Note 4. Fair Value

Financial assets and liabilities measured at fair value are classified in their entirety into the fair value hierarchy, based on the lowest level input significant to the fair value measurement. The following table classifies the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2015 and 2014, respectively into the fair value hierarchy:

	Balance at December 31, 2015
	Level 1		Level 2		Level 3		Total
Asset included in:
Cash and cash equivalents
Money market securities	$	3,290,490	$	—	$	—	$	3,290,490
Available-for-sale investments at fair value
U.S. government obligations	$	3,298,014	$	—	$	—	$	3,298,014
U.S. government agency obligations	$	—	$	14,589,378	$	—	$	14,589,378
Corporate debt securities	$	—	$	12,918,016	$	—	$	12,918,016

	Balance at December 31, 2014
	Level 1		Level 2		Level 3		Total
Asset included in:
Cash and cash equivalents
Money market securities	$	3,608,890	$	—	$	—	$	3,608,890
Liabilities included in:
Warrant liabilities
Growth Term Loan warrants	$	—	$	—	$	301,508	$	301,508
Convertible Preferred Stock warrants	$	—	$	—	$	429,035	$	429,035

There were no other financial instruments subject to fair value measurement on a recurring basis. Transfers to and from Levels 1, 2 and 3 are recognized at the end of the reporting period. There were no transfers between levels for the years ended December 31, 2015 and 2014.

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.

Fair values of these assets and liabilities are based on prices provided by independent market participants 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 for either of the years ended December 31, 2015 or 2014.

The Company’s portfolio of available-for-sale securities comprises U.S. Treasuries, U.S. government sponsored agency obligations and high credit quality corporate debt securities classified as available-for-sale securities. 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 3 instruments include Redeemable Convertible Preferred Stock warrant liabilities. 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 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 the Company’s IPO, there were no warrant liabilities outstanding at December 31, 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 Convertible Preferred Stock warrants and the probability of conversion of the underlying Convertible 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 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 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 and classified as Level 3 for the years ended December 31, 2015 and 2014 are as follows:

	December 31,
	2015			2014
Beginning balance	$	730,543		$	44,120
Issuance of Series E Convertible Preferred Stock Warrants		—			2,190,708
Exercise of Series E Convertible Preferred Stock Warrants		(4,116	)		(1,889,201	)
Exercise of Series D Convertible Preferred Stock Warrants		(91,798	)		(4,020	)
Reclassification of Series C-2 Convertible Preferred Stock Warrants to Common Stock Warrants		(555	)		—
Reclassification of Growth Term Loan Warrants to Common Stock Warrants		(229,550	)		—
Issuance of Convertible Note Warrants		741,828			—
Reclassification of Convertible Note Warrants to Common Stock Warrants		(1,386,035	)		—
Change in Convertible Preferred Stock warrant valuation		239,683			388,936
Ending balance	$	—		$	730,543