Fair Value Measurements

12 Months Ended

Dec. 31, 2016

3.	Fair Value Measurements

For a description of the fair value hierarchy and our fair value methodology, see “Note 2 – Summary of Significant Accounting Policies”. As of December 31, 2016 and 2015, the Company’s highly liquid money market funds included within cash equivalents, U.S. government agency securities and restricted cash including deposit in an escrow account are financial assets that are valued using Level 1 inputs. The Company classifies its municipal bonds and corporate notes as Level 2. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. There were no transfers in or out of Level 1 and Level 2 during the periods presented.

Liabilities that are measured at fair value consist of the derivative liability and the warrant for convertible preferred stock that utilize Level 3 inputs. There were no transfers in or out of Level 3 during the periods presented.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015 (in thousands):

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Financial assets:
Money market funds⁽¹⁾	$	10,156		—		—	$	10,156
Restricted cash (money market funds)⁽²⁾		19,593		—		—		19,593
U.S. government agency securities⁽³⁾		6,800		—		—		6,800
Total financial assets	$	36,549	$	—	$	—	$	36,549
Financial liabilities:
Derivative liability⁽⁴⁾		—		—		—	$	—
Total financial liabilities	$	—	$	—	$	—	$	—

(1)	Included in Cash and Cash Equivalents on accompanying consolidated balance sheets.

(2)	$19.4 million of restricted cash serves as full collateral for the redeemable convertible notes and $125,000 of restricted cash serves as collateral for the Company’s corporate credit card and deposit for its facility lease.

(3)	Included in Short Term Investments on accompanying consolidated balance sheets.

	December 31, 2015
	Level 1		Level 2		Level 3		Total
Financial assets:
Money market funds⁽¹⁾	$	28,927	$	—	$	—	$	28,927
Restricted cash (money market funds)⁽²⁾		33,919		—		—		33,919
Municipal bonds⁽³⁾		—		296		—		296
Corporate notes⁽³⁾		—		3,106		—		3,106
Total financial assets	$	62,846	$	3,402	$	—	$	66,248
Financial liabilities:
Derivative liability⁽⁴⁾	$	—	$	—	$	1,156	$	1,156
Total financial liabilities	$	—	$	—	$	1,156	$	1,156

(1)	Included in Cash and Cash Equivalents on accompanying consolidated balance sheets.

(2)	$33.8 million of restricted cash serves as full collateral for the redeemable convertible notes and $125,000 of restricted cash serves as collateral for the Company’s corporate credit card and deposit for its facility lease.

(3)	Included in Short Term Investments on accompanying consolidated balance sheets.

(4)

The fair value of the derivative liability is measured using the Black-Scholes option-pricing valuation model. Inputs used to determine the estimated fair value of the conversion option include the fair value of the underlying common stock at the valuation measurement date, the remaining contractual term of the conversion option, risk-free interest rates, expected dividends and expected volatility of the price of the underlying common stock. In addition, the Company estimated the convertible redeemable note exchange rate based on an analysis of its actual exchange of notes for cash redemption or exchange of notes for conversion to common stock. See Note 9 - Redeemable Convertible Notes for further detail.

The following table presents the activity for the derivative liability measured at estimated fair value using unobservable inputs for the year ended December 31, 2016 (in thousands):

	Derivative Liability
Balance as of December 31, 2015	$	1,156
Change in fair value included in interest and other income		(1,057	)
Gain on extinguishment of redeemable convertible notes		(99	)
Balance as of December 31, 2016	$	—

As of December 31, 2016 the fair value of the derivative liability was immaterial. The estimated reporting date fair value-based measurement of the derivative liability was calculated using the Black-Scholes valuation model, based on the following weighted-average assumptions for the year ended December 31, 2016:

	As of December 31,
	2016			2015
Expected term	1.01			2.00
Expected volatility		80.6	%		81.7	%
Risk-free interest rate		1.20	%		1.06	%
Expected dividend yield		0	%		0	%

- 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.

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