Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments Fair Value Measurements

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Financial Instruments Fair Value Measurements
9 Months Ended
Sep. 30, 2017
Fair Value Disclosures [Abstract]  
Financial Instruments Fair Value Measurements

Note 3 — Financial Instruments Fair Value Measurements

 

Recurring Fair Value Measurements

 

The following fair value hierarchy table presents information about each major category of the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2017. There were no such financial instruments as of December 31, 2016.

 

    Fair Value Measurement on a Recurring Basis at Reporting Date Using:  
    Quoted                    
    Prices in                    
    Active                    
    Markets     Significant              
    for     Other     Significant        
    Identical     Observable     Unobservable        
    Items     Inputs     Inputs        
    Level-1     Level-2     Level-3     Total  
September 30, 2017                                
Liabilities                                
Series A Warrants   $     $     $ 4,731,557     $ 4,731,557  
Series A Convertible Preferred Stock conversion                                
option embedded derivative liability                 1,298,113       1,298,113  
Total liabilities   $     $     $ 6,029,670     $ 6,029,670  

 

The Series A Preferred Stock Units were issued in three closings in the three months ended March 31, 2017, with each such unit comprised of one share of Series A Convertible Preferred Stock and one Series A Warrant - with each, at the option of the holder, convertible into and exercisable for, respectively, a share of the Company’s common stock. See Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants for further discussion of the Series A Preferred Stock Units private placement, the Series A Convertible Preferred Stock, and the Series A Warrant.

 

The Series A Warrant and the Series A Convertible Preferred Stock conversion option, which is accounted for as an embedded derivative and bifurcated from its host financial instrument, were determined to be derivatives under FASB ASC 815, as, along with other provisions, their conversion price and exercise price, respectively, are subject to potential adjustment resulting from future financing transactions, under certain conditions.

 

The Series A Warrants and the Series A Convertible Preferred Stock conversion option embedded derivative are each classified as a current liability on the unaudited condensed consolidated balance sheet, and were initially measured at fair value at the time of issuance and are subsequently remeasured at fair value at each reporting period, with changes in fair value recognized as other income or expense in the unaudited condensed consolidated statement of operations.

 

A reconciliation of the Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded derivative liability for the nine months ended September 30, 2017 is a follows:

 

          Series A  
          Convertible  
          Preferred Stock  
          Conversion Option  
    Series A     Embedded  
    Warrants     Derivative  
    Liability     Liability  
Balance at December 31, 2016   $     $  
Initial fair value on dates of issuance     4,050,706       1,221,963  
Change in fair value     680,851       76,150  
Balance at September 30, 2017   $ 4,731,557     $ 1,298,113  

 

In the nine months ended September 30, 2017, the change in fair values resulted in the recognition of: an expense of $680,851 with respect to the Series A Warrants liability; and, an expense of $76,150 with respect to the Series A Convertible Preferred Stock conversion option embedded derivative liability. As the Series A Preferred Stock Units were issued in the three months ended March 31, 2017, there was no comparable amount in the prior year period.

  

The fair value of the Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded derivative liability was determined using a Monte Carlo simulation valuation model - using the Company’s common stock price and certain other Level-3 inputs to take into account the probabilities of certain events occurring over the life of the respective financial instrument. The resulting estimated fair value is subjective and is affected by changes in inputs to the valuation model including the Company’s common stock price, and the assumptions regarding the estimated volatility in the value of the Company’s common stock price; the Company’s dividend yield; the likelihood and timing of dilutive transactions; and, the risk-free rates based on U.S. Treasury security yields. Changes in these assumptions can materially affect the estimated fair value of each financial instrument. The Series A Warrants liability and the Series A Convertible Preferred Stock conversion option embedded derivative liability estimated fair value and the underlying assumptions as of the dates indicated, are as follows:

 

          Issue  
          Dates’  
          Aggregated  
    September 30,     Weighted  
Series A Warrants Liability   2017     Average  
Fair value per Series A Warrant   $ 11.19     $ 9.58  
Series A Warrants outstanding     422,838       422,838  
Calculated aggregate fair value   $ 4,731,557     $ 4,050,706  
Value of common stock   $ 5.43     $ 5.73  
Exercise price per share   $ 6.65     $ 8.00  
Expected term (years)     6.59       7.21  
Volatility     53 %     47 %
Risk free rate     2.1 %     2.3 %
Dividend yield     0 %     0 %

 

          Issue  
          Dates’  
          Aggregated  
Series A Convertible Preferred Stock   September 30,     Weighted  
Conversion Option Embedded Derivative Liability   2017     Average  
Fair value per conversion option   $ 3.07     $ 2.89  
Series A Convertible Preferred Stock shares outstanding     422,838       422,838  
Calculated aggregate fair value   $ 1,298,113     $ 1,221,963  
Value of common stock   $ 5.43     $ 5.73  
Conversion price per share   $ 4.99     $ 6.00  
Expected term (years)     6.59       7.21  
Volatility     53 %     47 %
Risk-free interest rate     2.1 %     2.3 %
Dividend yield     0 %     0 %

 

Non-recurring Fair Value Measurements

 

The non-recurring issue-date fair values of the Senior Secured Note and Series S Warrants issued in connection with the Note and Security Purchase Agreement between the Company and Scopia Holdings LLC, are presented in Note 12, Note and Securities Purchase Agreement, Senior Secured Note, and Series S Warrants.

 

The non-recurring issue-date fair values of the Series A-1 Convertible Preferred Stock and Series A-1 Warrants issued in the Series A-1 Preferred Stock Units private placement are presented in Note 13, Series A Convertible Preferred Stock, Stockholders’ Deficit, and Warrants.