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Fair Value Measurements and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2020

Fair Value Measurements and Fair Value of Financial Instruments

3. Fair Value Measurements and Fair Value of Financial Instruments

Assets and liabilities recorded at fair value on a recurring basis in the condensed balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities 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 related assets or liabilities; and

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

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. We recognize transfers into and out of levels within the fair value hierarchy in the period in which the actual event or change in circumstances that caused the transfer occurs.

Level 1 securities consist of highly liquid money market funds for which the carrying amounts approximate their fair values due to their short maturities. Level 3 liabilities that are measured at fair value on a recurring basis include the redeemable convertible preferred stock warrant. The redeemable convertible preferred stock warrant was measured using an option pricing method by estimating the value using the Black-Scholes model. The inputs used in the Black-Scholes model included the value of the redeemable convertible preferred stock, the risk-free interest rate, the expected term of the instrument and the expected volatility. There was no outstanding redeemable convertible preferred stock warrant as of September 30, 2020. Below are inputs used for the Level 3 liability as of December 31, 2019:

	December 31, 2019
	Redeemable Convertible Preferred Stock Warrant
Value of Series C Redeemable Preferred Stock Per Share	$	6.82
Risk-Free Rate		1.90	%
Volatility		73.5	%
Term in Years	8.42

During the periods presented, we have not changed the manner in which we value liabilities that are measured at estimated fair value using Level 3 inputs. There were no transfers within the hierarchy during the three or nine months ended September 30, 2020 or the year ended December 31, 2019.

The following tables set forth our financial instruments measured at fair value on a recurring basis by level within the fair value hierarchy at September 30, 2020 and December 31, 2019:

	September 30, 2020
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Money market funds ⁽¹⁾	$	392,272	$	392,272	$	—	$	—

	December 31, 2019
	Total Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Money market funds ⁽¹⁾	$	48,168	$	48,168	$	—	$	—
Liabilities:
Redeemable convertible preferred stock warrant liability	$	450	$	—	$	—	$	450

(1)	Included within cash and cash equivalents on the condensed balance sheet.

The following table provides a summary of changes in the estimated fair value of our Level 3 financial instrument, which was written off upon our IPO in June 2020. No new warrant liabilities were issued during the three months ended September 30, 2020:

	Warrant Liability
	(in thousands)
Balance — December 31, 2019	$	450
Change in fair value		179
Balance — March 31, 2020		629
Warrant liability write-off upon IPO		(629	)
Balance — June 30, 2020	$	—

- 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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