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.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. We measure the fair values of these assets and liabilities based on prices provided by independent market participant that are based on observable inputs using market-based valuation techniques. These valuation models and analytical tools use market pricing or similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company did not adjust any of the valuations received from these third parties with respect to any of its level 1 securities at June 30, 2015 or December 31, 2014.

Our portfolio of securities comprises U.S. Treasuries, U.S. government sponsored agency obligations and high credit quality corporate debt securities classified as available-for-sale securities. Unrealized gains and losses will be included in accumulated other comprehensive income, net of tax. Realized gains, realized losses and declines in value of securities judged to be other-than-temporary, will be included in other income (expense). For the period-ended June 30, 2015, the amortized cost of investments held-for-sale approximated its fair value.

The following table provides information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014, respectively:

	Balance at June 30, 2015		Level 1		Level 2		Level 3		Balance at December 31, 2014		Level 1		Level 2		Level 3
Asset included in:
Cash and cash equivalents
Money market securities	$	9,666,594	$	9,666,594			$	—	$	3,608,890	$	3,608,890	$	—	$	—
Corporate debt securities	$	1,499,462	$	—	$	1,499,462	$	—	$	—	$	—	$	—	$	—
Investments at fair value
U.S. government obligations	$	3,307,680	$	3,307,680	$	—	$	—	$	—	$	—	$	—	$	—
U.S. government agency obligations	$	14,717,062	$	—	$	14,717,062	$	—	$	—	$	—	$	—	$	—
Corporate debt securities	$	14,844,827	$	—	$	14,844,827	$	—	$	—	$	—	$	—	$	—
Liabilities:
Growth Term Loan warrants	$	—	$	—	$	—	$	—	$	301,508	$	—	$	—	$	301,508
Preferred Stock warrants	$	—	$	—	$	—	$	—	$	429,035	$	—	$	—	$	429,035

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

Initial investment in available-for-sale securities was made during the quarter ended June 30, 2015 as a result of funding received through the Company’s IPO.

Level 1 instruments include investments in money market funds and U.S. Treasuries. These instruments are valued using quoted market prices for identical unrestricted instruments in active markets. The Company defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity. Level 2 instruments include U.S. Government agency obligations and corporate debt securities. Valuations of Level 2 instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g. indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

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 and six months ended June 30, 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 May 11, 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 outstanding preferred stock warrants were converted to common stock warrants in connection with the closing of the Company’s IPO.

The Company’s warrant liabilities at December 31, 2014 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. As a result of their conversion to common stock warrants on May 11, 2015 with our IPO, there were no warrant liabilities outstanding at June 30, 2015.

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

	December 31, 2014
Fair value of Series B/C/D Stock and Series E Stock shares on grant date or measurement date	$0.14 - $0.22
Exercise price	$0.01 - $0.346
Expected risk-free interest rate		1.20%
Expected volatility		70%
Expected term	4.1 years
Expected dividend yield	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 June 30, 2015 and June 30, 2014 are as follows:

	June 30, 2015			June 30, 2014
Beginning balance	$	730,543		$	44,120
Issuance of Series E Preferred Stock Warrants		—			1,890,000
Exercise of Series E Preferred Stock Warrants		(4,116	)		(1,890,000	)
Exercise of Series D Preferred Stock Warrants		(91,798	)		—
Reclassification of Series C-2 Warrants to Common Stock Warrants		(555	)		—
Reclassification of Growth Term Loan Warrants to Common Warrants		(229,550	)		—
Issuance of Convertible Note Warrants		741,828			—
Reclassification of Convertible Note Warrants to Common Stock Warrants		(1,386,035	)		—
Change in preferred stock warrant valuation		239,683			56,322
Ending balance	$	—		$	100,442