Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v3.19.1
Fair Value Measurements
 12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]
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 December 31, 2018 and 2017 by level within the fair value hierarchy, are as follows:
 
 
 
December 31, 2018
 
 
 
Quoted prices

in active

markets
 
 
Significant

other

observable

inputs
 
 
Significant

unobservable

inputs
 
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Warrant liability
 
$
-
 
 
$
-
 
 
$
209,909
 
Derivative liability
 
$
-
 
 
$
-
 
 
$
-
 
 
 
 
December 31, 2017
 
 
 
Quoted prices

in active

markets
 
 
Significant

other

observable

inputs
 
 
Significant

unobservable

inputs
 
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Warrant liability
 
$
-
 
 
$
-
 
 
$
1,227,786
 
Derivative liability
 
$
-
 
 
$
-
 
 
$
20,832,000
 
 
There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2018 and 2017.
 
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 years ended December 31, 2018 and 2017:
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
Beginning balance
 
$
1,227,786
 
 
$
1,619,287
 
Additions
 
 
241,000
 
 
 
3,917,977
 
Change in fair value
 
 
8,051,196
 
 
 
(4,309,478
)
Reclassification to equity at initial public offering
 
 
(9,310,073
)
 
 
-
 
Ending balance
 
$
209,909
 
 
$
1,227,786
 
 
The changes in fair value of the warrant liability are recorded in change in fair value of warrant liability in the 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 December 31, 2018 and 2017 is as follows:
  
 
 
As of December 31,
 
 
 
2018
 
 
2017
 
Common Unit/Stock Price
 
$
3.42
 
 
$
0.10
 
Term (Years)
 
 
4.27
 
 
 
4.46
 
Volatility
 
 
58
%
 
 
58
%
Risk-free rate of interest
 
 
2.58
%
 
 
2.15
%
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 years ended December 31, 2018 and 2017:
 
 
 
For the year ended December 31,
 
 
 
2018
 
 
2017
 
Beginning balance
 
$
20,832,000
 
 
$
-
 
Additions
 
 
7,886,125
 
 
 
13,058,000
 
Write-off on extinguishment of convertible notes payable
 
 
-
 
 
 
(1,266,000
)
Change in fair value
 
 
14,293,963
 
 
 
9,040,000
 
Reclassification to equity at initial public offering
 
 
(43,012,088
)
 
 
-
 
Ending balance
 
$
-
 
 
$
20,832,000
 
 
As of December 31, 2017, 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 IPO in the second quarter of 2018, and the present value of the convertible notes payable at non-qualifying IPO in the fourth quarter of 2018. The Company estimated a probability of 50% for the occurrence of a qualifying IPO in the second quarter of 2018 and a probability of 50% in the fourth quarter of 2018.
 
As of July 25, 2018, the date of the Company’s successful initial public offering, the Company measured the fair value of the derivative by estimating the fair value using the offering price of $5.00. On July 25, 2018, the derivative liability was reclassified to equity upon the Company’s initial public offering.
 
The Company’s derivative liabilities are measured at fair value using the Probability Weighted Expected Return valuation methodology. A summary of the weighted average significant unobservable inputs (Level 3 inputs) used in measuring the Company’s embedded conversion options that is categorized within Level 3 of the fair value hierarchy as of July 25, 2018 and December 31, 2017 are as follows:
 
 
 
July 25, 2018
 
 
December 31, 2017
 
Common Stock Price
 
$
5.00
 
 
$
0.10
 
Term (Years)   
 
 
0.50
 
 
 
1.00
 
Volatility   
 
 
65
%
 
 
52
%
Risk-free rate of interest
 
 
2.20
%
 
 
1.76
%
Dividend Yield   
 
 
0.0
%
 
 
0.0
%