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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2015
Fair Value Measurements |
Fair Value Measurements | 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 and a liability for common stock warrants. The Company’s Credit Line described in Note 8, is not measured at fair value on a recurring basis and is carried at amortized cost. The Company believes that the fair value of the Credit Line approximates its carrying value or amortized costs, due to the short-term nature of this obligation and the interest rate relative to 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. There were no transfers between Level I, Level II and Level III during the periods presented. 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:
|  | December 31, 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 |  | $ | 5,966 |  | $ | — |  | $ | — |  | $ | 5,966 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
U.S. Treasury securities |  |  | 103,813 |  |  | — |  |  | — |  |  | 103,813 |  |  | — |  |  | — |  |  | — |  |  | — |
U.S. agency securities |  |  | — |  |  | 78,853 |  |  | — |  |  | 78,853 |  |  | — |  |  | — |  |  | — |  |  | — |
Municipal securities |  |  | — |  |  | 18,920 |  |  | — |  |  | 18,920 |  |  |  |  |  |  |  |  |  |  |  |  |
Total financial assets |  | $ | 109,779 |  | $ | 97,773 |  | $ | — |  | $ | 207,552 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
Current Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Warrants |  | $ | — |  | $ | — |  | $ | 3,649 |  | $ | 3,649 |  | $ | — |  | $ | — |  | $ | 2,232 |  | $ | 2,232 |
Long-term Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Senior secured term loan |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 20,964 |  | $ | 20,964 |
Total financial liabilities |  | $ | — |  | $ | — |  | $ | 3,649 |  | $ | 3,649 |  | $ | — |  | $ | — |  | $ | 23,196 |  | $ | 23,196 |
The Company's warrants to purchase common stock are valued using Level III inputs; the Company used inputs from a Black-Scholes model with market volatility that is determined for comparable companies in the same business sector. 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 consisted 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 we re 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 constituted 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 were recorded as interest expense as they occurred, 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 were detachable and therefore a stand-alone component of the senior secured term loan which was to be fair valued using Level III inputs as a separate derivative. Additionally, it was determined that the remaining components were embedded derivatives of the senior secured term loan, which require d 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 d significant judgment or estimation. The fair value of the components were 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 was determined by comparison to comparable companies in the same business sector. The fair value of the senior secured term loan wa s 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 until it was repaid in October 2015. The following table provides a roll forward of the fair value, as determined by Level III inputs, of the warrants for the years ended December 31, 2015 and 2014:
|  | Warrants |
|  | 2015 |  | 2014 |
|  | (in thousands) |
Beginning balance |  | $ | 2,232 |  | $ | 568 |
Warrants exercised |  |  | (240) |  |  | — |
Change in fair value |  |  | 1,657 |  |  | 1,664 |
Ending balance |  | $ | 3,649 |  | $ | 2,232 |
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 years ended December 31, 2015 and 2014:
|  | Term Loan |
|  | 2015 |  | 2014 |
|  | (in thousands) |
Beginning balance |  | $ | 20,964 |  | $ | 21,082 |
Change in fair value recognized in non-operating expense |  |  | (964) |  |  | (118) |
Loan payment |  |  | (20,000) |  |  | — |
Ending balance |  | $ | — |  | $ | 20,964 |
The early payment of the senior secured term loan included a prepayment penalty of $2.0 million and $5.3 million royalty payoff. 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 December 31, 2015.
|  |  |  |  |  |  |  |  | Weighted Average |
|  |  |  |  |  |  |  |  | Interest on |
|  | Fair Value at |  |  |  | Significant |  | Discount Rate |
|  | December 31, 2015 |  | Valuation Methodology |  | Unobservable Input |  | (range, if applicable) |
|  | (in thousands) |  |  |  |  |  | (in thousands) |
—Warrants |  | $ | 3,649 |  | Black-Scholes Option Pricing Model |  | Volatility |  |  |  |  |  | 79.6 | %
Senior Secured Term Loan The fair value of the liability represented a term loan, royalty interest, and a loan commitment that was based upon the achievement of certain revenue targets over the life of the contract. The fair value of the liability was 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. 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. The Company changed the volatility assumption from a group of 15 companies that was shared with the secured debt volatility prior periods to a group of four companies that is shared with the volatility used for stock-based compensation expense. The Company determined this was appropriate as the secured debt was settled in October 2015 and results in consistent volatility assumptions used for both common stock warrants and stock-based compensation. This resulted in an increase of the Company’s warrant valuation of $0.2 million on December 31, 2015.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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