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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2018

4.	Fair Value of Financial Instruments

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined 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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that 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 assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company’s financial instruments that are carried at fair value mainly consist of Level 1 assets and Level 3 liabilities. Level 1 assets include highly liquid bank deposits and money market funds, which were not material at December 31, 2018 and 2017. Level 3 liabilities that are measured on a recurring basis relate to the 2017 and 2016 Placement Warrants, as described in Note 12. Placement warrant liabilities are valued using the Black-Scholes option-pricing model. Generally, increases (decreases) in the fair value of the underlying stock, estimated term and volatility would result in a directionally similar impact to the fair value of the warrant (see Note 12). During the year ended December 31, 2018 and 2017, warrants to purchase 385,627 shares and 34,493 shares of common stock were exercised and the aggregate fair value upon exercise of $1.2 million and $0.3 million, respectively, was reclassified from liabilities to additional paid-in-capital. There were no warrants exercised during the year ended December 31, 2016.

The gains and losses from re-measurement of Level 3 financial liabilities are recorded as part of other income (expense), net in the consolidated statements of operations and comprehensive loss. During the year ended December 31, 2018 and 2017, the Company recorded a gain of $9.4 million and a loss of $16.6 million, respectively, related to the change in fair value of the 2017 and 2016 Placement Warrants. There have been no transfers between Level 1, Level 2 and Level 3 in any periods presented.

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy (in thousands):

	At December 31, 2018
	Level 1		Level 2		Level 3		Total
2017 Placement Warrants Liability	$	—	$	—	$	7,115	$	7,115
2016 Placement Warrants Liability	$	—	$	—	$	4,729	$	4,729
Total Warrant Liability	$	—	$	—	$	11,844	$	11,844

	At December 31, 2017
	Level 1		Level 2		Level 3		Total
2017 Placement Warrants Liability	$	—	$	—	$	12,487	$	12,487
2016 Placement Warrants Liability	$	—	$	—	$	9,933	$	9,933
Total Warrant Liability	$	—	$	—	$	22,420	$	22,420

The following table summarizes the changes in the fair value of the Company’s Level 3 financial liabilities (in thousands):

	Year Ended December 31,
	2018			2017			2016
Fair value, beginning of period	$	22,420		$	2,723		$	—
Issuance of 2016 Placement Warrants		—			—			2,726
Issuance of 2017 Placement Warrants		—			3,373			—
Change in fair value of Level 3 financial liabilities		(9,379	)		16,598			(3	)
Fair value of 2016 Placement Warrants at exercise		(1,187	)		(200	)		—
Fair value of 2017 Placement Warrants at exercise		(10	)		(74	)		—
Fair value, end of period	$	11,844		$	22,420		$	2,723

- 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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