Fair Value of Financial Assets and Liabilities

12 Months Ended

Dec. 31, 2016

Fair Value of Financial Assets and Liabilities

4.	Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

	Fair Value Measurements as of December 30, 2016 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	15,440	$	—	$	—	$	15,440
Short-term investments:
U.S. government-sponsored enterprise securities		—		53,365		—		53,365
U.S. treasury securities		—		13,532		—		13,532
	$	15,440	$	66,897	$	—	$	82,337
Liabilities:
Derivative liability	$	—	$	—	$	91	$	91
	$	—	$	—	$	91	$	91

	Fair Value Measurements as of December 31, 2015 Using:
	Level 1		Level 2		Level 3		Total
Liabilities:
Derivative liability	$	—	$	—	$	2	$	2
Preferred stock warrant liability		—		—		110		110
	$	—	$	—	$	112	$	112

During the years ended December 31, 2016, 2015 and 2014, there were no transfers between Level 1, Level 2 and Level 3.

The warrant liability in the table above is comprised of the fair value of a warrant for the purchase of Series A preferred stock and is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy (see Note 9).

The fair value of the derivative liability (see Note 13) is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative instrument was determined using the Monte-Carlo simulation analysis. In determining the fair value of the derivative liability, the inputs impacting fair value include the fair value of the Company’s common stock, expected term of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments.

As of December 31, 2016, the Company determined the per share common stock price available based on the closing price of its common stock on The NASDAQ Global Market as of December 30, 2016. As of December 31, 2015, the Company determined the per share fair value of the underlying stock price by taking into consideration recent business development and economic factors it deemed relevant. The Company determined the expected term of the instrument to be 2.50 years and 0.12 years as of December 31, 2016 and 2015, respectively. The Company estimated its expected stock volatility to be 81.1% and 74.1% as of December 31, 2016 and 2015, respectively, based on the historical volatility of publicly traded peer companies for terms matching the expected term of the instrument for each respective period. The risk-free interest rate was determined to be 1.33% and 0.14% for the years ended December 31, 2016 and 2015, respectively, by reference to the U.S. Treasury yield curve for terms matching the expected term of the instrument for each respective period. The Company estimated the expected sales-based milestone payments based on four times the maximum research funding allowable under the CFFT collaboration agreement (see Note 13) plus the expected achievement of certain milestones, which totaled $28.5 million for each of the years ended December 31, 2016 and 2015. The Company estimated the discount rate in the calculation of the present value of the expected future milestone payments to be 25% for the years ended December 31, 2016 and 2015, respectively, based on expected returns of alternative investments of a similar type.

Changes in the values of the preferred stock warrant liability and the derivative liability are summarized below (in thousands):

	Preferred Stock Warrant Liability			Derivative Liability
Fair value at December 31, 2013	$	40		$	141
Adjustment to fair value of derivative liability (see Note 13)		—			113
Change in fair value		80			(189	)
Fair value at December 31, 2014		120			65
Change in fair value		(10	)		(63	)
Fair value at December 31, 2015		110			2
Change in fair value		(82	)		89
Conversion to common stock warrant		(28	)		—
Fair value at December 31, 2016	$	—		$	91

- 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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