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, 2020 and December 31, 2019.


	June 30, 2020
	(unaudited)
(in thousands)	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	4,086	$	4,086
Total fair value	$	—	$	—	$	4,086	$	4,086


	December 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	3	$	3
Total fair value	$	—	$	—	$	3	$	3

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


	Six Months Ended
	June 30, 2020
	Warrant
	Liability
(in thousands)	(unaudited)
Beginning fair value of Level 3 liability	$	3
Additions		3,696
Change in fair value		387
Ending fair value of Level 3 liability	$	4,086

Warrant Liability

The warrants associated with the Level 3 warrant liability were the November 2016 Series A warrants, the October 2018 Underwriter warrants and the May 2020 Series 3 warrants, which, at June 30, 2020, were valued at $1, $1,566 and $4,084,478 respectively, in the Company’s unaudited condensed consolidated balance sheets. The warrants associated with the Level 3 warrant liability activity for the year ended December 31, 2019 were the November 2016 Series A warrants, the October 2018 Underwriter warrants, the March 2019 LOC warrants and the Bridge warrants, which at December 31, 2019 were valued at $10, $3,482, zero and zero, respectively in the Company’s consolidated balance sheets.

The Series A Warrants

The Series A warrant valuation of $1 at June 30, 2020 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.49, a strike price of $787.50 per share, an expected term of 1.90 years, volatility of 141% and a risk-free discount rate of 0.16%. The Series A warrant valuation of $10 at December 31, 2019 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.65, a strike price of $787.50 per share, an expected term of 2.41 years, volatility of 143.41% and a risk-free discount rate of 1.62%. The net decrease in the fair value of the warrants of $2 and $9 for the three and six months ended June 30, 2020, respectively, was recorded as a gain in the change in fair value of financial instruments in the condensed consolidated statements of operations.

The October 2018 Underwriter Warrants

The October 2018 Underwriter Warrants valuation of $1,566 at June 30, 2020 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.49, a strike price of $52.50 per share, an expected term of 3.30 years, volatility of 141% and a risk-free discount rate of 0.18%. The October 2018 Underwriter Warrants valuation of $3,482 at December 31, 2019 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.65, a strike price of $52.50 per share, an expected term of 3.76 years, volatility of 143.41% and a risk-free discount rate of 1.69%. The net decrease in the fair value of the warrants of $530 and $735 for the three and six months ended June 30, 2020, respectively, was recorded as a gain in the change in fair value of financial instruments in the condensed consolidated statements of operations.

The May 2020 Series 3 Warrants

The May 2020 Series 3 Warrants valuation of $4,084,478 at June 30, 2020 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.49, a strike price of $0.05 per share, an expected term of 5.39 years, volatility of 141% and a risk-free discount rate of 0.29%. The May 2020 Series 3 Warrants valuation of $3,695,723 at issuance on May 22, 2020 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.44, a strike price of $0.05 per share, an expected term of 5.50 years, volatility of 143% and a risk-free discount rate of 0.34%. The net increase in the fair value of the warrants of $386,755 for the three and six months ended June 30, 2020 was recorded as a loss in the change in fair value of financial instruments in the condensed consolidated statements of operations.