7. Warrant liability

On May 26, 2017, the Company issued 200,000 warrants to subscribe for Series A Preferred Shares at £0.01 each, which are exercisable at any time after May 26, 2017 provided that they have not otherwise lapsed in accordance with their terms. The warrants to subscribe for Series A Preferred Shares expire upon the earlier of (i) 10 years from their issuance date, or (ii) upon an IPO or exit unless an exercise delay notice is provided by the Series A warrant holder, in which case they will expire 12 months following an IPO or exit. On May 28, 2019, in conjunction with the completion of the IPO, 120,000 warrants to subscribe for Series A Preferred Shares were exercised for 171,480 ordinary shares. The holders of the remaining 80,000 warrants provided the Company with an exercise delay notice, which are exercisable into 114,320 ordinary shares following the completion of the IPO, as adjusted for the impact of the Share Capital Reorganization (Note 1).

On May 26, 2017, in conjunction with the issuance of 3,562,583 Series B1 Preferred Shares at a price per share of £11.2278, the Company issued 627,903 warrants to subscribe for Series B1 Preferred Shares with an exercise price of £0.01. In addition, on October 27, 2017, in conjunction with the issuance of 384,615 Series B1 Preferred Shares the Company issued a further 115,384 warrants to subscribe for Series B1 Preferred Shares with an exercise price of £0.01. In conjunction with the Series B2 Financing, the existing holders of warrants to subscribe for Series B1 preferred shares surrendered 194,911 warrants to subscribe for the same number of Series B1 preferred shares and the Company issued a further 194,911 warrants to subscribe for the same number of Series B1 preferred shares to the new investor. The transfer of warrants between investors did not have an impact to the valuation of the warrant liability, as this represents a transaction between shareholders and the Company did not issue any new instruments or change the rights and preferences of the underlying warrants to subscribe for Series B1 preferred shares.

On March 7, 2019, the holders of the Series B1 warrants to subscribe for Series B1 Preferred Shares agreed that 50% of the warrants would be exercised in conjunction with the IPO and 50% of the warrants would expire. The Company assessed this event as a modification to the terms of the Series B1 warrants and, remeasured the warrant liability immediately before and immediately after the modification, which resulted in an incremental change in fair value of $0.1 million, which is included in other expense for the six months ended June 30, 2019. On May 28, 2019, in conjunction with the completion of the IPO, all Series B1 Preferred share warrants were exercised for 531,077 ordinary shares, as adjusted for the impact of the Share Capital Reorganization (Note 1).

Prior to the completion of the IPO, the warrants to subscribe for Series A and Series B1 Preferred Shares were recorded as a liability and remeasured to fair value at each reporting date (Note 3). Changes in the fair value of the warrant liability were recognized as other expense, net in the consolidated statements of operations and comprehensive loss. Upon the closing of the IPO on May 28, 2019, warrants that were not exercised in conjunction with the IPO automatically became warrants to subscribe for ordinary shares, and meet the criteria to be classified as shareholders’ equity (deficit). As such, following the final remeasurement on May 28, 2019, the Company reclassified the carrying value of the warrant liability to additional paid-in-capital in the condensed consolidated balance sheet. The following table provides a roll-forward of the fair values of the Company’s warrant liability for which fair value was determined by Level 3 inputs (in thousands):


	Warrant
	Liability
Fair value at December 31, 2018	$	4,804
Change in fair value of warrant liability recorded as other expense		5,381
Conversion of warrant liability to equity upon closing of IPO and exercise of warrants		(10,021)
Impact of exchange rates on translation of warrant liability to USD included in accumulated other comprehensive income (loss)		(164)
Fair value at June 30, 2019	$	—

The warrant liability in the table above consisted of the fair value of warrants to subscribe for Series A and Series B1 Preferred Shares (see Note 6) and, prior to the IPO, was based on significant inputs not observable in the market, which represent a Level 3 measurement within the fair value hierarchy. The Company’s valuation of the warrants to subscribe for Series A and Series B1 Preferred Shares utilized the Black‑Scholes option‑pricing model, which incorporates assumptions and estimates to value the warrant liability. The Company assessed these assumptions and estimates on a quarterly basis prior to the closing of the IPO in May 2019.

The quantitative elements associated with the Company’s Level 3 inputs impacting the fair value measurement of the warrant liability included the fair value per share of the underlying Series A and Series B1 preferred shares or ordinary shares at the time of final remeasurement, into which the warrants were exercisable, the remaining contractual term of the warrants, risk‑free interest rate, expected dividend yield and expected volatility of the price of the underlying convertible preferred shares.

The most significant assumption in the Black‑Scholes option‑pricing model impacting the fair value of the warrant liability was the fair value of the Series A and Series B1 preferred shares, or ordinary shares at the time of final remeasurement, into which the warrant is exercisable as of each remeasurement date. Given the absence of an active market for the Company’s equity securities prior to the IPO, the Company determined the fair value per share of the convertible preferred shares underlying the warrants by taking into consideration the implied value derived from an independent third‑party valuation of the Company’s ordinary shares, adjusted for certain restrictions on the exercise of the B1 warrants per their contractual terms. Assumptions related to the remaining term, risk-free interest rate, expected dividend yield and expected volatility did not have an impact to the fair value of the warrants because the exercise price of the warrants was £0.01, and the fair value of the warrant was equal to the difference between the exercise price and the fair value regardless of the assumptions. The Company historically had been a private company and lacked company‑specific historical and implied volatility information of its shares. Therefore, it estimated its expected share volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk‑free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company had estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends. The following table presents the unobservable inputs to the fair value measurement of the warrant liability:


	Remeasurement upon closing
	of the IPO on May 28, 2019						December 31, 2018
	Series A			Series B1			Series A			Series B1
	Warrants			Warrants			Warrants			Warrants(1)
Risk free rate		2.2	%		2.1	%		2.6	%		2.5	%
Expected dividend yield		—	%		—	%		—	%		—	%
Expected term (years)		8.0			5.8			8.4			6.25
Expected volatility		74.7	%		78.2	%		75.4	%		79.6	%
Exercise price		£0.01			£0.01			£0.01			£0.01
Fair value of preferred shares or ordinary shares underlying the warrant	$	12.28		$	12.28		$	8.61		$	4.15

(1)

The fair value of the Series B1 preferred shares underlying the warrants to purchase Series B1 preferred shares at December 31, 2018 includes a 50% probability that the warrants will be not be exercisable prior to the IPO, based on their contractual terms.On March 7, 2019, the holders of the Series B1 warrants to subscribe for Series B1 Preferred Shares agreed that 50% of the warrants would be exercised in conjunction with the IPO and 50% of the warrants would expire