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 September 30, 2020 and December 31, 2019.


	September 30, 2020
	(unaudited)
(in thousands)	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	126	$	126
Series D perpetual preferred stock liability		—		—		6,430		6,430
Total fair value	$	—	$	—	$	6,556	$	6,556


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

The Series D perpetual preferred stock liability represents 848,117 of 8% cumulative perpetual preferred shares. The shares are redeemable at $8.00 per share on December 31, 2024, the date in which contractual cash outflows of the Exchange Note 2 (See Note 7) require the entire settlement or redemption of the Series D perpetual preferred stock liability. The shares are entitled to stock dividends at the rate of 8% per annum, compounded monthly for twenty-four consecutive calendar months, based on the outstanding number of shares, including any dividend in arrears. Since the shares are mandatorily redeemable on a specified date they are recognized as liabilities.

The fair value of the Series D perpetual preferred stock liability amounting to $6,430,000 as of
September 30, 2020 was based on weighted discounted cash flows representing the settlement value of the shares and cumulative dividends issued using a current borrowing rate adjusted for counterparty. They were classified as level 3 fair values in the fair value hierarchy due to the use of unobservable inputs, including the Company’s own credit risk.

The Company determined and performed the valuations of the Series D perpetual preferred stock liability with the assistance of an independent valuation service provider. On a quarterly basis, the Company considers the main level 3 inputs used derived as follows:

Discount rates for Series D perpetual preferred stock were determined using comparison of various effective yields on investments as of the valuation date.

Weighted probability of cash outflows was estimated based on the entity's knowledge of the business and how the current economic environment is likely to impact the timing of the cash outflows.

The following table summarizes the quantitative information about the significant unobservable inputs used in level 3 fair value measurements:


	Range of inputs (probability-weighted average)		Relationship of unobservable
Unobservable Inputs	2020	2019	inputs to fair value
Risk Adjusted Discount Rate	12%-15% (14%)	N/A	Lower discount rate (-200 basis points (bps)) would increase FV by $103,000; Higher discount rate (+100 bps) would decrease FV by $117,000
Timing of Cash Flows: Settlement on September 30, 2021	60%-90% (90%)	N/A	If expected cash flows determined by Management would consider a mix of 70%, 15%, and 15% for the respective scenarios, FV would have decreased by $38,000. If expected cash flows determined by Management would consider a mix of 60%, 20%, and 20% for the respective scenarios, FV would have decreased by $57,000.
Timing of Cash Flows: Settlement on December 30, 2021	5%-20% (5%)	N/A	If expected cash flows determined by Management would consider a mix of 70%, 15%, and 15% for the respective scenarios, FV would have decreased by $38,000. If expected cash flows determined by Management would consider a mix of 60%, 20%, and 20% for the respective scenarios, FV would have decreased by $57,000.
Timing of Cash Flows: Settlement on August 31, 2022	5%-20% (5%)	N/A	If expected cash flows determined by Management would consider a mix of 70%, 15%, and 15% for the respective scenarios, FV would have decreased by $38,000. If expected cash flows determined by Management would consider a mix of 60%, 20%, and 20% for the respective scenarios, FV would have decreased by $57,000.

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


	Nine Months Ended
	September 30, 2020
	Warrant Liability		Series D perpetual preferred stock liability
(in thousands)	(unaudited)		(unaudited)
Beginning fair value of Level 3 liability	$	3	$	—
Additions		3,696		6,359
Exercises		(5,993)		—
Change in fair value		2,420		71
Ending fair value of Level 3 liability	$	126	$	6,430

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 September 30, 2020, were valued at zero, $1,000 and $125,000 respectively, in the Company’s 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 zero, $3,000, zero and zero, respectively in the Company’s condensed consolidated balance sheets.

The November 2016 Series A Warrants

The Series A warrant valuation of zero at September 30, 2020 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.29, a strike price of $787.50 per share, an expected term of 1.70 years, volatility of 148% and a risk-free discount rate of 0.13%. The Series A warrant valuation of zero 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 zero for the three and nine months ended September 30, 2020, was recorded as a gain in the change in fair value of financial instruments in the unaudited condensed consolidated statements of operations.

The October 2018 Underwriter Warrants

The October 2018 Underwriter Warrants valuation of $1,000 at September 30, 2020 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.29, a strike price of $52.50 per share, an expected term of 3.00 years, volatility of 156% and a risk-free discount rate of 0.16%. The October 2018 Underwriter Warrants valuation of $3,000 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 $1,000 and $3,000 for the three and nine months ended September 30, 2020, respectively, was recorded as a gain in the change in fair value of financial instruments in the unaudited condensed consolidated statements of operations.

The May 2020 Series 3 Warrants

The May 2020 Series 3 Warrants valuation of $123,000 at September 30, 2020 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.29, a strike price of $0.00 per share, an expected term of 5.14 years, volatility of 142% and a risk-free discount rate of 0.28%. The May 2020 Series 3 Warrants valuation of $3,696,000 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 $2,034,000 and $2,422,000 for the three and nine months ended September 30, 2020, respectively, was recorded as a loss in the change in fair value of financial instruments in the unaudited condensed consolidated statements of operations.