12. FAIR VALUE

FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

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

Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and

Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.

Common Stock Warrant Liabilities.

Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our consolidated statement of operations.

2016 Warrant Liability

The Company has a warrant liability related to warrants issued in January 2016 (the “2016 Warrant Liability”) and it represents the fair value of such warrants, of which, 357 warrants remain outstanding as of December 31, 2020.

In March 2018, a portion of the 2016 Warrant Liability was part of a settlement agreement pursuant to a lawsuit that was filed against the Company by one of the warrant holders. As such, approximately $0.4 million of the warrant liability, representing 1,347 warrants, was canceled on the date of the settlement agreement.

The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the Black Scholes model. As of December 31, 2020, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of less than one month; annual volatility of 135%; and a risk-free interest rate of 0.08%. As of December 31, 2019, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of one year; annual volatility of 140%; and a risk-free interest rate of 1.59%. The 2016 Warrant Liability matured and was settled for cash of approximately $0.1 million in January 2021. The balance of the 2016 Warrant Liability was zero as of the date of issuance of this Form 10-K.

Bridge Note Warrant Liabilities

During 2019 and 2018, the Company issued warrants in connection with the issuance of Bridge Notes. All of these warrants issuances were classified as warrant liabilities (the “Bridge Note Warrant Liabilities”). See Note 6 - Convertible Notes for further discussion.

The Bridge Note Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of December 31, 2020, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 1.3 to 3.4 years; annual volatility of 162% to 201%; and risk free rate of 0.10% to 0.17%. As of December 31, 2019, assumptions used in the valuation of the Bridge Note Warrant Liabilities include: remaining life to maturity of 2.3 to 4.4 years; annual volatility of 141% to 163%; and risk free rate of 1.58% to 1.65%.

During the years ended December 31, 2020 and 2019, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:


Dollars in Thousands
	Year Ended December 31, 2020
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	70	$	1,268	$	1,338
Total gains:
Revaluation recognized in earnings		60		(73)		(13)
Balance at December 31	$	130	$	1,195	$	1,325

	Year Ended December 31, 2019
	2016 Warrant		Bridge Note		Total Warrant
	Liability		Warrant Liabilities		Liabilities
Beginning balance at January 1	$	116	$	1,016	$	1,132
Additions:		–		1,858		1,858
Total (gains) losses:
Revaluation recognized in earnings		(46)		(370)		(416)
Modification recognized in earnings		–		1,128		1,128
Deductions – warrant liability settlement		–		(2,364)		(2,364)
Balance at December 31	$	70	$	1,268	$	1,338

Derivative Liabilities.

Certain of our issued and outstanding convertible notes contain features that are considered derivative instruments and are required to bifurcated from the debt host and accounted for separately as derivative liabilities. The estimated fair value of the derivatives will be remeasured at each reporting date and any change in estimated fair value of the derivatives will be recorded as non-cash adjustments to earnings. The gains or losses included in earnings are reported in other income (expense) in our consolidated statement of operations.

Bridge Notes Redemption Feature

At the time of the Bridge Note issuances, the Company recorded derivative instruments and valued the derivatives using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without. Approximately $0.4 million of Bridge Notes Redemption Feature derivative liabilities were written off due to Bridge Note conversions during the year ended December 31, 2019.

Conversion Option

The Company recorded derivative liabilities related to the Conversion Option of the Exchange Notes and valued them using the Monte Carlo methodology. Approximately $0.1 million of Conversion Option derivative liabilities were written off due to Exchange Note conversions during the year ended December 31, 2019.

During the year ended December 31, 2019, the change in the fair value of the derivative liabilities was comprised of the following:


(Dollars in thousands)	Year Ended December 31, 2019
	Bridge Notes
	Redemption		Conversion		Total Derivative
	Feature		Option		Liabilities
Beginning balance at January 1	$	30	$	32	$	62
Deductions - write-off in conjunction with convertible note conversions		(438)		(39)		(477)
Total loss:
Revaluation recognized in earnings		408		7		415
Balance at December 31	$	—	$	—	$	—