NOTE 4. Fair Value of Financial Instruments

Fair value accounting is applied for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, short‑term investments, accounts receivable, accounts payable and accrued liabilities that approximate fair value due to their relatively short maturities. As short‑term investments are classified as held‑to‑maturity, they are recorded at their amortized cost.

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 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 to sell 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.

The Company’s money market funds are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities. The Company’s corporate bonds and commercial paper, classified as cash equivalents, are classified within Level 2 of the fair value hierarchy and are valued based on quoted prices for similar assets or prices derived from observable market data. Level 3 liabilities consist of convertible promissory notes embedded derivative liabilities and a convertible preferred stock warrant liability as they are valued by using inputs that are unobservable in the market. The determination of the fair values of the convertible promissory notes embedded derivative is discussed in Note 8.

The following tables present the Company’s financial assets and liabilities that are measured at fair value at March 31, 2018 and December 31, 2017:

	Level 1		Level 2		Level 3		Total
March 31, 2018				(in thousands)
Recurring Financial Assets:
Money Market Funds	$	5,600	$	—	$	—	$	5,600
Corporate Bonds		—		—		—		—

Total assets	$	5,600	$	—	$	—	$	5,600

	Level 1		Level 2		Level 3		Total
March 31, 2018				(in thousands)
Recurring Financial Liabilities:
Convertible promissory notes embedded derivative liability	$	—	$	—	$	—	$	—
Convertible preferred stock warrant liability		—		—		—		—

Total liabilities	$	—	$	—	$	—	$	—

	Level 1		Level 2		Level 3		Total
December 31, 2017				(in thousands)
Recurring Financial Assets:
Money Market Funds	$	1,192	$	—	$	—	$	1,192
Corporate Bonds		—		1,415		—		1,415

Total assets	$	1,192	$	1,415	$	—	$	2,607

	Level 1		Level 2		Level 3		Total
December 31, 2017				(in thousands)
Recurring Financial Liabilities:
Convertible promissory notes embedded derivative liability	$	—	$	—	$	—	$	—
Convertible preferred stock warrant liability		—		—		67		67

Total liabilities	$	—	$	—	$	67	$	67

The following tables present a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2018 and 2017:

	Convertible Preferred Stock Warrant Liability		Convertible Promissory Notes Embedded Derivative Liability

					Total
			(in thousands)
Balance at January 1, 2018	$	67	$	—	$	67
Issuances		—		—		—
Revaluation loss included in (loss) gain on revaluation of financial instruments, net		3		—		3
Settlements		(70)		—		(70)
Balance at March 31, 2018	$	—	$	—	$	—

Total gains included in other income and (expenses) attributable to liabilities still held as of March 31, 2018	$	—	$	—	$	—

	Convertible Preferred Stock Warrant Liability		Convertible Promissory Notes Embedded Derivative Liability

					Total
			(in thousands)
Balance at January 1, 2017	$	134	$	3,280	$	3,414
Issuances		—		—		—
Revaluation gains included in (loss) gain on revaluation of financial instruments, net		(32)		(150)		(182)
Settlements		—		—		—
Balance at March 31, 2017	$	102	$	3,130	$	3,232

Total gains included in other income and (expenses) attributable to liabilities still held as of March 31, 2017	$	32	$	150	$	182