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:

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Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities.

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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.

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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:

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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.

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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.

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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.

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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.