securities because published net asset values were readily available. As of September 30, 2019 and December 31, 2018, gross unrealized gains and unrealized losses for cash equivalents and short-term investments were not material, and the contractual maturity of all marketable securities was less than one year.

The fair value of the warrants was calculated using the Black-Scholes option pricing model and was revalued to fair value at the end of each reporting period until the warrants were converted to common stock warrants effective with the closing of the IPO on June 24, 2019. The liability was valued using the following assumptions:

	December 31,
	2018
Exercise price (1)	$	14.46
Stock price (2)	$	13.20
Time to maturity (in years)		3.64
Volatility (3)		83.7	%
Risk-free interest rate (4)		2.50	%
Expected dividend	$	—

(1) Based upon terms provided in the warrant agreement.

(2) Based upon an independently prepared valuation as of December 31, 2018, adjusted for the one-for-six reverse stock split.  

(3) Based upon the historical daily volatility of a group of peer public company closing prices.

(4) Based upon interest rate for U.S. Treasury Bonds, as published by the U.S. Federal Reserve.

The preferred stock warrants were previously valued at Level 3 as there were no observable inputs supported by market activity. The Company estimated the fair value of the preferred stock warrants using the Black-Scholes model which considers various potential liquidity outcomes and assigned probabilities to each to arrive at the weighted equity value. Upon the IPO, the 49,997 preferred stock warrants were revalued and converted to common stock warrants of Class A shares and the warrant liability of $0.5 million was reclassified to additional paid-in capital as a result of the conversion. Revaluation upon IPO was performed using the following assumptions: expected life of 3.17 years; fair value of Series A of $17.00 per share; risk-free interest rate of 1.69%; volatility of 83.61% and no expected dividends.  For further information regarding convertible preferred stock warrants, refer to Note 9, Capital Stock.