NOTE 5. FINANCIAL INSTRUMENTS

Cash, Cash Equivalents and Marketable Securities

The Company’s money market funds and marketable securities are categorized as Level 1 and 2, respectively, within the fair value hierarchy. The following table shows the cost, gross unrealized losses and fair value, with a breakdown by significant investment category, of the Company’s cash, cash equivalents and marketable securities as of December 31, 2018:

The following tables show information about the Company’s marketable securities that have been in a continuous unrealized loss position for less than 12 months and for 12 months or greater as of December 31, 2018 and 2017:

All marketable securities held by the Company as of December 31, 2018 will mature in one year or less.

The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. As of December 31, 2018, the Company considered the declines in market value of its marketable securities to be temporary in nature. The Company typically invests in highly-rated securities, and its investment policy generally limits the amounts that may be invested with any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the securities portfolio.

There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the year ended December 31, 2018.

Stock Warrants

All of the Company’s outstanding stock warrants are categorized as Level 3 within the fair value hierarchy. Stock warrants have been recorded at their fair value using either a probability weighted expected return model or the Black-Scholes option-pricing model. These models incorporate contractual terms, maturity, risk-free interest rates and volatility. The value of the Company’s stock warrants would increase if a higher risk-free interest rate was used, and would decrease if a lower risk-free interest rate was used. Similarly, a higher volatility assumption would increase the value of the stock warrants, and a lower volatility assumption would decrease the value of the stock warrants. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist.

In 2016, in connection with the Investment Agreement between the Company and Acacia Research Corporation (“Acacia”) and the convertible secured promissory note issued by the Company to Acacia (the “Acacia Note”), the Company issued three four-year warrants, each to purchase 51,437 shares of the Company’s common stock (the “Acacia Note Warrants”) and a five-year warrant (the “Primary Warrant”). The Company determined, using the Black-Scholes option-pricing model, that the fair values of the Acacia Note Warrants and the Primary Warrant were $841 and $8,064, respectively, at the time of issuance. The Company recorded the fair value of the Primary Warrant as a liability because its notional amount was not fixed, and recorded the Acacia Note Warrants as equity. In March 2017, each of the Primary Warrant and the Acacia Note Warrants was amended to provide that the exercise price thereof is equal to the lower of $13.6088 or the Company’s IPO price per share (which was $15.00). As of December 31, 2018 the Acacia Note Warrants were outstanding.

In connection with the funding of the Bridge Loan (see Note 8), in March 2017, April 2017 and May 2017, the Company issued to the Bridge Loan Lenders warrants to purchase shares of common stock (the “Bridge Loan Warrants”). Such warrants were automatically adjusted upon completion of the IPO. At issuance date, the Company determined the fair value of the Bridge Loan Warrants of $6,534 using the Black-Scholes option-pricing model. The Bridge Loan Warrants were recorded as equity and were outstanding at December 31, 2018.

The following table summarizes quantitative information with respect to the significant unobservable inputs used for the Bridge Loan Warrants that were categorized within the Level 3 fair value hierarchy at the time of issuance:

In May 2017, upon exercise of the Primary Warrant, the Company issued to Acacia a five-year warrant to purchase 809,400 shares of the Company’s common stock (the “10% Warrant”) at an exercise price of $13.6088. At the issuance date, the fair value of the 10% Warrant under Level 3 measurement was $5,790 using the Black-Scholes option-pricing model and was classified as equity. The 10% Warrant was outstanding at December 31, 2018.

The following table summarizes quantitative information with respect to the significant unobservable inputs used for the Company’s 10% Warrant at issuance:

In April 2018, in connection with the advisory agreement between the Company and a financial advisory firm, the Company issued such firm a five-year warrant to purchase up to 20,000 shares of the Company’s common stock (“April 2018 Warrant”). The April 2018 Warrant was fully vested and exercisable upon issuance and has an exercise price of $11.73 per share. The Company recorded these stock warrants at their fair value using the Black-Scholes option-pricing model. The holder is able to redeem the warrant for a number of shares equal to the in-the-money value of the warrant. The Company recorded the fair value of the award as a liability that is remeasured each reporting period. The April 2018 Warrant is outstanding at December 31, 2018.

The following table summarizes quantitative information with respect to the significant unobservable inputs that were used to value the April 2018 Warrant:

The following table represents a roll-forward of the fair value of the April 2018 Warrant, which was recorded within other accrued liabilities in the consolidated balance sheet during the year ended December 31, 2018:

The expense at issuance of the April 2018 Warrant has been recorded in general and administrative expense and the change in fair value has been recorded in other income (expense), net in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2018.