7. Warrants

Common Stock Warrant Expense

In November 2015, an engagement letter was effectuated with the Company’s former Vice Chairman of the Board of Directors. Under the terms of the engagement, upon being appointed the Company’s Vice Chairman and the closing of a minimum of $25 million in gross proceeds from sales of its Series A convertible preferred stock under a private placement memorandum, the Vice Chairman would receive 234,860 common stock warrants. On December 12, 2016, both of the aforementioned conditions had been met and the Company issued 234,860 common stock warrants at an exercise price of $14.50 per share.

The fair value of the warrants was determined using a Monte Carlo simulation method which calculates the estimated value based on running numerous simulations and analyzing the various outcomes. The total fair value of the award was approximately $661,000 and was being amortized over a five-year vesting period. On August 13, 2019, this board member was not up for re-election at the annual shareholder’s meeting, therefore the vesting of the common stock warrants ceased on August 13, 2019 resulting in the cancellation of 109,601 unvested warrants. For the years ended December 31, 2019 and 2018, the Company recorded stock-based compensation expense of approximately $82,000 and $132,000, respectively, related to these warrants.

Warrant Liability

The Company evaluated the accounting treatment for the Series A convertible preferred stock warrants issued in 2017 and in prior years and concluded pursuant to its evaluation of Accounting Standard Codification 480, Distinguishing Liabilities From Equity, that due to the contingent liquidation redemption feature in the underlying Series A convertible preferred stock not being solely within the control of the Company, the Series A convertible preferred stock warrants issued were considered a liability in the consolidated balance sheet. As a result, the Company recorded a warrant liability and the subsequent changes in fair value were recorded as a component in other income (expense) in the consolidated statement of operations. The warrant liability required the Company to remeasure the value of the underlying warrants and report the effect of the changes on our operations until the warrants are exercised or expired. The change in fair value of the warrant liability recorded in the consolidated statement of operations in 2018 was a gain of $1.6 million. The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying preferred stock for each reporting period. The warrant liability was measured using the Monte Carlo valuation model.

Upon the Company’s IPO, the Series A convertible preferred stock warrants were converted into common stock warrants which resulted in the warrant liability being remeasured at the IPO date and classified into additional paid-in-capital.

The following table (in thousands) summarizes the Company’s warrant activity and fair value calculations of its derivative warrants for the year ended December 31, 2018:


	Warrant Liability
Balance at December 31, 2017	$	11,868
Change in fair value of warrants		(1,632)
Reclassification into equity upon initial public offering		(10,236)
Balance at December 31, 2018	$	—