Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.19.2
Fair Value Measurements
6 Months Ended
Jun. 30, 2019
Fair Value Measurements  
Fair Value Measurements

6.    Fair Value Measurements

The Company measures the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Each level of input has different levels of subjectivity and difficulty involved in determining fair value.

·

Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date. Therefore, determining fair value for Level 1 investments generally does not require significant judgment, and the estimation is not difficult.

·

Level 2 – Pricing is provided by third-party sources of market information obtained through investment advisors. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information received from its advisors.

·

Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 instruments involves the most management judgment and subjectivity.

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 by level within the fair value hierarchy, are as follows:

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

June 30, 2019

 

 

 

 

 

Significant

 

 

 

 

 

Quoted prices

 

other

 

Significant

 

 

in  active

 

  observable

 

  unobservable

 

 

   markets

 

       inputs

 

 inputs

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities:

 

 

  

 

 

  

 

 

  

Derivative liability

 

$

 —

 

$

 —

 

$

387

Warrant liability

 

$

 —

 

$

 —

 

$

39

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

December 31, 2018

 

 

 

 

 

Significant

 

 

 

 

 

Quoted prices

 

other

 

Significant

 

    

in active

    

  observable

    

  unobservable

 

 

  markets

 

    inputs

 

   inputs

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities:

 

 

  

 

 

  

 

 

  

Warrant liability

 

$

 —

 

$

 —

 

$

210

 

There were no transfers between Level 1, 2 or 3 during the three and six months ended June 30, 2019 or June 30, 2018.

Warrant Liability

The following table includes a summary of changes in fair value of the Company’s warrant liability measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

    

June 30, 2019

 

June 30, 2018

    

June 30, 2019

 

June 30, 2018

Beginning balance

 

$

103

 

 

927

 

$

210

 

 

1,228

Additions

 

 

 —

 

 

65

 

 

 4

 

 

65

Change in fair value

 

 

(64)

 

 

4,358

 

 

(175)

 

 

4,249

Reclass to additional paid-in capital

 

 

 —

 

 

 —

 

 

 —

 

 

(192)

Ending balance

 

$

39

 

$

5,350

 

$

39

 

$

5,350

 

The changes in fair value of the warrant liability are recorded in change in fair value of warrant liability in the condensed consolidated statements of operations.

A summary of the weighted average significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liability that is categorized within Level 3 of the fair value hierarchy as of June 30, 2019 and December 31, 2018 is as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 2019

    

December 31, 2018

 

Common Stock Price

 

$

1.16

 

$

3.42

 

Term (Years)

 

 

3.77

 

 

4.27

 

Volatility

 

 

59

%  

 

58

%

Risk-free rate of interest

 

 

1.74

%  

 

2.58

%

Dividend Yield

 

 

0.0

%  

 

0.0

%

 

Derivative Liability

The following table includes a summary of changes in fair value of the Company’s derivative liability measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2019 and June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

For the three months ended

 

For the six months ended

 

    

June 30, 2019

 

June 30, 2018

    

June 30, 2019

 

June 30, 2018

Beginning balance

 

$

 —

 

$

22,959

 

$

 —

 

$

20,832

Additions

 

 

216

 

 

245

 

 

216

 

 

1,558

Change in fair value

 

 

171

 

 

2,572

 

 

171

 

 

3,386

Ending balance

 

$

387

 

$

25,776

 

$

387

 

$

25,776

 

As of June 30, 2018, the Company measured the fair value of the derivative by estimating the fair value of the convertible notes payable at certain conversion points. To calculate the fair value of the convertible notes payable with the conversion feature, the Company calculated the present value of the convertible notes payable upon conversion at a qualifying initial public offering in the second quarter of 2018, and the present value of the convertible notes payable at non-qualifying initial public offering in the last quarter of 2018. The Company estimated a probability of 75% for the occurrence of a qualifying initial public offering in the second quarter of 2018 and a probability of 25% in the last quarter of 2018. The Company’s derivative liabilities were measured at fair value using the Probability Weighted Expected Return valuation methodology.

As of June 30, 2019, the Company measured the fair value of the derivative by estimating the fair value of the Series A Convertible Preferred Stock as if conversion occurred on June 30, 2019. The Company calculated value of the conversion feature using the Fixed Conversion Price of the Series A Preferred Stock, as adjusted to 95% of the volume weighted average price of the common stock for the previous ten trading days and the specified floor price of $1.50.