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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2018
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 4. FAIR VALUE MEASUREMENTS The Company records its financial assets and liabilities at fair value except for its debt, which is recorded at amortized cost. The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
| • | Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.
| • | Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices 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 assets or liabilities.
| • | Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis, as of March 31, 2018 and December 31, 2017 (in thousands):
|  | March 31, 2018 |
|  | Fair Value Measured Using |  |  |  |  |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total Balance |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 17,494 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,494 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | 1,816 |  |  | $ | 1,816 |
Common stock warrant liability |  |  | — |  |  |  | — |  |  |  | 13,247 |  |  |  | 13,247 |
Derivative liability |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total liabilities |  | $ | — |  |  | $ | — |  |  | $ | 15,063 |  |  | $ | 15,063 |
|  | December 31, 2017 |
|  | Fair Value Measured Using |  |  |  |  |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total Balance |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 13,097 |  |  | $ | — |  |  | $ | — |  |  | $ | 13,097 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | — |  |  | $ | — |  |  | $ | 1,672 |  |  | $ | 1,672 |
Common stock warrant liability |  |  | — |  |  |  | — |  |  |  | 18,712 |  |  |  | 18,712 |
Derivative liability |  |  | — |  |  |  | — |  |  |  | 14,600 |  |  |  | 14,600 |
Total liabilities |  | $ | — |  |  | $ | — |  |  | $ | 34,984 |  |  | $ | 34,984 |
The following table presents the issuances, changes in fair value and reclassifications of the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis (in thousands):
|  | (Level 3) |
|  | Contingent Consideration Liability |  |  | Common Stock Warrant Liability |  |  | Derivative Liability |  |  | Total |
Balance as of December 31, 2017 |  | $ | 1,672 |  |  | $ | 18,712 |  |  | $ | 14,600 |  |  | $ | 34,984 |
Exercise of warrants |  |  | — |  |  |  | (127 | ) |  |  | — |  |  |  | (127 | )
Conversion of JGB debt to common stock (Note 10) |  |  | — |  |  |  | — |  |  |  | (12,066 | ) |  |  | (12,066 | )
Reclassification to equity (Note 2) |  |  | — |  |  |  | (6,550 | ) |  |  | — |  |  |  | (6,550 | )
Change in estimated fair value |  |  | 144 |  |  |  | 1,212 |  |  |  | (2,534 | ) |  |  | (1,178 | )
Balance as of March 31, 2018 |  | $ | 1,816 |  |  | $ | 13,247 |  |  | $ | — |  |  | $ | 15,063 |
The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between Level 1, Level 2 and Level 3 categories during the periods presented. In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company’s instruments measured at fair value and their classification in the valuation hierarchy are summarized below:
| • | Money market funds - Investments in money market funds are classified within Level 1. At March 31, 2018 and December 31, 2017, money market funds were included on the balance sheets in cash and cash equivalents.
| • | Contingent consideration liability - As of March 31, 2018 and December 31, 2017, the Company had a contingent obligation to issue 227,845 shares of the Company’s common stock to the former owners of ImmuMetrix, Inc., or IMX, in conjunction with its acquisition of IMX in June 2014. The issuance of shares will occur if the Company completes 2,500 commercial tests involving the measurement of dd-cfDNA in organ transplant recipients in the United States by June 10, 2020. The fair value of the contingent consideration is estimated using the closing market price of the common stock multiplied by management’s estimate of the probability of achievement of the contingency condition disclosed above, as of each period end. The probability of achievement of a contingency condition is a significant input in the Level 3 measurement and ranged from 80% to 100% in presented periods. The changes in the fair value of $0.1 million and $(0.2) million were recorded as a change in estimated fair value of contingent consideration within the operating expenses during the three months ended March 31, 2018 and 2017, respectively. Increases (decreases) in the estimation of the probability percentage result in a directionally similar impact to the fair value of the contingent consideration liability.
| • | Common stock warrant liability – The Company utilizes a binomial-lattice pricing model (the Monte Carlo Simulation Model) that involves a market condition simulation to estimate the fair value of the warrants. The application of the Monte Carlo Simulation Model requires the use of a number of complex assumptions including the Company’s stock price, expected life of the warrants, stock price volatility determined from the Company’s historical stock prices and stock prices of peer companies in the diagnostics industry, and risk-free rates based on the implied yield currently available in the U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the warrants. Increases (decreases) in the assumptions discussed above result in a directionally similar impact to the fair value of the common stock warrant liability.
| • | Derivative liability –The Company utilized the Monte Carlo Simulation Model to estimate the fair value of the compound derivative liability recorded in connection with the JGB Debt. The Monte Carlo Simulation Model used multiple input assumptions to simulate the likelihood that market conditions will be achieved through 100,000 random trials. These assumptions included the expected term of the embedded derivative, the volatility of the Company’s stock prices and its peers’ stock prices over such expected term, likelihood, timing, and amount of future equity financing rounds, the likelihood of any prepayment or default events, the likelihood of monthly redemptions by the JGB Debt holders, and the likelihood and ability of JGB to convert the debt into equity. In each iteration of the simulations these assumptions were used to simulate the Company’s stock price drawing from a risk neutral distribution, the occurrence of a conversion event, the occurrence of a prepayment event, the occurrence of a default event, and any resulting payoff from such event. The average present value over all iterations of the simulation was then calculated. Increases (decreases) in the assumptions discussed above result in a directionally similar impact to the fair value of the derivative liability. The assumptions used in this simulation model were reviewed on a quarterly basis and adjusted, as needed. For the three months ended March 31, 2017 and from January 1, 2018 to March 27, 2018, the Company recorded the changes in fair value of the derivative liability of $0.8 million income and of $2.5 million income, respectively, in the change in estimated value of common stock warrant liability and derivative liability in its condensed consolidated statements of operations. The derivative liability was re-measured and fully extinguished upon the final JGB Debt conversion on March 27, 2018 (see Note 10).
Common Stock Warrant Liability and Derivative Liability Valuation Assumptions
|  | March 31, 2018 |  |  |  | December 31, 2017 |  |
Private Placement Common Stock Warrant Liability |  |  |  |  |  |  |  |  |  |
Stock Price |  | $ | 7.97 |  |  |  | $ | 7.34 |  |
Exercise Price |  | $ | 1.12 |  |  |  | $ | 1.12 |  |
Remaining term (in years) |  |  | 5.04 |  |  |  |  | 5.29 |  |
Volatility |  |  | 68.00 |  | % |  |  | 66.00 |  | %
Risk-free interest rate |  |  | 2.53 |  | % |  |  | 2.21 |  | %
Subsequent Financing Common Stock Warrant Liability |  |  |  |  |  |  |  |  |  |
Stock Price |  | $ | 7.97 |  |  |  | $ | 7.34 |  |
Exercise Price |  | $ | 4.00 |  |  |  | $ | 4.00 |  |
Remaining term (in years) |  | 5.21 |  |  |  |  | 5.46 |  |
Volatility |  |  | 67.00 |  | % |  |  | 65.00 |  | %
Risk-free interest rate |  |  | 2.54 |  | % |  |  | 2.21 |  | %
Placement Agent Common Stock Warrant Liability |  |  |  |  |  |  |  |  |  |
Stock Price |  | $ | 7.97 |  |  |  | $ | 7.34 |  |
Exercise Price |  | $ | 1.12 |  |  |  | $ | 1.12 |  |
Remaining term (in years) |  | 3.04 |  |  |  |  | 3.29 |  |
Volatility |  |  | 84.00 |  | % |  |  | 82.00 |  | %
Risk-free interest rate |  |  | 2.37 |  | % |  |  | 1.99 |  | %
JGB Common Stock Warrant Liability |  |  |  |  |  |  |  |  |  |
Stock Price |  |  | — |  |  |  | $ | 7.34 |  |
Exercise Price |  |  | — |  |  |  | $ | 4.67 |  |
Remaining term (in years) |  |  | — |  |  |  |  | 4.71 |  |
Volatility |  |  | — |  | % |  |  | 69.00 |  | %
Risk-free interest rate |  |  | — |  | % |  |  | 1.89 |  | %
Derivative Liability (final re-measurement at March 27, 2018) |  |  |  |  |  |  |  |  |  |
Stock Price |  | $ | 7.79 |  |  |  | $ | 7.34 |  |
Remaining term (in years) |  |  | 0.04 |  |  |  |  | 2.16 |  |
Volatility |  |  | 45.00 |  | % |  |  | 69.00 |  | %
Risk-free interest rate |  |  | 1.70 |  | % |  |  | 2.14 |  | %
The Company has determined that debt at similar interest rates and terms to its current debt is not currently available to the Company and therefore the Company is unable to calculate the fair value of its debt at March 31, 2018.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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