3. Fair Value Measurements

ASC 820 “Fair Value Measurements,” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as 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. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1— Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.

Level 2— Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model derived valuations whose significant inputs are observable.

Level 3— Unobservable inputs that reflect the reporting entity’s own assumptions.

The following tables set forth the fair value of the Company’s financial instruments that were measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018.


		June 30, 2019
	(unaudited)
		Level 1		Level 2		Level 3		Total
Warrant liability		$	—	$	—	$	5,182,273	$	5,182,273
Total fair value		$	—	$	—	$	5,182,273	$	5,182,273


	December 31, 2018
	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	220,376	$	220,376
Total fair value	$	—	$	—	$	220,376	$	220,376

The change in the estimated fair value of Level 3 liabilities is summarized below:


	Six Months Ended
	June 30, 2019
	Warrant
	Liability
	(unaudited)
Beginning fair value of Level 3 liability	$	220,376
Additions		5,122,928
Extinguishment		—
Change in fair value		(161,031)
Ending fair value of Level 3 liability	$	5,182,273

Warrant Liability

The warrants associated with the Level 3 warrant liability were the November 2016 Series A Warrants, the October 2018 Underwriter Warrants, the LOC warrant and the 2019 Bridge Note warrants, which at June 30, 2019 were valued at $1,053, $52,265, $150,970, and $4,977,985, respectively in the Company’s condensed consolidated balance sheet. At December 31, 2018, the warrants associated with the Level 3 warrant liability were the November 2016 Series A Warrants, the October 2018 Underwriter Warrants, which were valued at $7,388 and $212,988, respectively in the Company’s consolidated balance sheet.

The Series A warrant valuation of $7,388 at December 31, 2018 was computed using the Black-Scholes-Merton pricing model using a stock price of $16.10, a strike price of $787.50 per share, an expected term of 3.41 years, volatility of 135.63% and a risk-free discount rate of 2.46%. The Series A warrant valuation of $1,053 at June 30, 2019 was computed using the Black-Scholes-Merton pricing model using a stock price of $4.70, a strike price of $787.50 per share, an expected term of 2.92 years, volatility of 145.60% and a risk-free discount rate of 1.71%. The net change in the fair value of the warrants of $9,941 was recorded as a net loss and $6,335 was recorded as a net gain for the three and six months ended June 30, 2019, respectively, in the change in fair value of warrants, derivative liability and conversion option liability in the condensed statements of operations.

The October 2018 Underwriter Warrants valuation of $212,988 at December 31, 2018 was computed using the Black-Scholes-Merton pricing model using a stock price of $16.10, a strike price of $52.50 per share, an expected term of 4.76 years, volatility of 135.63% and a risk free discount rate of 2.51%. The October 2018 Underwriter Warrants valuation of $52,265 at June 30, 2019 was computed using the Black-Scholes-Merton pricing model using a stock price of $4.70, a strike price of $52.50 per share, an expected term of 4.26 years, volatility of 145.60% and a risk-free discount rate of 1.76%. The net change in the fair value of the warrants of $221,753 and $160,723 for the three and six months ended June 30, 2019, respectively, is recorded as a net gain to in the change in fair value of warrants, derivative liability and conversion option liability in the condensed statements of operations

The LOC Warrants were issued on March 29, 2019 with a valuation at issuance and at March 31, 2019 of $116,297, computed using the Black-Scholes-Merton pricing model using a stock price of $19.60, a strike price of $17.50 per share, an expected term of 5.0 years, volatility of 145.72% and a risk-free discount rate of 2.23%. The LOC Warrants valuation of $150,970 at June 30, 2019 was computed using the Black-Scholes-Merton pricing model using a stock price of $4.70, a strike price of $4.70 per share, an expected term of 4.75 years, volatility of 145.60% and a risk-free discount rate of 1.76%. The net change in the fair value of the warrants of $34,673 for the three and six months ended June 30, 2019 was recorded as a loss in the change in fair value of warrants, derivative liability and conversion option liability in the consolidated statements of operations.

The 2019 Bridge Warrants were issued between March and June 2019, concurrent to the Company entering into Promissory Notes of $5,050,000. The Company issued (i) fourteen Notes with a principal balance of $3,550,000 and warrant coverage at 125% of principal, and (ii) seven Notes with a principal balance of $1,500,000 and warrant coverage at 75% of principal. The exercise price of the warrants is either (i) the price the Company issues common shares in its next public offering subject to a registration statement or (ii) if no such offering is consummated by the four-month maturity date of the Notes, then the exercise price is equal to the closing price of the Company’s common stock on the Notes four-month maturity date. The warrants for all twenty-one Bridge Notes had a collective fair value of $4,977,985 at June 30, 2019, computed using the Black-Scholes-Merton pricing model using a stock price of $4.70, a strike price of $4.70 per share, an expected term of 4.77 years, volatility of 145.60% and a risk-free discount rate of 1.76%. The warrants for all twenty-one Bridge Notes had a collective issuance date fair value of $5,005,742, computed using the Black-Scholes-Merton pricing model using a range of stock prices between $4.84 and $32.90, a range of strike prices between $4.84 and $32.90 per share, an expected term of 5.0 years, a range of volatilities between 145.60% and 145.72%, and a range of risk-free discount rates between 1.76% and 2.23%. The net change in fair value of the warrants of $27,754 for the three and six months ended June 30, 2019 was recorded as a gain in the change in fair value of warrants, derivative liability and conversion option liability in the consolidated statements of operations.