Fair Value Measurements and Marketable Securities

6 Months Ended

Jul. 31, 2019

Fair Value Measurements and Marketable Securities

Fair Value Measurements and Marketable Securities

3. Fair Value Measurements and Marketable Securities

The Company follows ASC 820, Fair Value Measurements, with respect to marketable securities that are measured at fair value on a recurring basis. Under the standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.

The hierarchy is broken down into three levels as follows:

Level 1

Assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in active markets

Level 2

Assets and liabilities whose values are based on quoted prices in markets that are not active or inputs that are observable for substantially the full term of the asset or liability

Level 3

Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis are as follows:


	July 31, 2019								January 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in thousands)								(in thousands)
Assets
Cash equivalents⁽¹⁾
Money market funds	$	698,945	$	—	$	—	$	698,945	$	42,132	$	—	$	—	$	42,132
Corporate debt securities		—		15,008		—		15,008		—		27,941		—		27,941
Total cash equivalents		698,945		15,008		—		713,953		42,132		27,941		—		70,073
Marketable securities
Corporate debt securities		—		79,985		—		79,985		—		91,796		—		91,796
U.S. treasury securities		14,018		—		—		14,018		11,451		—		—		11,451
Total marketable securities		14,018		79,985		—		94,003		11,451		91,796		—		103,247
Total assets	$	712,963	$	94,993	$	—	$	807,956	$	53,583	$	119,737	$	—	$	173,320
Liability
Contingent consideration related to business combinations⁽²⁾		—		—		—		—		—		—	$	474	$	474
Redeemable convertible preferred stock warrant liability ⁽³⁾		—		—		—		—		—		—		4,537		4,537
Total liabilities	$	—	$	—	$	—	$	—	$	—	$	—	$	5,011	$	5,011

(1)	Included in “Cash and cash equivalents” on the condensed consolidated balance sheets.

(2)

The contingent consideration consists of development milestone payments. The fair value of the contingent consideration was estimated by developing the risk-adjusted discounted value as well as discounted probability-weighted expected payments. That measure is based on Level 3 inputs which are significant inputs that are not observable in the market. Key assumptions at the acquisition date included (a) a discount rate range of 3%-3.02% and (b) three probability-adjusted milestone payments, each $0.2 million. As of January 31, 2019, the first milestone payment of $0.2 million had been made. During the three months ended April 30, 2019, the remaining milestones were deemed not probable of being paid and the remaining contingent consideration of $0.5 million was written off to Other expense, net.

(3)

Immediately prior to the closing of the IPO on June 14, 2019, the redeemable convertible preferred stock warrants also converted into 336,386 warrants to purchase Class B common stock on a one-to-one basis. The redeemable convertible preferred stock warrant liability was reclassified to additional paid-in capital. Within the same month, the Company received notice from the holders of 336,386 shares as to their intentions to convert the warrants into shares of common stock of the Company. Such shares were settled via net settlement method, which was elected by the holders to reduce the number of shares issued upon exercise to reflect net settlement of the exercise price, resulting in the issuance of 322,278 shares of the Company’s common stock.

There were no transfers between the levels of the fair value hierarchy during the three and six months ended July 31, 2019 or July 31, 2018.

The securities that had been in continuous unrealized loss position per security type and in aggregate are not material as of July 31, 2019 and January 31, 2019. There were no impairments considered “other-than-temporary” as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.

The remaining contractual maturities of marketable securities as of July 31, 2019 and January 31, 2019 were less than one year.

The following summarizes the changes in the redeemable convertible preferred stock warrant liability, which is classified as a Level 3 instrument:


	Three Months Ended July 31,				Six Months Ended July 31,
	2019		2018		2019		2018
	(in thousands)				(in thousands)

Balance at beginning of period	$	5,704	$	961	$	4,537	$	961
Adjustment resulting from change in fair value recognized in the condensed consolidated statements of operations		4,855		2,055		6,022		2,055
Reclassification of liability for redeemable convertible preferred stock warrants to additional paid-in capital upon initial public offering		(10,559)		—		(10,559)		—
Balance at end of period	$	—	$	3,016	$	—	$	3,016

The fair value of the redeemable convertible preferred stock warrant liability was estimated using the Black-Scholes option-pricing model and was based on significant inputs not observable in the market, and therefore was classified as a Level 3 instrument. The inputs include the Company’s preferred stock price, expected stock price volatility, risk-free interest rate, and contractual term. A loss of $4.9 million and $2.1 million was recorded as a component of Other expense, net, relating to the final remeasurement of the redeemable convertible preferred stock warrant liability during the three months ended July 31, 2019 and July 31, 2018, respectively, and a loss of $6.0 million and $2.1 million during the six months ended July 31, 2019 and July 31, 2018, 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.

+ References + Details