10. Derivative Financial Instruments

The Company determined that certain embedded features related to the Series 1 preferred stock are derivative financial instruments.

Fair values of derivative instruments to be classified as derivative liabilities on the balance sheet consist of the following:


($ in thousands)
Liability derivates:	Balance Sheet Location		Fair Value
June 30, 2018:
Derivative liabilities		Liabilities	$	2,358

The change in the derivative liability for the three and six months ended June 30, 2018 consisted of the following:


($ in thousands)
	Fair Value
Balance, December 31, 2017	$	2,424
Dividends		73
Change in fair value		(28	)

Balance, March 31, 2018	$	2,469

Dividends		72
Change in fair value		(183	)

Balance, June 30, 2018	$	2,358

The fair value of the Series 1 preferred stock dividends was estimated using a probability-weighted approach and a Monte Carlo simulation model. The fair value of the embedded derivatives was estimated using the “with” and “without” method where the preferred stock was first valued with all of its features (“with” scenario) and then without derivatives subject to the valuation analysis (“without” scenario). The fair value of the derivatives was then estimated as the difference between the fair value of the preferred stock in the “with” scenario and the preferred stock in the “without” scenario. The model also takes into account, management estimates of clinical success/failure based upon market studies and probability of potential conversion and liquidation events. If these estimates were different, the valuations would change, and that change could be material. Inputs to the models included the following:


	June 30, 2018			December 31, 2017
Risk-free interest rate		2.74	%		1.92 - 2.12	%
Expected dividend rate		0			0
Expected volatility		82.40	%		68.7 - 80.4	%
Preferred stock conversion limit - percentage of outstanding common stock		19.90	%		19.90	%
Preferred conversion floor price	$	1.00		$	1.00

See Notes 5 and 8 for additional discussion regarding the accounting for and valuation of these derivative financial instruments.