Note 8. Derivative Liabilities and Fair Value Measurements

Fair value measurements are determined based on assumptions that a market participant would use in pricing an asset or a liability. A three-tiered hierarchy distinguishes between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).

The Company’s financial instruments as of March 31, 2020 and December 31, 2019 consisted of cash and cash equivalents, trade receivables, accounts payable, accrued expenses and other current liabilities. The carrying amounts of all the aforementioned financial instruments approximate fair value because of the short-term nature of these instruments.

Derivative Liabilities

The following table presents the placement in the fair value hierarchy of the Company’s derivative liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:


			Quoted prices in
			active markets		Significant other		Significant
			for identical		observable		unobservable
As of March 31, 2020:	Balance		assets (Level 1)		inputs (Level 2)		inputs (Level 3)

May 2018 Class A Warrants	$	2,298	$	—	$	—	$	2,298
B3D Conversion Option		3,457		—		—		3,457
Calm Warrants		123		—		—		123
Calm Conversion Option		550		—		—		550
Total	$	6,428		—		—	$	6,428
As of December 31, 2019:

May 2018 Class A Warrants	$	778	$	—	$	—	$	778
B3D Conversion Option		382		—		—		382
Calm Warrants		216		—		—		216
Calm Conversion Option		1,761		—		—		1,761
Total	$	3,137	$	—	$	—	$	3,137

The Company measures its derivative liabilities at fair value. The derivative liabilities were classified within Level 3 because they were valued using the Monte-Carlo model, which utilizes significant inputs that are unobservable in the market. The Company assumed an investment round in years 2020 and 2021 to take into account the possible impact of the anti-dilution rights included in its derivative liabilities.

These derivative liabilities were initially measured at fair value and are marked to market at each balance sheet date. The revaluation adjustment of the derivative liabilities is included in “(Loss) gain on revaluation of warrants and conversion options”” in the consolidated condensed statements of operations and comprehensive loss.

The following table summarizes the changes in the Company’s derivative warrant liabilities measured at fair value using significant unobservable inputs (Level 3) during the three months ended March 31, 2020:


December 31, 2019	$	3,137
Increase due to the recording of new B3D Note based upon the Sixth Credit Agreement Amendment		1,643
Conversions of B3D Note		(599)
Settlement of derivative liability due to the exercise of Class A Warrants		(3,122)
Revaluation of derivative conversion options and warrants at March 31, 2020		5,369
March 31, 2020	$	6,428

In March 2020, the Company recorded the settlement of the derivative liability associated with the exercise of its May 2018 Class A Warrants of $3,122. The exercise of the May 2018 Class A Warrants resulted in the issuance of 2,578,455 shares of Common Stock and was recorded in “Common Stock” and “Additional Paid-in Capital” on the Company’s consolidated condensed balance sheet as of March 31, 2020.

Valuation Processes for Level 3 Fair Value Measurements

Fair value measurement of the derivative warrant liabilities falls within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.

March 31, 2020:


Description	Valuation technique	Unobservable inputs	Range
May 2018 Class A Warrants	Monte Carlo Method	Volatility	80.50	%
		Risk-free interest rate	0.37	%
		Expected term, in years	3.13
		Dividend yield	0.00	%

Description	Valuation technique	Unobservable inputs	Range
Calm Warrants	Monte Carlo Method	Volatility	79.10	%
		Risk-free interest rate	0.44	%
		Expected term, in years	4.27
		Dividend yield	0.00	%

Description	Valuation technique	Unobservable inputs	Range
Calm Conversion option	Monte Carlo Method	Volatility	79.10	%
		Risk-free interest rate	0.28	%
		Expected term, in years	2.17
		Dividend yield	0.00	%

Description	Valuation technique	Unobservable inputs	Range
B3D Conversion option	Monte Carlo Method	Volatility	89.50	%
		Risk-free interest rate	0.22	%
		Expected term, in years	1.17
		Dividend yield	0.00	%

December 31, 2019:


Description	Valuation technique	Unobservable inputs	Range
May 2018 Class A Warrants	Monte Carlo Model	Volatility	65.20	%
		Risk-free interest rate	1.67	%
		Expected term, in years	3.38
		Dividend yield	0.00	%

Calm Warrants	Monte Carlo Model	Volatility	66.90	%
		Risk-free interest rate	1.62	%
		Expected term, in years	4.52
		Dividend yield	0.00	%

Calm Conversion option	Monte Carlo Model	Volatility	66.90	%
		Risk-free interest rate	1.75	%
		Expected term, in years	2.41
		Dividend yield	0.00	%

B3D Conversion option	Monte Carlo Model	Volatility	65.70	%
		Risk-free interest rate	1.62	%
		Expected term, in years	1.42
		Dividend yield	0.00	%

Sensitivity of Level 3 Measurements to Changes in Significant Unobservable Inputs

The inputs to estimate the fair value of the Company’s derivative liabilities were the current market price of the Company’s Common Stock, the exercise price of the derivative of the conversion options and the warrants, their remaining expected term, the volatility of the Company’s Common Stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement.

Generally, an increase in the market price of the Company’s shares of Common Stock, an increase in the volatility of the Company’s shares of Common Stock, and an increase in the remaining term of the derivative liabilities would each result in a directionally similar change in their estimated fair values. Such changes would increase the associated liabilities while decreases in these assumptions would decrease the associated liabilities. An increase in the risk-free interest rate or a decrease in the differential between the derivative liabilities’ exercise price and the market price of the Company’s shares of Common Stock would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not declared, and does not plan to declare, dividends on its Common Stock, and as such, there is no change in the estimated fair value of the derivative liabilities due to the dividend assumption.