Annual report pursuant to Section 13 and 15(d)

Fair Value of Financial Instruments

Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

16. Fair Value of Financial Instruments


The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:


Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)


Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.


Level 3 Valuation Techniques:


Level 3 financial liabilities consist of warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.


The Company uses the Monte Carlo model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model is a discrete-time model that allows for sources of uncertainty and simulates the movements of the underlying asset and calculates the resulting derivative value for each trial. Such simulations are performed for a number of trials and the average value across all trials is determined in order to arrive at the concluded value of such derivative. The model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, and risk free rates, as well as volatility. A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in “change in fair value of warrant liability” in the Company’s condensed consolidated statements of operations.


As of December 31, 2016, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.


The warrant liability was valued using the Monte Carlo model and the following assumptions:


    August 10,     June 30,  
    2016     2016  
Strike price   $ 2.00     $ 2.00  
Market price   $ 6.08     $ 3.20  
Expected life     5 years       5 years  
Risk-free interest rate     1.07 %     1.01 %
Dividend yield     0.00 %     0.00 %
Volatility     100 %     100 %


The following table sets forth a summary of the changes in the fair value of the Level 3 financial liabilities that are measured at fair value on a recurring basis:


Balance – January 1, 2016   $ -  
Initial value of derivative liability     380,000  
Change in fair value of derivative liability     401,000  
Reclassification of derivative liability to additional paid in capital     (781,000 )
Balance – December 31, 2016   $ -  


As discussed in Note 8, on August 10, 2016, the Company entered into an Amendment with White Winston pursuant to which the Company agreed that the Pro Rata Warrant would be fully exercisable, notwithstanding the pro rata formula set forth in the warrant. Accordingly, as the derivative liability was eliminated on August 10, 2016, the Company reclassified $781,000 to additional paid in capital.