3. Fair Value Measurements

The Company's financial assets and liabilities carried at fair value are comprised of investment assets that include money market and investments, a liability for convertible preferred stock warrants, a liability for common stock warrants and a senior secured term loan. The Company’s Equipment Financing Facility, described in Note 8, is not measured at fair value on a recurring basis and is carried at amortized cost. The Company believes the fair value of the facility approximates its carrying value, or amortized cost, due to the short-term nature of this obligation and the interest rate relative to current market rates.

The fair value accounting guidance requires that assets and liabilities be carried at fair value and classified in one of the following three categories:

Level I: Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access

Level II: Observable market‑based inputs or unobservable inputs that are corroborated by market data, such as quoted prices, interest rates, and yield curves

Level III: Inputs that are unobservable data points that are not corroborated by market data.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

The following table represents the fair value hierarchy for the Company’s financial assets and financial liabilities measured at fair value on a recurring basis:


	September 30, 2015								December 31, 2014
	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Money market deposits	$	183,250	$	—	$	—	$	183,250	$	—	$	—	$	—	$	—
U.S. Treasury securities		18,273		—		—		18,273		—		—		—		—
U.S. agency securities		—		8,116		—		8,116		—		—		—		—
Total financial assets	$	201,523	$	8,116	$	—	$	209,639	$	—	$	—	$	—	$	—

Current Liabilities:
Warrants	$	—	$	—	$	3,741	$	3,741	$	—	$	—	$	2,232	$	2,232
Long‑term Liabilities:
Senior secured term loan	$	—	$	—	$	21,276	$	21,276	$	—	$	—	$	20,964	$	20,964
Total financial liabilities	$	—	$	—	$	25,017	$	25,017	$	—	$	—	$	23,196	$	23,196

The Company's convertible preferred and common stock warrants are valued using Level III inputs; the Company uses inputs from a Black-Scholes model with market volatility that is determined for comparable companies in the same business sector. As of September 30, 2015, the Company’s third-party valuation specialist uses the common stock price as quoted on the NASDAQ stock market. The carrying amounts of cash, accounts receivable, and accounts payable approximate their fair value and are excluded from the table above.

In April 2013, the Company entered into a senior secured term loan with a third‑party lender, which consists of a credit agreement, royalty agreement, warrants, and loan commitment. The Company considered the guidance under ASC 825‑10, Financial Instruments, which provides a measurement basis election for most financial instruments (i.e., either historical cost or fair value), allowing reporting entities to mitigate potential mismatches that arise under the current mixed measurement attribute model and ASC 820, Fair Value Measurements and Disclosures that provides for the fair value measurement of assets and liabilities, except for derivatives, for which the fair value is determined by ASC 815, Derivatives and Hedging.

The Company evaluated the components of the senior secured term loan and determined that they are derivatives to be evaluated under ASC 815‑15‑25‑1. The fair value accounting for derivatives is not an option, as derivatives must be fair valued under ASC 815 following the measurement guidance under ASC 820. Therefore, the Company engaged a third party to determine the fair value of the derivatives using the guidance of ASC 820 and recorded the Senior Secured Term Loan at fair value.

ASC 815 requires the terms and features of an instrument that are not a derivative itself to be evaluated for embedded derivatives that must be bifurcated and separately accounted for as freestanding derivatives. In general, under ASC 815‑15‑25‑1, an embedded derivative is separated from the host contract and accounted for as a derivative instrument if and only if the following criteria are met:

Economic characteristics/risks of the derivative are not clearly and closely related to host;

The hybrid instrument is not re‑measured at fair value under other applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur;

A separate instrument with the same terms would be considered a derivative: (i) one or more underlying, (ii) One or more notional amounts, (iii) no or minimal initial net investment, (iv) net settlement.

Based upon the Company's evaluation, the senior secured term loan constitutes a liability with embedded derivative features that must be accounted for separately as mark-to-market instruments. In addition, adjustments to the embedded royalty feature will be recorded as interest expense as they occur, offset to the carrying amount of the debt (with the eventual cash outlay to settle such amounts recorded against the carrying amount of the debt). Based on the Company's evaluation, it was determined that the warrants granted are detachable and therefore are a stand-alone component of the senior secured term loan to be fair valued using Level III inputs as a separate derivative. Additionally, it was determined that the remaining components are embedded derivatives of the senior secured term loan, which require a fair value assessment using Level III inputs at the end of each reporting period. The Company's independent appraiser assisted in the evaluation of the components of the senior secured term loan that require significant judgment or estimation. The fair value of the components is calculated using various techniques such as (i) discounted future cash flows, (ii) the income approach, using various revenue assumptions and applying a Monte-Carlo simulation to each outcome and (iii) Black-Scholes Option Pricing Model with market volatility that is determined by comparison to comparable companies in the same business sector. The fair value of the senior secured term loan is re-measured at the end of each reporting period with the change in fair value recorded within non-operating expense in the statements of operations.

The following table provides a roll forward of the fair value, as determined by Level III inputs, of the warrants for the nine months ended September 30, 2015:


	Warrants
	(in thousands)
Balance at December 31, 2014	$	2,232
Change in fair value		1,509
Balance at September 30, 2015	$	3,741

The following table provides a roll forward of the fair value, as determined by Level III inputs, of the senior secured term loan for the nine months ended September 30, 2015:


	Term Loan
	(in thousands)
Balance at December 31, 2014	$	20,964
Change in fair value recognized in non‑operating expense		312
Balance at September 30, 2015	$	21,276

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurement classified in Level III of the fair value hierarchy at September 30, 2015.

Weighted Average

Interest on

Fair Value at

Significant

Discount Rate

September 30, 2015

Valuation Methodology

Unobservable Input

(range, if applicable)

(in thousands)

Senior secured term loan

21,276

—Term loan

Discounted Cash Flows

Discount rate on CCC bond plus premium

17.5

CCC Bond range

(6.08% ‑ 63.76%)

—Royalty interest

Royalty interest in future revenues

Revenues Volatility

189,119

431,961

32.3

—Loan commitment

Discounted Cash Flows

Discount rate on CCC bond plus premium

17.5

CCC Bond range

(6.08% ‑ 63.76%)

—Warrants

3,741

Black-Scholes Option Pricing Model

Volatility

50.5

Senior Secured Term Loan

The fair value of the liability represents a term loan, royalty interest, and a loan commitment that is based upon the achievement of certain revenue targets over the life of the contract. The fair value of the liability is determined using discounted cash flow methodology, a Monte Carlo Simulation model for projected revenues, and the Longstaff-Schwartz model for royalty payments with significant inputs that include discount rate, projected revenues, projected royalty payments and percentage probability of occurrence for projected revenues and royalty payments. A significant change in projected revenues in isolation could result in a significantly different fair value measurement; a significant change in the discount rate in isolation could result in a significantly different fair value measurement; and changes in the probability of occurrence between the outcomes in isolation could result in a significantly different fair value measurement.

Warrants

The significant unobservable inputs used in the fair value of warrants are derived from the Company's common stock valuation that is based upon a model with inputs from a Black-Scholes model and market volatility that is determined for comparable companies in the same business sector. The inherent risk in the market volatility is the selection of companies with similar business attributes to the Company.