Debt and Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2018

Fair Value Disclosures [Abstract]

Debt and Fair Value of Financial Instruments

5.Debt and Fair Value of Financial Instruments

At March 31, 2018 and December 31, 2017, the carrying value and the aggregate fair value of the Company’s warrant liability and short- and long-term debt were as follows (in thousands):

	As of  March 31, 2018				As of  December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Liabilities:
Warrant liability	$	3,047	$	3,047	$	—	$	—
Short-term debt, related party		—		—		1,000		1,000
Long-term debt, related party		1,200		1,200		1,200		1,200
Long-term debt		1,623		1,623		1,558		1,558
Total liabilities	$	5,870	$	5,870	$	3,758	$	3,758

The warrants were accounted for as liabilities, with changes in the fair value included in net loss for the respective periods. Because some of the inputs to our valuation model were either not observable nor derived principally from or corroborated by observable market data by correlation or other means, the warrant liability is classified as a Level 3 in the fair value hierarchy.

Our stock price can be volatile and there could be material fluctuations in the value of the warrants in future periods.

A roll forward of our warrant liability classified as Level 3 and measured at fair value on a recurring basis is as follows (in thousands):

Balance at December 31, 2017 (audited)	$	—
Warrants issued		2,908
Change in fair value of warrant liability		139
Balance at March 31, 2018 (unaudited)	$	3,047

Warrant Liability

As further discussed in Note 10, on March 6, 2018, the Company completed a private placement with several investors, wherein a total of 2,857,144 shares of the Company’s common stock was issued at a purchase price of $1.75 per share, with each investor also receiving a warrant to purchase up to a number of shares of Common Stock equal to the number of shares of Common Stock purchased by such investor in the Offering at an exercise price of $2.17 per share, for a total purchase price of $5,000,000.

The initial fair value of the warrant liability associated with the Offering was $2.9 million, and the fair value has increased to $ 3.0 million as of March 31, 2018.

All changes in the fair value of warrants will be recognized in our consolidated statements of operations until they are either exercised or expire.  The warrants are not traded in an active securities market and, as such, the estimated fair value as of March 31, 2018 was determined by using an option pricing model (Black-Scholes) with the following assumptions:

	As of
	March 31, 2018
Expected term	5.50
Common stock market price	$	1.75
Risk-free interest rate		2.63	%
Expected volatility		72.7	%
Resulting fair value (per warrant)	$	1.04

Expected volatility is based on historical volatility. Historical volatility was computed using monthly pricing observations for recent periods that correspond to the expected term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining contractual term of the warrants. The risk-free interest rate is the U.S. Treasury bond rate as of the valuation date.

Debt

On January 30, 2018, the Company entered into amendments to certain of its existing Secured Promissory Notes (the “Notes”) for the sole purpose of extending the relevant maturity dates. The Note dated August 18, 2017 issued to Steven L. Elfman and Monique P. Elfman was amended to extend the maturity date of the Note to February 11, 2018 and was subsequently repaid in full. The Note dated June 26, 2017 issued to William W. Smith, Jr. and Dieva L. Smith was amended to extend the maturity date to July 25, 2018. The Notes dated August 24, 2017 issued to Next Generation TC FBO Andrew Arno IRA 1663 and Andrew Arno were amended to extend the maturity date of each to July 25, 2018.

In connection with the March 6, 2018 private placement discussed in Note 10, as a condition to closing, the following note holders further amended their existing Secured Promissory Notes for the sole purpose of extending the relevant maturity dates to March 25, 2020: (i) Secured Promissory Note dated June 26, 2017, issued to Smith and Dieva L. Smith, as amended; (ii) Secured Promissory Note dated August 24, 2017, issued to Next Generation TC FBO Andrew Arno IRA 1663, as amended; and (iii) Secured Promissory Note, dated August 24, 2017 issued to Andrew Arno, as amended.

The Company evaluated the conversion of the debt under FASB ASU Topic No. 470-60, Troubled Debt Restructurings, for determining whether the modification of the debt instruments would be considered a troubled debt restructuring, using the two-step decision tree. The two steps included an assessment of whether the company is experiencing financial difficulties and if the creditors have provided concessions. Upon completion of this review, the Company concluded that the refinancing did not qualify as troubled debt restructuring.