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Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
Fair Value of Financial Instruments
The fair values of the Company’s assets, including the money market funds, investments in marketable fixed income debt securities classified as cash and cash equivalents, investments in marketable fixed income debt securities classified as held-to-maturity and Flex Note receivable, measured on a recurring basis are summarized in the following tables, as applicable (in thousands):  
 
September 30, 2019
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Money market funds (1)
$
5,554

 
$
5,554

 
$

 
$

Fixed income debt securities classified as cash and cash equivalents
15,748

 

 
15,748

 

Fixed income debt securities classified as short-term investments
3,718

 

 
3,718

 

Flex note receivable
500

 

 
500

 

Total assets
25,520

 
5,554

 
19,966

 

 
December 31, 2018
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Money market fund (1)
$
154

 
$
154

 
$

 
$

Flex note receivable
750

 

 
750

 

Total assets
904

 
154

 
750

 


_______________________
(1) Included as a component of cash and cash equivalents on the accompanying condensed consolidated balance sheet.
As discussed in Note 10- Private Placement, the First Closing Warrants and Purchase Rights were determined to be liability classified. Therefore, they were stated at fair value at issuance and marked to market at each reporting date until shareholder approval was obtained in June 2019 that changed their classification from liability to equity. Series D 2X liquidation preference issued in connection with the issuance of Series D in 2016 and 2017 was also stated at fair value.
The First Closing Warrants, Purchase Rights and Series D 2X liquidation preference were considered Level 3 instruments because the fair value measurement was based, in part, on significant inputs not observed in the market. The Company determined the fair value of these three instruments as described below.
The following table summarizes the changes in Level 3 financial liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2019 and 2018 (in thousands). There were no activities for the three months ended September 30, 2019 and 2018.
 
Warrant Liability
Balance at December 31, 2018
$

 Initial warrant liability at issuance
3,611

 Change in fair value of warrants
3,315

 Reclassification from warrant liability to equity
(6,926
)
Balance at September 30, 2019
$

 
Purchase Rights Liability
Balance at December 31, 2018
$

 Initial purchase rights liability at issuance
3,183

 Change in fair value of purchase rights
19,617

 Reclassification from purchase rights liability to equity
(22,800
)
Balance at September 30, 2019
$

 
Series D 2X Liquidation Preference Liability
Balance at December 31, 2017
$
79,870

 Change in fair value of Series D 2X liquidation preference
130

 Redemption of Series D 2X liquidation preference upon conversion of Series D
(80,000
)
Balance at September 30, 2018
$


First Closing Warrants

The fair value of the First Closing Warrants issued in April 2019 in connection with the Private Placement and the change in fair value of warrants as a result of mark-to-market were determined using the Black-Scholes-Merton (BSM) option-pricing model based on the following weighted-average assumptions for the period indicated.
 
Nine Months Ended September 30, 2019
Expected volatility
75.0
%
Risk-free interest rate
2.2
%
Expected dividend yield
%
Expected term (years)
6.9


Purchase Rights

The fair value of the Purchase Rights issued during the First Closing in connection with the Private Placement and the change in fair value of Purchase Rights as a result of being marked to market at the time of their classification change from liability to equity upon stockholder approval of the Private Placement were determined using a combination of a lattice model and a BSM option-pricing model. The lattice model was used to determine a range of future value of the Company’s common stock as of the Second Closing. The BSM option-pricing model was used to determine the fair value of the warrants issued at the Second Closing and the existing warrants subsequently canceled at the Second Closing (see discussion of the warrants canceled in Note 10- Private Placement) based on the applicable assumptions, including the future value of the Company’s common stock as determined by the lattice model, warrants exercise price, time to expiration, expected volatility of the Company's peer group, risk-free interest rate and expected dividend. The fair value of the Purchase Rights was then calculated as the difference between the sum of the future value of the Company’s common stock and value of the Second Closing warrants, and the sum of the purchase price of $4.50 for the Second Closing and the value of canceled warrants. The fair value of the Purchase Rights was calculated through backward induction within the lattice model framework.
Series D 2X Liquidation Preference
As described in Note 2 to the 2018 Audited Financial Statements, under the terms of the Series D issued, in a liquidation transaction Private Evofem’s Series D participated, prior and in preference to the other series of convertible preferred stock and common stock, at a rate of two times its initial investment, plus accrued and unpaid dividends (the Series D 2X Liquidation Preference). The Company determined the Series D 2X Liquidation Preference represented an embedded derivative, which required bifurcation and separate liability accounting and was initially recorded at fair value. See the Series D Redeemable Convertible Preferred Stock discussion in Note 8 — Convertible Preferred Stock for the terms of the Series D.
To determine the final fair value of the Series D 2X liquidation preference, the Company utilized a hybrid valuation model that considers the probability of achieving certain exit scenarios, the Company’s cost of capital, the estimated period the Series D 2X liquidation preference would be outstanding, consideration received for the instrument with the Series D 2X liquidation preference and at what price and changes, if any, in the fair value of the underlying instrument to the Series D 2X liquidation preference. At December 31, 2017, the most significant assumption was the probability of occurrence, which was concluded to be high, and as a result the fair value as of December 31, 2017 approximated the final redemption value.
In connection with the Merger, Private Evofem converted 80 shares of Series D into the Company’s common stock. The valuations resulted in a concluded fair value of the Series D 2X liquidation preference of $80.0 million as of the Closing Date, which was reclassified from a Series D 2X liquidation preference to additional paid-in capital upon the conversion into the Company’s common stock.
The change in fair value of the Series D 2X liquidation preference for the nine months ended September 30, 2018 was $0.1 million. There was no such change for the three months ended September 30, 2018, and three and nine months ended September 30, 2019 as the Series D was converted into common stock in connection with the Merger.