Annual report pursuant to Section 13 and 15(d)

Fair Value of Financial Instruments

v3.3.1.900
Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2015
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

 

3. Fair Value of Financial Instruments

        ASC Topic 820, Fair Value Measurement ("ASC 820"), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company's own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

        ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes among the following:

 

 

 

           

•          

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

           

•          

Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

           

•          

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

        To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Cash, Cash Equivalents and Marketable Securities

        All highly liquid investments that have maturities of three months or less when acquired are considered by the Company to be cash equivalents and are valued at cost, which approximates fair market value. The Company classifies its marketable securities as "available-for-sale", carries them at fair market value and classifies them as current assets on its balance sheets. Unrealized gains and losses on marketable securities are recorded as a separate component of accumulated other comprehensive income/(loss) included in stockholders' equity. There were no charges taken for other-than-temporary declines in fair value of investments during the years ended December 31, 2015 and 2014. The following table presents the Company's cash and available-for-sale securities' adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or marketable securities as of December 31, 2015 and 2014:

                                                                                                                                                                                    

 

 

December 31, 2015

 

 

 

Adjusted Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Cash and Cash
Equivalents

 

Marketable
Securities

 

Cash

 

$

20,672,737

 

$

 

$

 

$

20,672,737

 

$

20,672,737

 

$

 

Level 1(1):

 

 


 

 

 


 

 

 


 

 

 


 

 

 


 

 

 


 

 

Money market funds

 

 

4,100,829

 

 

 

 

 

 

4,100,829

 

 

4,100,829

 

 

 

U.S. Treasury securities

 

 

12,020,862

 

 

92

 

 

(1,434

)

 

12,019,520

 

 

 

 

12,019,520

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Subtotal

 

 

16,121,691

 

 

92

 

 

(1,434

)

 

16,120,349

 

 

4,100,829

 

 

12,019,520

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Level 2(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

 

22,000,000

 

 

 

 

 

 

22,000,000

 

 

22,000,000

 

 

 

U.S. government agency securities

 

 

114,049,441

 

 

269

 

 

(204,783

)

 

113,844,927

 

 

 

 

113,844,927

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Subtotal

 

 

136,049,441

 

 

269

 

 

(204,783

)

 

135,844,927

 

 

22,000,000

 

 

113,844,927

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total

 

$

172,843,869

 

$

361

 

$

(206,217

)

$

172,638,013

 

$

46,773,566

 

$

125,864,447

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

 

                                                                                                                                                                                    

 

 

December 31, 2014

 

 

 

Adjusted Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Cash and Cash
Equivalents

 

Marketable
Securities

 

Cash

 

$

7,141,548

 

$

 

$

 

$

7,141,548

 

$

7,141,548

 

$

 

Level 1(1):

 

 


 

 

 


 

 

 


 

 

 


 

 

 


 

 

 


 

 

Money market funds

 

 

29,064,011

 

 

 

 

 

 

29,064,011

 

 

29,064,011

 

 

 

U.S. Treasury securities

 

 

70,717,422

 

 

258

 

 

(19,040

)

 

70,698,640

 

 

 

 

70,698,640

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Subtotal

 

 

99,781,433

 

 

258

 

 

(19,040

)

 

99,762,651

 

 

29,064,011

 

 

70,698,640

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total

 

$

106,922,981

 

$

258

 

$

(19,040

)

$

106,904,199

 

$

36,205,559

 

$

70,698,640

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  


 

 

 

(1)          

The fair value of Level 1 securities is estimated based on quoted prices in active markets for identical assets or liabilities.

(2)          

The fair value of Level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term on the assets or liabilities.

        As of December 31, 2015, the Company held $22.5 million of available-for-sale investment securities with contractual maturity dates of more than one year and less than two years. The Company did not hold any investment securities exceeding a two-year maturity.

        The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers in or out of Level 3 in the hierarchy during the years ended December 31, 2015 or 2014.

Warrant Liability

        At December 31, 2015, there is an outstanding warrant to purchase up to 20,161 shares of the Company's common stock with a fair value recorded as a liability of $153,238 as it contains a cash settlement feature upon certain strategic transactions. The following table sets forth a summary of changes in the fair value of this warrant liability, which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs:

                                                                                                                                                                                    

 

 

Warrant Liability

 

Balance as of January 1, 2014

 

$

350,519

 

Amounts acquired or issued

 

 

 

Changes in estimated fair value

 

 

(122,412

)

Amounts reclassified to additional paid-in capital

 

 

(145,256

)

​  

​  

Balance as of December 31, 2014

 

 

82,851

 

Amounts acquired or issued

 

 

 

Changes in estimated fair value

 

 

70,387

 

​  

​  

Balance as of December 31, 2015

 

$

153,238

 

​  

​  

​  

​  

        On each re-measurement date, the fair value of the warrant classified as a liability is estimated using the Black-Scholes option pricing model. For this liability, the Company develops its own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company's common stock, stock price volatility, the contractual term of the warrants, risk-free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. The following assumptions were used at December 31, 2015 and 2014 to determine the warrant liability:

                                                                                                                                                                                    

 

 

December 31,

 

 

 

2015

 

2014

 

 

 

Common stock
warrant liability

 

Common stock
warrant liability

 

Estimated remaining term

 

 

6.3 years

 

 

7.3 years

 

Risk-free interest rate

 

 

2.0 

%

 

2.0 

%

Volatility

 

 

67.4 

%

 

71.8 

%

Dividend yield

 

 

%

 

%

Fair value of underlying instrument*

 

$

10.50 

 

$

5.98 

 


 

 

 

*          

Trevena, Inc. closing stock price.

        The warrant liability is recorded on its own line item on the Company's balance sheets and is marked-to-market at each reporting period with the change in fair value recorded on its own line in the statements of operations and comprehensive loss.

        In connection with the issuance of debt, on September 19, 2014 and December 23, 2015, the Company issued to the lenders and the placement agent in the transaction warrants to purchase an aggregate of 42,639 shares of the Company's common stock. These detachable warrant instruments have qualified for equity classification and have been allocated upon the relative fair value of the base instrument and the warrants, according to the guidance of ASC 470-20-25-2. See Note 6 for additional information.