Fair Value Measurements

6 Months Ended

Jun. 30, 2015

5. Fair Value Measurements

The following tables summarize the Company's assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014:

June 30, 2015	Fair Value		(Level 1)		(Level 2)		(Level 3)
Common stock warrants	$	59,262	$	-	$	-	$	59,262
Total	$	59,262	$	-	$	-	$	59,262

December 31, 2014	Fair Value		(Level 1)		(Level 2)		(Level 3)
Common stock warrants	$	30,278	$	-	$	-	$	30,278
Total	$	30,278	$	-	$	-	$	30,278

Prior to the Merger, the Company issued senior secured promissory notes (the “Senior Secured Notes”) with an aggregate principal amount of $5,000,000 which were redeemable upon an event of default. The Senior Secured Notes were later exchanged in favor of amended senior secured promissory notes (the “Amended Secured Convertible Notes”), resulting in an extinguishment of the related derivative liability for the prior Senior Secured Notes. The Company then issued new secured convertible notes (the “New Secured Convertible Notes”, and together with the Amended Secured Convertible Notes, the “Secured Convertible Notes”) with an aggregate principal amount of $3,000,000 which may be redeemed upon an event of default. Since the Secured Convertible Notes were issued at a substantial discount and the event of default clause may require accelerated repayment, the Secured Convertible Notes include an embedded derivative that is not clearly and closely related to the host contract. Accordingly, the Company bifurcated the embedded derivative from the host contract and recognized a derivative liability at fair value upon issuance of the Secured Convertible Notes. The Company estimated the fair value of the derivative liability using a valuation model which included the weighted probability of the amount of redemption and the time until redemption occurs over the note term. The Secured Convertible Notes were paid in full on October 2, 2014, resulting in an extinguishment of the related derivative liability, see Note 6 below.

In May 2013, the Company sold Series A-1 redeemable convertible preferred stock (“Series A-1 Preferred Stock”) which contained provisions for anti-dilution protection in the event the Company issues common stock at a price below a price per share formula, as defined. At June 30, 2015, the threshold price was $0.289 per share. The anti-dilution protection requires the Company to issue the holders of Series A-1 Preferred Stock shares of common stock or in the event that not enough shares of common stock are authorized and unissued, cash. The anti-dilution provision represents an embedded derivative as it is not clearly and closely related to the host contract. Accordingly, the Company bifurcated the embedded derivative from the host contract and recognized a derivative liability at fair value upon issuance of the Series A-1 Preferred Stock. The Company estimated the fair value of the derivative liability using the Monte Carlo option pricing valuation model which included a probability weighted present value calculation. Post-Merger, the Series A-1 Preferred Stock are no longer redeemable.

As discussed in Note 7, in January 2014, the Company issued warrants to purchase 238,412 shares common stock at an exercise price of $3.04 to a placement agent. The exercise price is subject to adjustment and the warrants may be exercised without cash consideration by forfeiting a portion of shares. Accordingly, the Company recognized a derivative liability at fair value upon issuance of the warrants. The exercise price was reduced to its floor of $2.27 as a result of the sale of the Fortress Shares in October 2014. The Company estimated the fair value of the derivative liability using the Black-Scholes option pricing model. The fair value of the derivative liability as of June 30, 2015 was estimated using the following assumptions:

Expected volatility	60	%
Risk free rate	1.05	%
Dividend yield	0	%
Expected term (in years)	3.8226

The assumptions utilized were derived in a similar manner as discussed in Note 7 related to the fair value of stock options.

The Company revalues the derivative liabilities at the end of each reporting period using the same models as at issuance, updated for new facts and circumstances, and recognizes the change in the fair value in the statements of operations as other income (expense). The following sets forth a summary of changes in fair value of the Company’s level 3 liabilities measured on a recurring basis for the six months ended June 30, 2014 and June 30, 2015:

			Series A-1
	Convertible		Preferred		Common
	Notes Payable		Stock		Stock
	Derivative Liability		Derivative Liability		Warrants
Balance at December 31, 2013	$	534,975	$	56,926	$	-
Extinguishment		(118,300)		-		-
Fair value at issuance		189,300		-		466,706
Change in fair value		(220,975)		(56,926)		(117,743)
Balance at June 30, 2014	$	385,000	$	-	$	348,963

			Series A-1
	Convertible		Preferred		Common
	Notes Payable		Stock		Stock
	Derivative Liability		Derivative Liability		Warrants
Balance at December 31, 2014	$	-	$	-	$	30,278
Fair value at issuance		-		-		41,305
Change in fair value		-		-		(12,321)
Balance at June 30, 2015	$	-	$	-	$	59,262

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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