Fair Value Measurements

12 Months Ended

Dec. 31, 2016

3.	Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). At December 31, 2016 and 2015 the carrying amount of prepaid expenses, accounts payable and accrued liabilities approximated their estimate fair value due to their relatively short maturities. Management believes the terms of the Notes and long term debt reflect current market conditions for an instrument with similar terms and maturity, therefore the carrying value of the Company’s debt approximated its fair value.

Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s money market funds are classified as Level 1 because they are valued using quoted market prices. The Company’s marketable securities consist of available-for-sale securities and are classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data. The Company’s financial instruments as of December 31, 2015 included a warrant liability and an obligation to issue common stock in connection with the asset purchase agreement with Eiccose, LLC (“Eiccose”) (see Note 7), which were classified as Level 3.

As of December 31, 2015, in order to determine the fair value of the Company’s warrant liability and the obligation to issue common stock in connection with the Eiccose asset purchase agreement, the Company engaged an independent third-party valuation expert to determine the fair value of these instruments based on the common stock value which is based on probability weighted scenarios, each based on an income approach. The income approach estimates enterprise value based on the expectation of future cash flows that the Company will generate over the forecast horizon and a terminal value at the end of the forecast horizon. These future cash flows and terminal value are discounted to their present values using a discount rate based upon the required rate of return based on the risks associated with the investment. Upon settlement in March 2016, the Company remeasured the fair value of the Company’s warrant liability and the obligation to issue common stock in connection with the Eiccose asset purchase agreement based on the fair value of the common stock that was issued upon settlement of these instruments.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the periods presented.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Financial Assets:
Money market funds	$	9,657	$	—	$	—	$	9,657
Corporate debt securities		—		11,469		—		11,469
Commercial paper		—		22,891		—		22,891
Total	$	9,657	$	34,360	$	—	$	44,017

	December 31, 2015
	Level 1		Level 2		Level 3		Total
Financial liabilities:
Warrant liability	$	—	$	—	$	885	$	885
Obligation to issue common stock		—		—		1,457		1,457
Total	$	—	$	—	$	2,342	$	2,342

There were no financial liabilities as of December 31, 2016. There were no financial assets as of December 31, 2015.

The following table provides a reconciliation of liabilities measured at fair value using Level 3 significant unobservable inputs (in thousands):

	Year Ended December 31,
	2016			2015
Balance, beginning of period	$	2,342		$	—
Issuance of common stock warrants		—			885
Initial recognition of obligation to issue common stock to Eiccose		—			1,457
Change in fair value of common stock warrants and obligation to issue common stock to Eiccose ⁽¹⁾		369			—
Settlement of warrant liability upon exercise of common stock warrants		(1,050	)		—
Settlement of Eiccose obligation upon issuance of common stock		(1,661	)		—
Balance, end of period	$	—		$	2,342

(1)	Changes in fair value of the obligation to issue common stock and the common stock warrant liability are recorded in other expense, net on the accompanying consolidated statements of operations.

The following table summarizes the estimated value of the Company’s cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands):

	December 31, 2016
	Amortized cost		Unrealized gain		Unrealized loss			Estimated Fair Value
Cash equivalents:
Money market funds		9,657		—		—			9,657
Corporate debt securities		2,180		—		—			2,180
Total cash equivalents	$	11,837	$	—	$	—		$	11,837
Marketable securities:
Corporate debt securities	$	9,294	$	—	$	(5	)	$	9,289
Commercial paper		22,901		3		(13	)		22,891
Total marketable securities	$	32,195	$	3	$	(18	)	$	32,180

As of December 31, 2016, the contractual maturity of the available-for-sale marketable securities is less than one year. There were no cash equivalents and marketable securities at December 31, 2015.

- 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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