3. Fair Value of Financial Assets and Liabilities

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy utilized to determine such fair values as of December 31, 2018 and 2017:


	Fair Value Measurements as of December 31, 2018 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	126,047	$	—	$	—	$	126,047
Restricted cash		492		—		—		492

	$	126,539	$	—	$	—	$	126,539


	Fair Value Measurements as of December 31, 2017 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	5,684	$	—	$	—	$	5,684
Restricted cash		24		—		—		24

	$	5,708	$	—	$	—	$	5,708

Liabilities:
Derivative liability	$	—	$	—	$	371	$	371
Warrant to purchase redeemable convertible preferred stock		—		—		35		35

	$	—	$	—	$	406	$	406

During the years ended December 31, 2018 and 2017, there were no transfers between Level 1, Level 2 and Level 3.

Valuation of the Warrant to Purchase Preferred Stock

The liability for the warrant to purchase redeemable convertible preferred stock in the table above is composed of the fair value of a warrant to purchase shares of Series A Preferred Stock that was issued to a lender in connection with a loan and security agreement in 2017 (the “Loan Agreement”) (Note 7). The fair value of the warrant to purchase preferred stock was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

In order to determine the fair value of the warrant to purchase preferred stock, the Company utilized available facts and circumstances to estimate the number of shares of Series A Preferred Stock for which the warrant would ultimately be exercisable. The Company then used the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the warrant to purchase preferred stock. Estimates and assumptions impacting the fair value measurement included the fair value of the underlying shares of Series A Preferred Stock, the remaining contractual term of the warrant, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying preferred stock. The Company determined the fair value of the underlying preferred stock based on various valuation methodologies. The Company lacks company-specific historical and implied volatility information of its stock. Therefore, it estimated its expected stock volatility based on the historical volatility of publicly traded guideline companies for a term equal to the remaining contractual term of the warrant. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrant. The Company estimated no expected dividend yield based on the fact that the Company has never paid or declared dividends and does not intend to do so in the foreseeable future. Upon the IPO, the warrant to purchase preferred stock was converted to a warrant to purchase common stock. The carrying amount of warrant to purchase preferred stock as of the date of IPO was transferred to the account of additional paid in capital.

The following table sets forth a summary of changes in the fair value of the Company’s preferred stock warrant liability for which fair value was determined by Level 3 inputs:


	Warrant Liability
Balance as of December 31, 2016	$	—
Initial fair value of warrant to purchase redeemable convertible preferred stock		18
Change in fair value		17

Balance as of December 31, 2017	$	35
Change in fair value		162
Conversion of preferred stock warrant to common stock warrant		(197	)

Balance as of December 31, 2018	$	—

Valuation of Derivative

In January 2016, in connection with a license agreement entered into with University Health Network (“UHN”), and as part of the initial consideration for the license, the Company issued 1,161,665 shares of common stock to UHN pursuant to a stock purchase agreement (the “Stock Purchase Agreement”). The Stock Purchase Agreement contained a provision requiring the Company to make a cash payment to UHN of up to $2,000 if UHN’s fully diluted ownership is reduced within specified percentages as part of an IPO by the Company. The Company concluded the anti-dilution feature represented a derivative instrument and should be measured at fair value, with changes in fair value recognized as a gain or loss to other income (expense), net in the consolidated statements of operations and comprehensive loss. The initial fair value of the derivative of $49 was recorded as research and development expense in January 2016.

On December 31, 2016 and 2017, the Company remeasured the fair value of the derivative, using current assumptions, resulting in an increase in fair value of $39 and $283, respectively, which was recorded in other expense in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2016 and 2017, respectively.

On June 21, 2018, in connection with the Company’s IPO, the Company remeasured the fair value of the derivative to $2,000 as the Company was required to pay the dilution payment as mentioned above, which the Company paid in July 2018. An increase in fair value of $1,629 was recorded in other expense in the accompanying consolidated statement of operations and comprehensive loss for the year ended December 31, 2018.

The following table sets forth a summary of changes in the fair value of the Company’s derivative liability for which fair value is determined by Level 3 inputs:


	Derivative Liability
Balance as of December 31, 2016	$	88
Change in fair value		283

Balance as of December 31, 2017		371
Change in fair value		1,629
Payment		(2,000	)

Balance as of December 31, 2018	$	—