Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2015

Note 4. Fair Value Instruments

Fair value measurements used by the Company for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements are based on the premise that fair value represents an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the input used in measuring fair value:


Level 1	–	Quoted process in active markets for identical assets or liabilities on the reporting date. Financial assets in Level 1 include the amounts held in money market accounts classified as cash equivalents.

Level 2	–	Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3	–	Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, third-party appraisals, discounted cash flow models, and fund manager estimates. Financial liabilities in this category include the Company’s preferred stock warrants.

The following table provides information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014, respectively:

	Balance at March 31, 2015		Level 1		Level 2		Level 3		Balance at December 31, 2014		Level 1		Level 2		Level 3
Asset included in:
Money Markets	$	1,816,071	$	1,816,071	$	—	$	—	$	3,608,890	$	3,608,890	$	—	$	—
Liabilities:
Growth Term Loan warrants	$	231,140	$	—	$	—	$	231,140	$	301,508	$	—	$	—	$	301,508
Preferred Stock warrants	$	120,418	$	—	$	—	$	120,418	$	429,035	$	—	$	—	$	429,035
Convertible Note warrants	$	727,737	$	—	$	—	$	727,737	$	—	$	—	$	—	$	—

There are no other financial instruments subject to fair value measurement on a recurring basis.

Transfers to/from Levels 1, 2, and 3 are recognized at the end of the reporting period. There were no transfers between levels for the three months ended March 31, 2015 or the year ended December 31, 2014. The Company used its May 2015 IPO pricing as an input for measurement of the fair value of its Level 3 preferred stock warrant liabilities at March 31, 2015 and the Black-Scholes option pricing model, and other valuation models for measuring the fair value of its Level 3 preferred stock warrant liabilities at December 31, 2014.

The Company’s warrant liabilities were categorized as Level 3 because they were valued based on unobservable inputs and management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments.

The March 31, 2015 and December 31, 2014 fair value assessments used the Black-Sholes option pricing model using the following assumptions:

	March 31, 2015	December 31, 2014
Fair value of Series B/C/D Stock and Series E Stock shares on grant date or measurement date	$0.01 – $0.12	$0.14 – $0.22
Exercise price	$0.01 – $0.346	$0.01 – $0.346
Expected risk-free interest rate	0.4 – 1.90%	1.20%
Expected volatility	55 – 75%	70%
Expected term	0.7 – 9.4 years	4.1 years
Expected dividend yield	0%	0 – 8%

The volatility assumption is based on the volatility of publicly traded industry competitors as adjusted for future expectations. The expected term was based on the Company’s historical experience and future expectations with regard to the exercise of the preferred stock warrants and the probability of conversion of the underlying preferred stock. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the warrants. At December 31, 2014 the fair value of the Company’s redeemable convertible preferred stock was determined by a valuation model that considered both income and market-based valuations of the Company’s enterprise value.

The expected dividend yield at December 31, 2014 is consistent with the dividend rate on the Company’s redeemable convertible preferred stock. The assumptions used in the Black-Scholes option pricing model are inherently subjective and involve significant judgment. Any change in the fair value was recognized as a component of other income (expense) in the statements of operations.

A reconciliation of the beginning and ending liabilities measured at fair value on a recurring basis using Level 3 inputs for March 31, 2015 and December 31, 2014 are as follows:


	March 31, 2015		December 31, 2014
Beginning balance	$	730,543	$	44,120
Issuance of Series E Warrants		—		2,190,708
Exercise of Series E Warrants		(4,116)		(1,889,201	)
Exercise of Series D Warrants		—		(4,020	)
Issuance of Convertible Note Warrants		741,828		—
Change in stock warrant valuation		(388,960)		388,936
Ending balance	$	1,079,295	$	730,543

- 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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