8. Fair Value Measurements

The Company measures and reports certain financial instruments at fair value on a recurring basis and evaluates its financial instruments subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them in each reporting period.

The Company determined that certain investments in debt securities classified as available-for-sale securities were Level 1 financial instruments.

Additional investments in corporate debt securities and commercial paper are considered Level 2 financial instruments because the Company has access to quoted prices but does not have visibility to the volume and frequency of trading for all of these investments. For the Company’s investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.

Foreign exchange derivatives not designated as hedging instruments are considered Level 2 fair value measurements. The Company’s foreign exchange derivative instruments are typically short-term in nature.

The Company also determined that the contingent consideration, described further below, was a Level 3 financial instrument.

The fair value of these instruments as of March 31, 2018 and December 31, 2017 was as follows (in thousands):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
As of March 31, 2018:
Cash equivalents:
U.S. Treasury money market funds	$	10,777	$	—	$	—
Commercial paper	$	—	$	6,896	$	—
Short-term investments:
U.S. government securities	$	11,895	$	—	$	—
Asset backed securities			$	7,102
Corporate securities	$	—	$	17,526	$	—
Commercial paper	$	—	$	26,339	$	—
Liabilities:
Contingent consideration	$	—	$	—	$	11,814
Foreign exchange derivatives not designated as hedging instruments	$	—	$	56	$	—
As of December 31, 2017:
Cash equivalents:
U.S. Treasury money market funds	$	4,540	$	—	$	—
Commercial paper	$	—	$	1,029	$	—
Repurchase agreements	$	—	$	2,500	$	—
Short-term investments:
U.S. government securities	$	11,885	$	—	$	—
Asset backed securities			$	8,383
Corporate securities	$	—	$	22,082	$	—
Commercial paper	$	—	$	29,842	$	—
Other assets:
Foreign exchange derivatives not designated as hedging instruments	$	—	$	40	$	—
Liabilities:
Contingent consideration	$	—	$	—	$	11,948

Pursuant to the acquisition of certain assets, liabilities, and subsidiaries of Serendex A/S through is wholly-owned Danish subsidiary, Savara ApS on July 15, 2016, Savara agreed to pay the seller, in addition to a stipulated amount of shares of Savara’s common stock, (i) $5.0 million upon receipt of marketing approval of Molgradex by the European Medicines Agency, (ii) $15.0 million upon receipt of marketing approval of Molgradex by the FDA, and (iii) $1.5 million upon receipt of marketing approval of Molgradex by the Japanese Pharmaceuticals and Medical Devices Agency (the “Contingent Milestone Payments”). The Company estimates the likelihood of approval in each region, separately, based on the product candidate’s current phase of development and utilizing published studies of clinical development success rates for comparable non-oncology orphan drugs. The present value of the potential cash outflows from the probability weighted Contingent Milestone Payments is then estimated by taking into consideration that the Contingent Milestone Payments are similar to a business expense of the Company and would be senior to any Company debt obligations. The resulting weighted average present value factor is then applied to discount the probability adjusted Contingent Milestone Payments for each region to derive the fair value of the Contingent Milestone Payments.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments (in thousands) for the three months ended March 31, 2018 and year ended December 31, 2017:

	Warrant Liability			Put options on convertible promissory notes			Contingent Consideration
As of December 31, 2016	$	303		$	979		$	9,708
Change in fair value		67			169			2,240
Put option at issuance of convertible promissory notes		—			828			—
Conversion of convertible promissory notes					(1,976	)
Reclassification of warrant liability to common equity upon Merger		(370	)		—			—
Balance at December 31, 2017	$	—		$	—		$	11,948
Change in fair value		—			—			(134	)
Balance at March 31, 2018	$	—		$	—		$	11,814

The Company records changes in fair value of the contingent consideration in general and administrative expense.

In June 2017, the Company determined that there would be a change to the Molgradex program due to the FDA’s guidance on the clinical program requirements for a New Drug Application submission in the U.S. related to the Molgradex product, which was issued in May 2017. Based on the FDA's guidance, the Company modified certain criteria of its Molgradex development program which the Company believes will accelerate the development timeline in the U.S. The Company accordingly accounted for this change in its valuation of the contingent consideration as of June 30, 2017. Additionally, in the first quarter of 2018, Savara received approval from the FDA of its expansion of the Molgradex Phase 3 Study for PAP into the U.S. to support its expedited U.S. development strategy for Molgradex. However, in order to achieve sufficient support for the study endpoints and outcome, the sample size of the study will be increased resulting in the extension of the patient enrollment completion dates, and hence, the approval dates of Molgradex, by approximately two calendar quarters. The Company likewise accounted for this change in its valuation of the contingent consideration as of March 31, 2018.

The Company also accounted for the time value of money related to the Contingent Milestone Payments from December 31, 2017 to March 31, 2018 in its assessment. Accordingly, the related contingent consideration liability was remeasured to $11.8 million as of March 31, 2018 reflecting a change in fair value of $0.1 million for the three months ended March 31, 2018.

The Company did not transfer any assets measured at fair value on a recurring basis to or from Level 1, Level 2 and Level 3 during the three months ended March 31, 2018 and year ended December 31, 2017.