Fair Value Measurements

3 Months Ended

Mar. 31, 2017

11. Fair Value Measurements

Information about the liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, and the input categories associated with those liabilities, is as follows:


	March 31, 2017
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
Liabilities:
Embedded compound derivative	$	—	$	—	$	35	$	35


	December 31, 2016
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
Liabilities:
Embedded compound derivative	$	—	$	—	$	35	$	35

Embedded Compound Derivatives — LSA with Hercules

As described in Note 6, the LSA contains an interest rate reset upon an event of default and a put option upon an event of default or qualified change of control. Each of these features represents an embedded derivative instrument requiring bifurcation from the Term Loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The proceeds from the issuance of the Term Loan were allocated first to the warrant and compound derivative at their respective fair values, with the residual going to the carrying amount of the loan resulting in a discount to the face value of the debt. The fair value of the compound derivative upon issuance of $11 was recognized as a derivative liability and will be adjusted to fair value at each reporting date. At December 31, 2016, the fair value of the derivative liability was remeasured and valued at $35. The fair value of the derivative instruments is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used an income approach to estimate the fair value of the derivative liability and estimated the probability of an event of default occurring at various dates and then estimates the present value of the amount the holders would receive upon an event of default.

The significant assumption used in the model is the probability of the following scenarios occurring:


	At Issuance Date	At March 31, 2017
Probability of an event of default	10%	50%
Prepayment penalties	1.0% - 3.0%	1.0% - 3.0%
End of term payment	$245,000	$245,000
Risk-free interest rate	1.01%	1.03%

The risk-free interest rate was obtained from U.S. Treasury rates for the applicable periods. The Company’s expected volatility was based upon the historical volatility for industry peers and used an average of those volatilities. The expected life of the Company’s options was determined using the simplified method as a result of limited historical data regarding the Company’s activity. The dividend yield considers that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future.

A roll-forward of the preferred stock warrant liability and derivative liability categorized with Level 3 inputs is as follows:


	Derivative Instruments
Balance — January 1, 2017	$	35
Change in fair value		—

Balance — March 31, 2017	$	35

Gains and/or losses arising from changes in the estimated fair value of the warrants and embedded compound derivatives were recorded within other income, net, on the condensed consolidated statement of operations.

- 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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