Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2015

3. Fair Value of Financial Instruments

Cash, Cash Equivalents and Marketable Securities

All highly liquid investments that have maturities of three months or less when acquired are considered by the Company to be cash equivalents and are valued at cost, which approximates their fair market value. The Company classifies its marketable securities as “available-for-sale”, carries them at fair market value and classifies them as current assets on its balance sheets. Unrealized gains and losses on marketable securities are recorded as a separate component of accumulated other comprehensive income/(loss) included in stockholders’ equity. There were no charges taken for other-than-temporary declines in fair value of investments during the three and nine months ended September 30, 2015 and 2014.

The following tables shows the Company’s cash and available-for-sales securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or marketable securities as of September 30, 2015 and December 31, 2014:

	September 30, 2015
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities

Cash	$	10,842,926	$	—	$	—		$	10,842,926	$	10,842,926	$	—

Level 1 (1):
Money market funds	4,191,613		—		—			4,191,613		4,191,613		—
U.S. Treasury securities	24,090,948		12,652		—			24,103,600		—		24,103,600

Subtotal	28,282,561		12,652		—			28,295,213		4,191,613		24,103,600


Level 2 (2):
Repurchase agreements	23,000,000		—		—			23,000,000		23,000,000		—
U.S. agency securities	106,804,197		33,355		(3,607		)	106,833,945		1,000,170		105,833,775

Subtotal	129,804,197		33,355		(3,607		)	129,833,945		24,000,170		105,833,775


Total	$	168,929,684	$	46,007	$	(3,607	)	$	168,972,084	$	39,034,709	$	129,937,375

	December 31, 2014
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities

Cash	$	7,141,548	$	—	$	—		$	7,141,548	$	7,141,548	$	—

Level 1 (1):
Money market funds	29,064,011		—		—			29,064,011		29,064,011		—
U.S. Treasury securities	70,717,422		258		(19,040		)	70,698,640		—		70,698,640

Subtotal	99,781,433		258		(19,040		)	99,762,651		29,064,011		70,698,640


Total	$	106,922,981	$	258	$	(19,040	)	$	106,904,199	$	36,205,559	$	70,698,640

(1) The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or liabilities.

(2) The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term on the assets or liabilities.

As of September 30, 2015, the Company held $37.5 million of available-for-sale investment securities with contractual maturity dates of more than one year and less than two years. The Company did not hold any investment securities exceeding a two-year maturity.

Warrant Liability

At September 30, 2015, there is an outstanding warrant to purchase up to 20,161 shares of the Company’s common stock with a fair value recorded as a liability of $153,953 as it contains a cash settlement feature upon certain strategic transactions. The following table sets forth a summary of changes in the fair value of this warrant liability, which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs:

	Warrant Liability
Balance as of December 31, 2014	$	82,851
Changes in estimated fair value	71,102

Balance as of September 30, 2015	$	153,953

On each re-measurement date, the fair value of the warrant classified as a liability is estimated using the Black-Scholes option pricing model. For this liability, the Company develops its own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company’s common stock, stock price volatility, the contractual term of the warrants, risk-free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. The following assumptions were used at September 30, 2015 and December 31, 2014 to determine the warrant liability:

	September 30, 2015			December 31, 2014
	Common stock warrant liability			Common stock warrant liability
Estimated remaining term	6.59 years			7.34 years
Risk-free interest rate	1.67		%	1.99		%
Volatility	70		%	72		%
Dividend yield	0		%	0		%
Fair value of underlying instrument*	$	10.35		$	5.98

*Trevena, Inc. closing stock price.

The warrant liability is recorded on its own line item on the Company’s balance sheets and is marked-to-market at each reporting period with the change in fair value recorded on its own line in the statements of operations and comprehensive loss.

- 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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