3. 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:

At December 31, 2014 and September 30, 2015, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts payable, accrued expenses and other current liabilities, long term debt, warrant liability and the Investor Rights Obligation. 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 $6.5 million as of September 30, 2015 was based on current interest rates for similar types of borrowings and is in Level Two 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:

 

 

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*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 Series B Convertible Preferred Stock) is marked‑to‑market each reporting period with the change in fair value recorded to other income (expense) in the 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 December 31, 2014 include (i) volatility of 60.0%, (ii) risk free interest rate of 2.1%, (iii) strike price ($0.2999), (iv) fair value of Series B Convertible Preferred Stock ($0.18), and (v) expected life of 8.23 years. The significant assumptions used in preparing the option pricing model for valuing the Warrant Liability as of September 30, 2015 include (i) volatility of 70.0%, (ii) risk free interest rate of 1.56%, (iii) strike price ($8.40), (iv) fair value of Series B Convertible Preferred Stock ($4.95), and (v) expected life of 5.4 years. Significant decreases in the Company’s stock price volatility will significantly decrease the overall valuation of the Company’s warrant liability, while significant increases in the Company’s stock price volatility will significantly increase the overall valuation.

The Investor Rights Obligation expired in October of 2015 upon the closing of our IPO. While outstanding, the Investor Rights Obligation was remeasured at each reporting period and changes in fair value were recorded as a component of other income (expense) in the Company’s Statement of Operations. The fair value of the Investor Rights Obligation was determined using a valuation model, which considers the probability of achieving certain milestones, the entity’s cost of capital, the estimated period the rights will be outstanding, consideration received for the instrument with the rights, the number of shares to be issued to satisfy the rights, the price of such shares and any changes in the fair value of the underlying instrument. The significant assumptions used in preparing the option pricing model for valuing the Company’s Investor Rights Obligation as of December 31, 2014 include (i) volatility of 60%, (ii) risk free interest rate ranging from 0.05% to 0.63%, (iii) strike price ($8.40), (iv) fair value of Preferred Stock ranging from $0.00 to $5.04, and (v) expected life ranging from 0.5 to 1.75 years. The significant assumptions used in preparing the option pricing model for valuing the Company’s Investor Rights Obligation as of September 30, 2015 include (i) volatility of 90%, (ii) risk free interest rate of 0.00%, (iii) strike price ($8.40), (iv) fair value of Preferred Stock ranging from $4.57 to $5.32, and (v) expected life of 0.04 years.

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the Warrant Liability and the Investor Rights Obligation for the nine months ended September 30, 2015:

No other changes in valuation techniques or inputs occurred during the nine months ended September 30, 2014 and 2015.  No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the nine months ended September 30, 2014 and 2015.