Annual report pursuant to Section 13 and 15(d) 12-31-2015

Fair Value Measurements

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Fair Value Measurements
12 Months Ended
Dec. 31, 2015
Fair Value Measurements And Marketable Securities [Abstract]  
Fair Value Measurements

5. Fair Value Measurements

 

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

 

The Company measures and records certain financial instruments at fair value on a recurring basis. 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 at December 31, 2015 and December 31, 2014. The following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy at December 31, 2015 and December 31, 2014:

 

    Fair Value Measurements at December 31, 2015  
Description   Level 1     Level 2     Level 3     Total  
Derivative liability                                
Common stock warrants   $ -     $ -     $ 598     $ 598  

 

    Fair Value Measurements at December 31, 2014  
Description   Level 1     Level 2     Level 3     Total  
Derivative liability                                
Common stock warrants   $ -     $ -     $ 11,358     $ 11,358  
Conversion feature of notes     -       -       2,612       2,612  
Total derivative liability   $ -     $ -     $ 13,970     $ 13,970  

 

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 years ended December 31, 2015 and 2014. The following table presents a reconciliation of the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2015 and 2014:

 

    Common Stock
 Warrants
    Preferred
Stock
 Warrants
    Conversion
Feature of
 Notes
    Total
Derivative
Liability
 
Balance at December 31, 2013   $ (199 )   $ (11 )   $ -     $ (210 )
Issuances of derivatives     (12,617 )     -       (1,930 )     (14,547 )
Reclassification from liability to equity     -       5       -       5  
Extinguishment of derivative liabilities     24       -       1,008       1,032  
Change in fair value     1,434       6       (1,690 )     (250 )
Balance at December 31, 2014   $ (11,358 )   $ -     $ (2,612 )   $ (13,970 )
                                 
Balance at December 31, 2014   $ (11,358 )   $ -     $ (2,612 )   $ (13,970 )
Issuances of derivatives     (14,556 )     -       -       (14,556 )
Modification of terms     (382 )     -       -       (382 )
Decrease in liability due to debt conversions     -       -       179       179  
Decrease in liability due to warrants being exercised     20,335       -       -       20,335  
Reclassification from liability to equity     2,403       -       -       2,403  
Extinguishment of derivative liabilities     -       -       3,468       3,468  
Change in fair value     2,960       -       (1,035 )     1,925  
Balance at December 31, 2015   $ (598 )   $ -     $ -     $ (598 )

 

$9.5 million of the warrant derivatives issued during September 2015 were recorded as a loss and included in the change in fair value of derivative liabilities per the Consolidated Statements of Operations and Comprehensive Loss since the value of the derivative liabilities issued exceeded the proceeds received from the issuance of common stock and warrants. See Footnote 8 for additional information.

 

Common Stock Warrants

 

The Company has issued certain warrants to purchase shares of common stock, which are considered mark-to-market liabilities and are re-measured to fair value at each reporting period in accordance with accounting guidance. In December 2015, 2.2 million of the warrants were no longer classified as derivative liabilities and were reclassified to equity.

 

The assumptions used in estimating the common stock warrant liability at December 31, 2015 and December 31, 2014 were as follows:

 

    December 31, 2015     December 31, 2014  
Weighted-average risk free interest rate     1.71 %     1.53 %
Weighted-average expected life (in years)     3.7       4.7  
Expected dividend yield     0 %     0 %
Weighted average expected volatility     119 %     116 %

 

Conversion Feature of Notes

 

The Company entered into convertible notes in 2014. The conversion features of the notes were evaluated and determined to be derivatives and were re-measured to fair value at each reporting period. During September 2015, the conversion features of the notes were terminated.

 

The assumptions used in estimating the conversion features of the notes at December 31, 2014 were as follows:

 

    December 31, 2014  
Weighted-average risk free interest rate     0.67 %
Weighted-average expected life (in years)     1.6  
Expected dividend yield     0 %
Weighted average expected volatility     32 %

 

Other Financial Instruments

 

The Company’s recorded values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The recorded value of notes payable approximates the fair value as the interest rate approximates market interest rates.