3. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

	Fair Value Measurements as of
	September 30, 2017 Using:
	Level 1		Level 2		Level 3		Total
	(unaudited)
Liabilities:
Warrant liability	$	—	$	—	$	6,289	$	6,289

	$	—	$	—	$	6,289	$	6,289

	Fair Value Measurements as of
	December 31, 2016 Using:
	Level 1		Level 2		Level 3		Total

Liabilities:
Warrant liability	$	—	$	—	$	780	$	780
Derivative liability	—		—		512		512
Contingent equity liability	—		—		18,938		18,938

	$	—	$	—	$	20,230	$	20,230

During the periods ended September 30, 2017 and December 31, 2016 there were no transfers between Level 1, Level 2 and Level 3.

Valuation of Warrant Liability

The warrant liability in the tables above is composed of the fair value of warrants to purchase common shares that the Company issued to two of its directors in connection with a guarantee of its obligations under a credit agreement (see Note 7). The fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. At September 30, 2017, the Company utilized the Black-Scholes option pricing model to value the warrant liability. The Black-Scholes option pricing model incorporated assumptions and estimates to value the warrant liability. Estimates and assumptions impacting the fair value measurement included the number of shares for which the warrants will be exercisable, the fair value per share of the underlying common shares issuable upon exercise of the warrants, the remaining contractual term of the warrants, the risk-free interest rate, the expected dividend yield, and the expected volatility of the price of the underlying common shares. The fair value per share of the Company’s common shares was based on the closing trading price of the shares on September 29, 2017, the last trading day in the quarter, and the increase in the fair value of the common shares during the nine months ended September 30, 2017 is the primary reason for the increase in the fair value of the warrant liability during the same period. The Company was a private company prior to its IPO in May 2017 and therefore lacks company-specific historical and implied volatility information of its shares. Therefore, it estimated its expected share volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. 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 warrants. The Company estimated a 0% 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.

Valuation of Derivative Liability

The fair value of the derivative liability recognized in connection with the Company’s license agreement with Yale (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. At September 30, 2017, the fair value of the derivative liability was determined using a Monte-Carlo simulation, which is a statistical method used to generate a defined number of share price paths to develop a reasonable estimate of the range of the expected share prices. The Monte-Carlo simulation incorporated assumptions and estimates to value the derivative liability, including the amount of the payment, the settlement date, the trading price of the Company’s common shares on September 29, 2017, the last trading day in the quarter, the risk-free interest rate and the expected volatility of the price of the underlying common shares. In April 2017, the agreement with Yale was amended such that if the change-of-control event was an IPO, the change-of-control payment would be due to Yale on the first trading day Yale was free to sell its equity interest in the Company and the change-of-control fee would be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale was free to sell its equity interest in the Company. Yale’s equity interest in the Company was subject to a lock-up agreement which generally restricted Yale’s shares from being traded until October 31, 2017, and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, would be determined upon expiration of the lock-up period in October 2017. The fair value of the derivative liability was determined to be $0 as of September 30, 2017. On October 31, 2017 the Company remeasured the derivative liability to fair value upon expiration of the lock-up period and determined that the fair value was $0 based on the value of the Company’s shares on this date.

Valuation of Contingent Equity Liability

BMS. The fair value of the contingent equity liability recognized in connection with the Company’s license agreement with BMS (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent equity liability was determined using the PWERM, which considered as inputs the probability of occurrence of events that would trigger the issuance of shares, the expected timing of such events, the value of the contingently issuable equity and a risk-adjusted discount rate. As of December 31, 2016, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 75%, the expected timing of such an event was estimated to be less than one year, the value of the contingently issuable equity was $18,750 and the discount rate was assessed to be 0%. In connection with the closing of the IPO in May 2017, the conditions for issuing shares in connection with the contingent equity liability were satisfied, and accordingly, the Company issued 1,345,374 common shares to BMS. The contingent equity liability was adjusted to fair value immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liability was reclassified to equity.

AstraZeneca. The fair value of the contingent equity liability recognized in connection with the Company’s license agreement with AstraZeneca (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent equity liability was determined using the PWERM, which considered as inputs the probability of occurrence of events that would trigger the issuance of shares, the expected timing of such events, the value of the contingently issuable equity and a risk-adjusted discount rate. The contingently issuable equity is issuable in two tranches, each for a fixed dollar amount of $5,000, for a total amount of $10,000. Using the PWERM, the Company assessed the fair value of each tranche of the contingent equity liability separately.

In October 2016, upon completion of the Series A First Closing (see Note 9), the first tranche of contingently issuable equity became issuable to AstraZeneca. As a result, the Company issued to AstraZeneca 538,150 Series A preferred shares with an aggregate fair value of $5,000, or $9.2911 per share, in satisfaction of the obligation to issue the first tranche of equity under the agreement. Upon the issuance of the 538,150 Series A preferred shares to AstraZeneca in October 2016, the Company reclassified the carrying value of the first tranche contingent equity liability, equal to the then-current fair value of $5,000, to the carrying value of Series A preferred shares.

The shares related to the second tranche become issuable upon the earlier of (i) the initiation of a Phase 2b or equivalent clinical trial of a product candidate based on the licensed patent rights and (ii) any liquidity event, including an IPO, any change of control or any assignment of the Company’s rights or obligations under the license agreement. As of December 31, 2016, the Company determined that the fair value of the second tranche contingent equity liability was $4,875. In determining this fair value, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 65%, the expected timing of such an event was estimated to be less than one year, the value of the contingently issuable equity was $7,500 and the discount rate was assessed to be 0%. In connection with the closing of the IPO in May 2017, the conditions for issuing shares in connection with the contingent equity liability were satisfied, and accordingly, the Company issued 538,149 common shares to AstraZeneca. The contingent equity liability was adjusted to fair value immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liability was reclassified to equity.

The following table provides a roll forward of the aggregate fair values of the Company’s warrant liability, derivative liability and contingent equity liability, for which fair value is determined by Level 3 inputs:

	Warrant		Derivative			Contingent
	Liability		Liability			Equity Liability

Balance at December 31, 2016	$	780	$	512		$	18,938
Change in fair value	5,509		(512		)	13,082
Issuance of common shares in settlement of contingent equity liability	—		—			(32,020		)

Balance at September 30, 2017	$	6,289	$	—		$	—

Beneficial Conversion Feature

In connection with the second tranche closing of Series A preferred shares on February 17, 2017, the Company determined that the conversion option associated with the shares sold met the definition of a beneficial conversion feature (“BCF”) as the fair value of the underlying common shares exceeded the adjusted conversion price. The BCF was recognized at its fair value of $12,006 as a reduction to the carrying value of the Series A preferred shares and a corresponding adjustment to additional paid-in capital. The fair value was determined using Level 3 inputs, equal to the product of the number of shares sold in the second tranche closing multiplied by the difference between the adjusted conversion price and the per share value of common shares at the commitment date (see Note 9). In May 2017, upon the completion of the Company’s IPO, all of the outstanding Series A preferred shares were automatically converted into an aggregate of 9,358,560 common shares. Upon conversion of the Series A preferred shares, the remaining unamortized BCF was reclassified to additional paid-in capital as a deemed dividend.