Quarterly report pursuant to Section 13 or 15(d) 09-30-2018

Fair Value Measurements

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Fair Value Measurements
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

5. Fair Value Measurements

 

Financial Instruments Measured and Recorded at Fair Value on a Recurring Basis

 

The Company has issued certain warrants to purchase shares of common stock, which are considered derivative liabilities because they have registration rights which could require a cash settlement and are re-measured to fair value at each reporting period in accordance with accounting guidance. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, under a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

  Level 1 - quoted market prices for identical assets or liabilities in active markets.
     
  Level 2 - observable prices that are based on inputs not quoted on active markets but corroborated by market data.
     
  Level 3 - unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

The Company classifies assets and liabilities measured at fair value in their entirety based on the lowest level of input that is significant to their fair value measurement. No financial assets were measured on a recurring basis as of September 30, 2018 and December 31, 2017. The following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2018 and December 31, 2017:

 

    Fair Value Measurements as of September 30, 2018  
Description   Level 1     Level 2     Level 3     Total  
Derivative liability                                
Common stock warrants   $ -     $ -     $ 2,071     $ 2,071  

 

    Fair Value Measurements as of December 31, 2017  
Description   Level 1     Level 2     Level 3     Total  
Derivative liability                                
Common stock warrants   $ -     $ -     $ 1,357     $ 1,357  

 

The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the nine months ended September 30, 2018 and 2017.

 

    Common Stock
Warrants
 
Balance as of December 31, 2016   $ (3,665 )
Issuances of warrants classified as derivatives     (810 )
Change in fair value     2,938  
Balance as of September 30, 2017   $ (1,537 )
         
Balance as of December 31, 2017   $ (1,357 )
Issuances of warrants classified as derivatives     (7,577 )
Change in fair value     6,500  
Exercise of warrants     575  
Other, net     (212 )
Balance as of September 30, 2018   $ (2,071 )

 

Common Stock Warrants

 

The Company has issued certain warrants to purchase shares of common stock, which are considered derivative liabilities because they have registration rights which could require a cash settlement and are re-measured to fair value at each reporting period in accordance with accounting guidance. As of September 30, 2018, and December 31, 2017, $0.02 million and $0.5 million, respectively, of the derivative liability was calculated using the Black-Scholes-Merton valuation model. As of September 30, 2018, and December 31, 2017, $2.0 million and $0.9 million of the derivative liability was calculated using the Monte Carlo Simulation valuation model.

 

The assumptions used in estimating the common stock warrant liability using the Black-Scholes-Merton valuation model as of September 30, 2018 and December 31, 2017 were as follows:

 

    September 30,
2018
    December 31,
2017
 
Weighted-average risk-free interest rate     2.58 %     1.89 %
Weighted-average expected life (in years)     1.3       1.9  
Expected dividend yield     - %     - %
Weighted-average expected volatility     153 %     107 %

 

The assumptions used in estimating the common stock warrant liability using the Monte Carlo Simulation valuation model as of September 30, 2018 and December 31, 2017 were as follows:

 

    September 30,
2018
    December 31,
2017
 
Weighted-average risk-free interest rate     2.88 %     2.2 %
Weighted-average expected life (in years)     2.9       3.6  
Expected dividend yield     - %     - %
Weighted average expected volatility     68 %     64 %

 

In addition, if at any time after the second anniversary of the issuance of the warrant, both: (1) the 30-day volume weighted average price of the Company’s stock exceeds $3.00; and (2) the average daily trading volume for such 30-day period exceeds $350,000, the Company may call this warrant for $0.01 per share. Because of the call provisions, management believes the Monte Carlo Simulation valuation model provides a better estimate of fair value for the warrants issued during July 2016 and January 2017 than the Black-Scholes-Merton valuation model.