Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.7.0.1
Fair Value Measurements
 3 Months Ended
Mar. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
 
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three‑level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows: 
•
Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
•
Level 2—inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model‑derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
•
Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
 
At March 31, 2017 and December 31, 2016, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts payable, accrued expenses and other current liabilities, long term debt, the term loan warrant liability and the underwriters’ unit purchase option liability. The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, restricted cash, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values because of the short‑term nature of these accounts. The estimated fair value of the Company’s debt of $1.5 million as of March 31, 2017 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy.

The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities that are measured at fair value on a recurring basis:
 
 
March 31, 2017
 
 
Fair Value Measurements Using
 
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
    
 
    
 
    
Investments in money market funds*
 
$
2,716,246

 
$
—

 
$
—

Liabilities
 
 
 
 
 
 
Warrant liability
 
$
—

 
$
—

 
$
2,706

Unit purchase option liability
 
$
—

 
$
—

 
$
6,607

 
 
 
 
December 31, 2016
 
 
 
Fair Value Measurements Using
 
 
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
 
    
 
    
 
    
Investments in money market funds*
 
 
$
4,758,539

 
$
—

 
$
—

Liabilities
 
 
 
 
 
 
 
Warrant liability
 
 
$
—

 
$
—

 
$
5,501

Unit purchase option liability
 
 
$
—

 
$
—

 
$
51

 
 
 
 
 
 
 
 
*    Investments in money market funds are reflected in cash and cash equivalents on the accompanying Balance Sheets.
 
Level 3 Valuation
 
The warrant liability (which relates to warrants to purchase shares of common stock as part of the term loan agreement) is marked‑to‑market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity. The fair value of the warrant liability is estimated using a Black‑Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant liability as of March 31, 2017, include (i) volatility of 95%, (ii) risk free interest rate of 1.62%, (iii) strike price ($8.40), (iv) fair value of common stock ($0.68), and (v) expected life of 3.6 years.
 
The underwriters’ unit purchase option (the “UPO”) was issued to the underwriters of the Company’s initial public offering (“IPO”) and provides the underwriters the option to purchase up to a total of 40,000 units. The units underlying the UPO will be, immediately upon exercise, separated into shares of common stock, underwriters’ Class A warrants and underwriters’ Class B warrants (such warrants together referred to as the Underwriters’ Warrants). The Underwriters’ Warrants are warrants to purchase shares of common stock. The Company classifies the UPO as a liability as it is a freestanding marked-to-market derivative instrument that is precluded from being classified in stockholders’ equity. The UPO liability is marked‑to‑market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the UPO is exercised, expire or other facts and circumstances lead the UPO to be reclassified to stockholders’ equity. The fair value of the UPO liability is estimated using a Black-Scholes option-pricing model within a Monte Carlo simulation model framework. The significant assumptions used in preparing the simulation model for valuing the UPO as of March 31, 2017, include (i) volatility range of 65% to 75%, (ii) risk free interest rate range of 0.74% to 1.63%, (iii) unit strike price ($7.48), (iv) underwriters’ Class A warrant strike price ($5.23), (v) underwriters’ Class B warrant strike price ($4.49), (vi) fair value of underlying equity ($0.68), and (vii) optimal exercise point of immediately prior to the expiration of the underwriters’ Class B warrants, which occurs on April 20, 2017.
 
The table presented below is a summary of changes of the Company’s Level 3 warrant liability and unit purchase option liability for the three months ended March 31, 2017:
 
 
 
Warrant
Liability
 
Unit purchase
option liability
 
Total
Balance at December 31, 2016
 
$
5,501

 
$
51

 
$
5,552

Change in fair value
 
(2,795
)
 
6,556

 
3,761

Balance at March 31, 2017
 
$
2,706

 
$
6,607

 
$
9,313


 
No other changes in valuation techniques or inputs occurred during the three months ended March 31, 2017 and no transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three months ended March 31, 2017.