Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Measurements

Fair Value Measurements

3. Fair Value Measurements

The carrying amounts of accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, which is considered a Level 2 input as described below, the Company believes that the fair value of long-term debt approximates its carrying value.

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

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 require the reporting entity to develop its own assumptions.

Financial assets measured at fair value on a recurring basis consist of the Company’s cash equivalents. As of September 30, 2013 and December 31, 2012, the carrying amount of cash equivalents was $0.3 million and $1.3 million, respectively, which approximates fair value and was determined based upon Level 1 inputs. Cash equivalents primarily consisted of money market funds. As of September 30, 2013 and December 31, 2012, the Company did not hold any Level 2 or Level 3 financial assets that are recorded at fair value on a recurring basis.

Financial liabilities that are measured at fair value on a recurring basis include the preferred stock warrant liability and exchangeable shares (see Note 2). None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

Liabilities measured at fair value on a recurring basis are as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
As of September 30, 2013:
Warrant liability	$	163	$	—	$	—	$	163
Exchangeable share liability	2,885		—		—		2,885
Total liabilities	$	3,048	$	—	$	—	$	3,048
As of December 31, 2012:
Warrant liability	$	184	$	—	$	—	$	184
Exchangeable share liability	551		—		—		551
Total liabilities	$	735	$	—	$	—	$	735

The preferred stock warrant liability was recorded at fair value using the Black-Scholes option pricing model and the exchangeable share liability was recorded at fair value based on the fair value of the underlying common stock.

The following assumptions were used in the Black-Scholes option pricing model to determine the fair value of the preferred stock warrant liability:

	September 30, 2013		December 31, 2012
Risk-free interest rate	2.1	%	1.2	%
Expected volatility	85.9	%	93.5	%
Remaining contractual term (in years)	7.56		8.31
Expected dividend yield	0.0	%	0.0	%

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

	Warrant Liability			Exchangeable Share Liability
Balance at December 31, 2011	$	221		$	563
Issuance of exchangeable shares	—			78
Change in fair value	(37		)	(90		)
Balance at December 31, 2012	184			551
Issuance of exchangeable shares	—			346
Change in fair value	(21		)	1,988
Balance at September 30, 2013	$	163		$	2,885

The preferred stock warrant liability and the exchangeable share liability were each reclassified into additional paid-in capital at their fair value in connection with the Company’s IPO on October 4, 2013 (see Note 6).