Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

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Fair Value Measurements
9 Months Ended
Sep. 30, 2017
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 September 30, 2017 and December 31, 2016. 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, 2017 and December 31, 2016:

 

    Fair Value Measurements as of September 30, 2017  
Description   Level 1     Level 2     Level 3     Total  
Derivative liability                                
Common stock warrants   $ -     $ -     $ 1,537     $ 1,537  

 

    Fair Value Measurements as of December 31, 2016  
Description   Level 1     Level 2     Level 3     Total  
Derivative liability                                
Common stock warrants   $ -     $ -     $ 3,665     $ 3,665  

 

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, 2017 and 2016.

 

    Common Stock
Warrants
    Convertible
Notes
    Total
Derivative
Liability
 
Balance at December 31, 2015   $ (598 )   $ -     $ (598 )
Issuances of derivatives     (5,817 )     -       (5,817 )
Decrease in liability due to warrants being exercised     273       -       273  
Change in fair value     (228 )     -       (228 )
Balance at September 30, 2016   $ (6,370 )   $ -     $ (6,370 )
                         
Balance at December 31, 2016   $ (3,665 )   $ -     $ (3,665 )
Issuances of derivatives     (810 )     -       (810 )
Decrease in liability due to warrants being exercised     -       -       -  
Change in fair value     2,938       -       2,938  
Balance at September 30, 2017   $ (1,537 )   $ -     $ (1,537 )

 

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. At September 30, 2017 and December 31, 2016, $506,000 and $528,000, respectively, of the derivative liability was calculated using the Black-Scholes-Merton valuation model. At September 30, 2017 and December 31, 2016, $1.0 million and $3.1 million of the derivative liability was calculated using the Monte Carlo Simulation valuation model. Issuances of common stock warrants deemed to be derivative liabilities during January 2017 were valued at $810,000 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 September 30, 2017 and December 31, 2016 were as follows:

 

    September 30, 2017     December 31, 2016  
Weighted-average risk free interest rate     1.6 %     0.9 %
Weighted-average expected life (in years)     2.7       2.5  
Expected dividend yield     - %     - %
Weighted-average expected volatility     120.0 %     136.0 %

 

The assumptions used in estimating the common stock warrant liability using the Monte Carlo Simulation valuation model at issuance (January 24, 2017) and September 30, 2017 were as follows:

 

    January 24, 2017     September 30, 2017  
Weighted-average risk free interest rate     1.94 %     1,77 – 1.89 %
Weighted-average expected life (in years)     5.0       3.75 – 4.53  
Expected dividend yield     - %     - %
Weighted-average expected volatility     65.60 %     62.60 – 62.63 %

 

In addition, if anytime 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 provision, management believes the Monte Carlo Simulation valuation model provides a better estimate of fair value for the warrants issued during July 2016 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 debt approximates the fair value as the interest rates are reflective of market interest rates.