Fair Value Measurements

9 Months Ended

Sep. 30, 2020

4. Fair Value Measurements

Financial instruments consist of cash equivalents, restricted cash, accounts receivable, other assets accounted for at fair value, accounts payable, accrued liabilities, and warrants liability. Cash equivalents, restricted cash, and warrants liability are stated at fair value on a recurring basis. Accounts receivable, accounts payable, and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. The carrying amount of the Company’s outstanding debt approximates the fair value as the debt bears a floating rate that approximates the market interest rate.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring and nonrecurring basis and indicates the fair value hierarchy of the valuation (in thousands):


	As of September 30, 2020
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents:
Money market funds	$	980,254	$	980,254	$	—	$	—
Restricted cash:
Certificates of deposit		80,912		—		80,912		—

Total	$	1,061,166	$	980,254	$	80,912	$	—


	As of December 31, 2019
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents:
Money market funds	$	650,498	$	650,498	$	—	$	—
Restricted cash:
Certificates of deposit		102,904		—		102,904		—
Prepaid expenses and other current assets:
Assets held for sale		980		—		—		980

Total	$	754,382	$	650,498	$	102,904	$	980

Liabilities:
Warrants liability	$	42,628	$	—	$	—	$	42,628

Total	$	42,628	$	—	$	—	$	42,628

Certificates of Deposit

The Company’s Level 2 instruments consist of restricted cash invested in certificates of deposit. The fair value of such instruments are estimated based on valuations obtained from third-party pricing services that utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include interest rate curves, foreign exchange rates, and credit ratings.

Gross unrealized gains or losses for cash equivalents as of September 30, 2020 and December 31, 2019 were not material.

Warrants Liability

In connection with the completion of the Company’s Direct Listing, all of the outstanding warrants to purchase shares of redeemable convertible and convertible preferred stock converted into warrants to purchase shares of Class B common stock. As a result, the Company reclassified the warrants liability to additional

paid-in

capital. Immediately prior to the Direct Listing and the reclassification to additional

paid-in

capital, the fair value of the warrants liability was estimated using a Black Scholes model and considered the closing price of the Company’s common stock on the first day of trading, the strike price of the warrants, the remaining term of the warrants, a risk-free interest rate that corresponds to the remaining term, and the volatility of comparable companies.

For the year ended December 31, 2019, the warrants liability was included in other noncurrent liabilities in the condensed consolidated balance sheet and the fair value of the warrant liability was estimated using a combination of an option-pricing model and a Monte Carlo simulation model with equal weighting applied to both models in determining the fair values. These models consider many assumptions, including the likelihood of various potential liquidity events, the nature and timing of such potential events, actions taken with regard to the warrants at expiration, as well as discounts for lack of marketability of the underlying securities and warrants.

The assumptions used to calculate the warrants liability as of September 29, 2020, the date immediately before the Direct Listing, and December 31, 2019 were as follows:


	September 29, 2020	December 31, 2019
Discounts for lack of marketability	—	20.0% - 28.0%
Fair value of underlying securities	$9.50	$6.81 - $8.04
Expected volatility	66.0%	66.0%
Dividend rate	—	—
Risk-free interest rate	0.1%	1.3%

The following table sets forth a summary of the changes in the estimated fair value of the Company’s warrants liability (in thousands):


Balance as of December 31, 2019	$	42,628
Net exercises in the period		(10,810	)
Change in fair value of warrants		(811	)
Reclassification to additional paid-in capital as a result of conversion of preferred stock warrants to common stock warrants		(31,007	)

Balance as of September 30, 2020	$	—