Fair Value of Financial Assets and Liabilities

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

Note 7. Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these 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)

The following table presents the Company's assets and liabilities that are measured at fair value at December 31, 2019 and 2018 ($ in thousands):

	Fair value measured at December 31, 2019
	Total at December 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	2019		(Level 1)		(Level 2)		(Level 3)
Assets
Marketable securities - mutual and exchange traded funds	$	857	$	857	$	-	$	-
Investments in Hoth	$	10,128	$	10,128	$	-	$	-

	Fair value measured at December 31, 2018
	Total at December 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	2018		(Level 1)		(Level 2)		(Level 3)
Assets
Marketable securities - mutual and exchange traded funds	$	2,700	$	2,700	$	-	$	-
Investments in Hoth	$	9,214	$	-	$	-	$	9,214
Liabilities
Fair value of warrant liabilities	$	82	$	-	$	-	$	82

Level 2 Valuation Techniques

The fair values of Level 2 marketable securities are determined using one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 Valuation Techniques

Level 3 Valuation Techniques – Assets

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

	Fair Value of Level 3 investment
	December 31, 2019			December 31, 2018
Beginning balance	$	9,214		$	1,020
Transfer of Hoth From Level 3 to Level 1 upon IPO		(9,214	)		-
Change in fair value of Hoth		-			8,194
Ending balance	$	-		$	9,214

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as change in fair value of investment in the Consolidated Statements of Operations.

A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company's valuation in Hoth that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of December 31, 2018 is as follows:

Date of valuation	December 31, 2018
Risk-free interest rate		2.45	%
Expected volatility		75.00	%
Contractual life (in years)		0.17

The investment in Hoth as of December 31, 2018 was valued using the PWERM (Probability Weighted Expected Return Method). Under this method, an analysis of future values of a company is performed for several likely scenarios. These scenarios included both a high and low range of values that were provided to Hoth by their investment bankers. The price per share was $6.50 and $5.50, respectively. The value is then discounted to the present using a risk-adjusted discount rate of 15%. The present values of the common stock under each scenario are then weighted based on the probability of each scenario occurring to determine the value of the investment. A 10% probability was placed on the high end and a 90% probability was placed on the low end.

Level 3 Valuation Techniques – Liabilities

Level 3 financial liabilities consist of the 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.

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 warrant liabilities are recorded in "change in fair value of warrant liabilities" in the Company's consolidated statements of operations.

The Series A and Series B warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company's stock price, contractual terms, maturity, risk free rates, as well as volatility. The warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions at the Company or require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities.

A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company's warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of December 31, 2019 and 2018 is as follows:

Date of valuation	December 31, 2019	December 31, 2018
Contractual life (in years)	0.93-1.06	1.94-2.06
Expected volatility	74% - 100%	72% - 103%
Risk-free interest rate	1.59%	2.48%

The risk-free interest rate was based on rates established by the Federal Reserve. The general expected volatility is based on standard deviation of the Company's underlying stock price's daily logarithmic returns. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock and does not expect to pay dividends on its common stock in the future.

The following table sets forth a summary of the changes in the fair value of the Company's Level 3 financial liabilities that are measured at fair value on a recurring basis for the year ended December 31, 2019 and 2018 ($ in thousands):

	Fair Value of Level 3 financial liabilities
	December 31, 2019			December 31, 2018
Beginning balance	$	82		$	822
Fair value adjustment of warrant liabilities		(82	)		(740	)
Ending balance	$	-		$	82