Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

7. Fair Value of Financial Instruments

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Recurring Fair Value Measurements

The carrying values of cash, restricted cash, prepaid expenses, accounts receivable, accounts payable and accrued expenses, and other short-term assets and liabilities approximate their respective fair values due to the short-term maturities of these assets and liabilities.

The following tables show assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:

	March 31, 2017
(in thousands)	Level 1		Level 2		Level 3
Assets:
Money market funds	$	7,386	$	—	$	—
Totals	$	7,386	$	—	$	—
Liabilities:
Silver Creek warrant liability	$	—	$	—	$	2,926
Totals	$	—	$	—	$	2,926

	December 31, 2016
(in thousands)	Level 1		Level 2		Level 3
Assets:
Money market funds	$	12,373	$	—	$	—
Totals	$	12,373	$	—	$	—
Liabilities:
Silver Creek warrant liability	$	—	$	—	$	1,499
Totals	$	—	$	—	$	1,499

In December 2016, Silver Creek issued warrants to purchase an aggregate of 1.9 million shares of Silver Creek Series C preferred stock (the “Silver Creek warrants”). During the first quarter of 2017, Silver Creek issued additional Silver Creek warrants to purchase an aggregate of 1.8 million shares of Silver Creek Series C preferred stock. The Silver Creek warrants were valued at $2.9 million and $1.5 million as of March 31, 2017 and December 31, 2016, respectively, using a Black-Scholes option pricing model, probability-weighted for different exercise scenarios. The key assumptions utilized in the Black-Scholes option pricing model as of March 31, 2017 were a risk-free interest rate of 2.2%, expected dividend yield of 0.0%, expected volatility of 62.2% and expected term of 6.9 years. The key assumptions utilized in the Black-Scholes option pricing model as of December 31, 2016 were a risk-free interest rate of 2.3%, expected dividend yield of 0.0%, expected volatility of 61.7% and expected term of 6.9 years. Changes in the fair value of the Silver Creek warrants are recognized as a component of “Other income, net” in the consolidated statements of operations and comprehensive loss.

There were no changes in valuation techniques or transfers between the fair value measurement levels during the three months ended March 31, 2017 or during the year ended December 31, 2016.

Other Fair Value Measurements

The estimated fair value of the Convertible Notes was $51.3 million as of March 31, 2017. The Company estimated the fair value of the Convertible Notes by using a quoted market rate in an inactive market, which is classified as a Level 2 input. The carrying value of the Convertible Notes was $47.9 million as of March 31, 2017 due to the bifurcation of the conversion feature of the Convertible Notes as described more fully in Note 10, “Borrowings.”

As discussed in Note 10, “Borrowings,” in December 2015, the Company closed a private placement of $175.0 million aggregate principal amount of 2022 Notes. The Company estimated the fair value of the 2022 Notes by using publicly-available information related to one of the 2022 Notes borrower’s portfolio of debt investments based on unobservable inputs, which is classified as a Level 3 input. The estimated fair value of the 2022 Notes was $172.7 million as of March 31, 2017. The carrying value of the 2022 Notes was $170.1 million as of March 31, 2017.