Annual report pursuant to Section 13 and 15(d) 12-31-2018

Fair Value Measurements

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Fair Value Measurements
12 Months Ended
Dec. 31, 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 mark-to-market liabilities 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 December 31, 2018 and 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 December 31, 2018 and 2017.

 

    Fair Value Measurements as of December 31, 2018
(in thousands)
 
Description   Level 1     Level 2     Level 3     Total  
Derivative liability                                
Common stock warrants   $ -     $ -     $ 1,566     $ 1,566  

 

    Fair Value Measurements as of December 31, 2017
(in thousands)
 
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 years ended December 31, 2018 and 2017. 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, 2018 and 2017 (in thousands):

 

    Common Stock Warrants  
Balance at December 31, 2016   $ (3,665 )
Issuance of derivatives     (810 )
Change in fair value     3,118  
Balance at December 31, 2017     (1,357 )
Issuance of derivatives     (7,577 )
Change in fair value     7,005  
Exercise of warrants     575  
Other, net     (212 )
Balance at December 31, 2018   $ (1,566 )

 

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. As of December 31, 2018 and 2017, approximately $1.6 million and $0.5 million respectively, of the derivative liabilities were calculated using the Black-Scholes-Merton valuation model. As of December 31, 2018, and 2017, less than $0.1 million and approximately $0.9 million respectively, were calculated using the Monte Carlo Simulation valuation model. Issuances of common stock warrants deemed to be derivative liabilities during the year ended December 31, 2018 were valued at approximately $7.6 million on the date of issuance using the Black-Scholes-Merton valuation model. Issuance of common stock warrants deemed to be derivative liabilities during the year ended December 31, 2017, were valued at approximately $0.8 million on the date of issuance using the Monte Carlo Simulation valuation model.

 

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

 

    December 31, 2018     December 31, 2017  
Weighted-average risk-free interest rate     2.51 %     1.89 %
Weighted-average expected life (in years)     0.9       1.9  
Expected dividend yield     - %     - %
Weighted average expected volatility     157 %     107 %

 

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

 

    December 31, 2018     December 31, 2017  
Weighted-average risk-free interest rate     2.46 %     2.20 %
Weighted-average expected life (in years)     3.1       3.6  
Expected dividend yield     - %     - %
Weighted average expected volatility     68 %     64 %

 

In addition, if 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 $0.4 million, the Company may call this warrant for $0.01 per share. For those warrants that have a call provision, management believes the Monte Carlo Simulation valuation model provides a better estimate of fair value for the warrants issued during 2018 and 2017 than the Black-Scholes-Merton valuation model.

 

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.