Fair Value Measurements

9 Months Ended

Sep. 30, 2014

3. Fair Value Measurements

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources.

The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3 — Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

The following fair value hierarchy table presents information about each major category of our financial assets and liabilities measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3		Total
September 30, 2014
Assets
Money market funds (cash equivalents)	$	46,877,800	$	—	$	—	$	46,877,800
Total assets	$	46,877,800	$	—	$	—	$	46,877,800
December 31, 2013
Assets
Money market funds (cash equivalents)	$	9,250,663	$	—	$	—	$	9,250,663
Total assets	$	9,250,663	$	—	$	—	$	9,250,663
Liabilities
Warrant liability	$	—	$	—	$	1,191,514	$	1,191,514
Total liabilities	$	—	$	—	$	1,191,514	$	1,191,514

We had outstanding warrants to purchase our Series B Preferred Stock, or the Series B Warrants, as of December 31, 2013. While the Series B Preferred Stock was outstanding, holders were able to redeem for cash upon an event that was not within our control, such as the liquidation of our preferred stock, as the preferred stockholders had voting control of our company and control of our board of directors, and therefore had the ability to trigger the liquidation of our preferred stock. As a result, the Series B Warrants were recorded as a warrant liability on our balance sheets with subsequent changes to fair value recorded on our statements of operations as change in fair value of warrant liability. In connection with our initial public offering during the third quarter of 2014, these warrants expired unexercised, and the Series B Preferred Stock underlying the Series B Warrants converted to common stock. As a result, the fair value of the Series B warrants recorded as a liability as of December 31, 2013 was reduced to zero as of September 30, 2014. On the grant date and in subsequent periods, we estimated the fair value of the preferred stock warrant liability using an option-pricing model, which requires inputs such as the expected volatility based on comparable public companies (75% - 80%), the estimated fair value of the Series B Preferred Stock ($0.63 - $1.51 per share), and the estimated time to liquidity (0.2 - 4 years). For this liability, we developed our own assumptions that do not have observable inputs or available market data to support the fair value.

The following tables set forth a summary of changes in the fair value of Level 3 preferred stock warrant liability for the nine months ended September 30, 2014 and 2013:

	Beginning of Period		Issuances		Exercises		Change in Fair Value			End of Period
Nine months ended September 30, 2013	$	1,344,200	$	—	$	—	$	(91,583	)	$	1,252,617
Nine months ended September 30, 2014	$	1,191,514	$	—	$	—	$	(1,191,514	)	$	—

- 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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