Fair Value Measurements and Available for Sale Investments

Fair Value Measurements

Our financial instruments consist principally of cash, cash equivalents, restricted cash, short-term and long-term investments, receivables, accounts payable, notes payable and, through January 31, 2017, preferred stock warrant liabilities. Certain of our financial assets and liabilities have been recorded at fair value in the consolidated balance sheet in accordance with the accounting standards for fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

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 supported by little or no market activities, therefore requiring an entity to develop its own assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes our assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy:



	Fair Value Measurements at End of Period Using:
(in thousands)	Fair Value		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At June 30, 2018
Money market funds⁽¹⁾	$	46,756	$	46,756	$	—	$	—
Mutual funds⁽¹⁾	5,078		5,078		—		—
U.S. treasury securities⁽²⁾	100,188		100,188		—		—
Agency securities⁽²⁾	57,659		—		57,659		—
Commercial and corporate obligations⁽¹⁾⁽²⁾	88,229		—		88,229		—
At December 31, 2017
Money market funds⁽¹⁾	$	41,318	$	41,318	$	—	$	—
Mutual funds⁽¹⁾	28,817		28,817		—		—
U.S. treasury securities⁽²⁾	79,397		79,397		—		—
Agency securities⁽²⁾	59,948		—		59,948		—
Commercial and corporate obligations⁽²⁾	111,660		—		111,660		—


⁽¹⁾	Included in cash and cash equivalents, and restricted cash in the accompanying consolidated balance sheets.


⁽²⁾	Included in short-term or long-term investments in the accompanying consolidated balance sheets depending on the respective maturity date.

The following methods and assumptions were used to estimate the fair value of our financial instruments for which it is practicable to estimate that value:

Marketable Securities. For fair values determined by Level 1 inputs, which utilize quoted prices in active markets for identical assets, the level of judgment required to estimate fair value is relatively low. For fair values determined by Level 2 inputs, which utilize quoted prices in less active markets for similar assets, the level of judgment required to estimate fair value is also considered relatively low.

Warrant Liabilities. Our preferred stock warrants were accounted for as derivative liabilities and measured at fair value on a recurring basis through January 31, 2017 as they contained features that were either not afforded equity classification or embodied risks that were not clearly and closely related to host contracts. We estimated the fair value of these derivatives utilizing the Black-Scholes option-pricing model, which required Level 3 inputs.

As discussed in Note 1 above, all of the outstanding warrants to purchase shares of preferred stock automatically converted into warrants to purchase shares of common stock in connection with the IPO and are accounted for as equity from the conversion date forward. Prior to the conversion, we estimated the fair value of convertible preferred stock warrants at the time of issuance and upon subsequent remeasurement using the Black-Scholes option-pricing model at each reporting date.

Estimating fair values of derivative financial instruments, including Level 3 instruments, requires the use of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors, including changes in the estimated fair value of our equity securities.

The following weighted-average assumptions were utilized in estimating the value of the liabilities for Series C preferred stock warrants using the Black-Scholes option-pricing model as of January 31, 2017, the conversion date:



	January 31, 2017
Fair value of preferred stock	$	16.95
Exercise price	$	4.55
Risk-free interest rate	1.4		%
Volatility	88.8		%
Dividend Yield	—		%
Contractual term (in years)	3.8
Weighted-average measurement date fair value per share	$	13.71

The following table summarizes the activity in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 Inputs):



	Six Months Ended June 30,
(in thousands)	2017
Preferred Stock Warrant Liabilities:
Beginning balance	$	(3,241	)
Net gains (losses) included in other expense	(1,366		)
Reclassification of warrant liabilities to equity	4,607
Ending balance	$	—

Fair Value of Other Financial Instruments

The fair value of our other financial instruments estimated as of June 30, 2018 and December 31, 2017 are presented below:



	June 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Notes payable	$	11,620	$	12,625	$	14,428	$	15,650

The following methods and assumptions were used to estimate the fair value of our notes payable:

Notes Payable—We use the income approach to value the aforementioned debt instrument. We use a present value calculation to discount principal and interest payments and the final maturity payment on these liabilities using a discounted cash flow model based on observable inputs. We discount these debt instruments based on what the current market rates would offer us as of the reporting date. Based on the assumptions used to value these liabilities at fair value, these debt instruments are categorized as Level 2 in the fair value hierarchy.

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, Australian tax incentive receivable, accounts payable, and accrued expenses approximate fair value due to their short-term nature.

Available for Sale Investments

We invest our excess cash in agency securities, debt instruments of financial institutions and corporations, commercial obligations, and U.S. Treasury securities, which we classify as available-for-sale investments. These investments are carried at fair value and are included in the tables above. The aggregate market value, cost basis, and gross unrealized gains and losses of available-for-sale investments by security type, classified in cash equivalents, short-term and long-term investments as of June 30, 2018 are as follows:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Total Fair Value
Agency securities⁽¹⁾	$	57,902	$	—	$	(244	)	$	57,658
Commercial and corporate obligations⁽²⁾	88,488		—		(259		)	88,229
US Treasury securities⁽³⁾	100,362		2		(176		)	100,188
Total available-for-sale investments	$	246,752	$	2	$	(679	)	$	246,075


⁽¹⁾	Of our outstanding agency securities, $43.8 million have maturity dates of less than one year and $13.9 million have a maturity date of between one to two years as of June 30, 2018.


⁽²⁾	Of our outstanding commercial and corporate obligations, $82.3 million have maturity dates of less than one year and $5.9 million have a maturity date of between one to two years as of June 30, 2018.


⁽³⁾	Of our outstanding U.S. Treasury securities $87.2 million have maturity dates of less than one year and $13.0 million have a maturity date of between one to two years as of June 30, 2018.