Fair Value Measurements

9 Months Ended

Sep. 30, 2016

11. Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and warrants. General accounting principles for fair value measurement established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy are described below:

Level 1: Values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or other model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3: Values are generated from model-based techniques that use significant assumptions not observable in the market.

The following table sets forth the Company’s assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. As required by the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	Fair Value Measurement Using
	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets at September 30, 2016:
Cash equivalents	$	22,220	22,220	—	—
Total assets at fair value	$	22,220	22,220	—	—
Liabilities at September 30, 2016:
Warrants issued May 2012	$	118,219	—	—	118,219
Warrants issued August 2013		265,466	—	—	265,466
Warrants issued September 2016		27,138,462	—	—	27,138,462
Total liabilities at fair value:	$	27,522,147	—	—	27,522,147
Assets at December 31, 2015:
Cash equivalents	$	524,083	524,083	—	—
Total assets at fair value	$	524,083	524,083	—	—
Liabilities at December 31, 2015:
Warrants issued May 2012	$	143,681	—	—	143,681
Warrants issued August 2013		650,449	—	—	650,449
Total liabilities at fair value:	$	794,130	—	—	794,130

Level 1

The Company’s financial assets consist of cash equivalents invested in money market funds in the amount of $22,220 and $524,083 at September 30, 2016 and December 31, 2015, respectively. These assets are classified as Level 1 as described above and total interest income recorded for these investments was insignificant during both the nine month periods ended September 30, 2016, and September 30, 2015. There were no transfers in or out of Level 1 during the period ended September 30, 2016.

Level 2

The Company does not have any financial assets or liabilities classified as Level 2.

Level 3

In conjunction with the Company’s May 2012, August 2013 and September 2016 financing transactions, the Company issued warrants to purchase shares of the Company’s common stock. Due to the provisions included in the warrant agreements, the warrants did not meet the exemptions for equity classification and as such, the Company accounts for these warrants as derivative instruments. The calculated fair value of the warrants is classified as a liability and is periodically re-measured with any changes in value recognized in “Other income (expense)” in the Statements of Operations.

The remaining warrants from the May 2012 transaction expire in May 2018 and were revalued as of September 30, 2016 using the following assumptions: 1) volatility of 112.61%; 2) risk-free interest rate of 0.77%; and 3) a closing stock price of $0.87.

The remaining warrants from the August 2013 expire in November 2018 and were revalued as of September 30, 2016 using the following assumptions: 1) volatility of 105.32%; 2) risk-free interest rate of 0.77%; and 3) a closing stock price of $0.87.

The initial valuation of the September 2016 warrants were valued as of September 26, 2016 using the following assumptions: 1) volatility of 119.94%; 2) risk-free interest rate of 1.13%; and 3) a closing stock price of $0.59.

The September 2016 warrants expire in September 2021 and were revalued as of September 30, 2016 using the following assumptions: 1) volatility of 120.43%; 2) risk-free interest rate of 1.14%; and 3) a closing stock price of $0.87.

The significant unobservable input used in the fair value measurement of the Company’s warrants is volatility. Significant increases (decreases) in the volatility in isolation would result in significantly higher (lower) liability fair value measurements.

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the nine month period ended September 30, 2016:


	Warrants issued May 2012	Warrants issued August 2013	Warrants issued September 2016	Total Liabilities
Balance at beginning of period	$ 143,681	$ 650,449	$ -	$ 794,130
Issues	-	-	17,649,231	17,649,231
Settlements	-	-	-	-
Revaluation	(25,462)	(384,983)	9,489,231	9,078,786
Balance at end of period	$ 118,219	$ 265,466	$ 27,138,462	$ 27,522,147

The Company currently does not have derivative instruments to manage its exposure to currency fluctuations or other business risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. All derivative financial instruments are recognized in the balance sheet at fair value.

- 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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