Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts and other receivables, 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 September 30, 2015 and December 31, 2014 (in thousands):

	Fair value measured at September 30, 2015
	Total carrying value at September 30,		Quoted prices in  active markets		Significant other  observable inputs		Significant  unobservable inputs
	2015		(Level 1)		(Level 2)		(Level 3)
Assets
Marketable securities - mutual funds	$	775	$	775	$	-	$	-
Liabilities
Fair value of warrant liabilities	$	1,759	$	-	$	-	$	1,759
	Fair value measured at December 31, 2014
	Total carrying value at December 31,		Quoted prices in  active markets		Significant other observable inputs		Significant  unobservable inputs
	2014		(Level 1)		(Level 2)		(Level 3)
Assets
Marketable securities - mutual funds	$	3,500	$	3,500	$	-	$	-

There were no transfers between Level 1, 2 or 3 during the three and nine months ended September 30, 2015.

Level 3 Valuation Techniques

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 “fair value adjustments for warrant liabilities” in the Company’s condensed consolidated statements of operations.

On July 21, 2015, the Company issued the July 2015 Warrants to the investors in the July 2015 Financing to purchase aggregate of 7,035,024 shares of common stock. The July 2015 Warrants become exercisable on January 22, 2016 at an exercise price of $0.43 per share. The warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions (as defined) at the Company and therefore are classified as liabilities. The July 2015 Warrants have been recorded at their fair value using the binomial 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.  

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 September 30, 2015 is as follows:

Date of valuation	July 21, 2015			September 30,2015
Risk-free interest rate		1.69	%	1.37%
Expected volatility		100.00	%	100.00%
Expected life (in years)		5.5		5.3
Expected dividend yield		-		-

The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility in the binomial model is based on an expected volatility of 100% which represents the percentage required to be used when valuing the cash settlement feature as contractually stated in the form of warrants. 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 as of September 30, 2015 (in thousands):

Beginning balance at January 1, 2015	$	-
Recognition of warrant liabilities		985
Fair value adjustment of warrant liabilities		774
Ending balance at September 30, 2015	$	1,759