Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement, or ASC 820, establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or 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 a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes among the following:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Cash, Cash Equivalents, Restricted Cash, and Marketable Securities

The following table presents the Company’s cash, cash equivalents, restricted cash, and marketable securities as of December 31, 2017 and 2016 (in thousands):



	December 31, 2017
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Restricted Cash		Marketable Securities
Cash	$	6,783	$	—	$	—		$	6,783	$	5,370	$	1,413	$	—
Level 1 (1):
Money market funds	11,187		—		—			11,187		11,187		—		—
U.S. treasury securities	1,991		—		—			1,991		—		—		1,991
Subtotal	13,178		—		—			13,178		11,187		—		1,991
Level 2 (2):
U.S. government agency securities	47,594		—		(42		)	47,552		—		—		47,552
Total	$	67,555	$	—	$	(42	)	$	67,513	$	16,557	$	1,413	$	49,543



	December 31, 2016
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Restricted Cash		Marketable Securities
Cash	$	13,756	$	—	$	—		$	13,756	$	12,563	$	1,193	$	—
Level 1 (1):
Money market funds	10,043		—		—			10,043		10,043		—		—
Level 2 (2):
Repurchase agreements	1,660							1,660		1,660
U.S. government agency securities	86,333		19		(17		)	86,335		—		—		86,335
Subtotal	87,993		19		(17		)	87,995		1,660		—		86,335
Total	$	111,792	$	19	$	(17	)	$	111,794	$	24,266	$	1,193	$	86,335


(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.

The Company classifies investments available to fund current operations as current assets on its balance sheets. As of December 31, 2017, the Company did not hold any investment securities exceeding a one-year maturity.

Unrealized gains and losses on marketable securities are recorded as a separate component of accumulated other comprehensive income (loss) included in stockholders’ equity. Realized gains (losses) are included in interest income (expense) in the statement of operations and comprehensive income (loss) on a specific identification basis. The Company did not record any realized gains or losses during the years ended December 31, 2017 and 2016. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. We do not hold Level 3 securities, and therefore, there were no transfers in or out of Level 3 in the hierarchy during the years ended December 31, 2017 or 2016.

Warrant Liability

At December 31, 2017, 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 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 (in thousands):



	Warrant Liability
Balance as of January 1, 2016	$	153
Amounts acquired or issued	—
Changes in estimated fair value	(78		)
Balance as of December 31, 2016	75
Amounts acquired or issued	—
Changes in estimated fair value	(65		)
Balance as of December 31, 2017	$	10

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 December 31, 2017 and 2016 to determine the warrant liability:



	December 31,
	2017			2016
Estimated remaining term	4.3 years			5.3 years
Risk-free interest rate	2.1		%	2.0		%
Volatility	77.6		%	77.2		%
Dividend yield	—		%	—		%
Fair value of underlying instrument*	$	1.60		$	5.88

*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.

In addition to the outstanding warrant to purchase 20,161 shares of common stock discussed above, the Company has outstanding warrants to purchase an aggregate of 102,930 shares of the Company’s common stock. These warrants qualify for equity classification and have been allocated upon the relative fair value of the base instrument and the warrant. See Note 6 for additional information.