Fair Value Measurements

12 Months Ended

Dec. 31, 2016

4.	Fair Value Measurements

Extinguishment of Derivative Liabilities related to Cognate

On May 2, 2016, the Company submitted a remediation plan (the “Remediation Plan”) related to certain stock previously issued to Cognate to regain compliance with Nasdaq’s Rule 5635. The Remediation Plan was accepted by Nasdaq on August 30, 2016.

Pursuant to the Remediation Plan, the Company canceled the most favored nation provisions related to warrants and common shares issued to Cognate under 2013 Manufacturing Services agreement (“2013 Agreement”) and 2014 Manufacturing Services Agreements (“2014 Agreements”) through a binding agreement with Cognate. In addition, Cognate returned and the Company extinguished 6,880,574 warrants at an original exercise price of $4.00 that were issued under the 2014 Agreements; the Company issued replacement warrants of 4,305,772 at a higher exercise price ($4.27). The fair value of the 4.3 million replacement warrants was approximately $403,000 on the grant date, and was recorded in the additional paid in capital. The aggregate fair value of the 6.88 million warrants extinguished as of August 30, 2016 was approximately $10.1 million, and was recorded through additional paid in capital.

A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Cognate warrants extinguishment as of August 30, 2016 is as follows:

Date of valuation	August 30, 2016
Strike price	$	0.35
Contractual term (years)		2.8
Volatility (annual)		81	%
Risk-free rate		1	%
Dividend yield (per share)		0	%

Derivative Warrants Granted in 2016

Public and Private Offering

During the year ended December 31, 2016, the Company issued 15,819,000 warrants (the “Warrants”) to multiple investors (the “Holders”), including 643,000 warrants at exercise price of $0.35 to Jerry Jasinowski, who serves as the board director of the Company. Since the Company’s adopted sequencing policy (see FN 3), the warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income on the statement of operation and disclosed in the financial statements as long as the contracts remain classified as liabilities

A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant granted during the year ended December 31, 2016 is as follows:

	2016 Warrants Granted
Strike price	$	0.36
Contractual term (years)		5.0
Volatility (annual)		99	%
Risk-free rate		2	%
Dividend yield (per share)		0	%

Debt Conversion

During the year ended December 31, 2016, the Company issued 6,034,000 shares of common stock and 2,517,000 warrants (the “Warrants”) to a debt holder (the “Holder”) to convert his outstanding debt in dispute and accrued interest for total $2.5 million. The Warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income on the statement of operation and disclosed in the financial statements as long as the contracts remain classified as liabilities

A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant granted during the year ended December 31, 2016 is as follows:

	2016 Warrants Granted
Strike price	$	0.48
Contractual term (years)		5.5
Volatility (annual)		137	%
Risk-free rate		1	%
Dividend yield (per share)		0	%

Share settled Debt

The fair value of share settled debt (in default) was valued based upon the closing price of the Company’s common stock as of October 13, 2016 and December 31, 2016.

Extinguishment of Warrant Liabilities Related to Cash Exercise

During the year ended December 31, 2016 approximately 2,555,000 warrants classified as derivative liabilities were exercised for cash. A summary of weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring warrant exercises (originally recorded as liabilities) during the year ended December 31, 2016 is as follows:

	2016 Warrants Exercises
Strike price	$	0.35
Contractual term (years)		2.2
Volatility (annual)		84	%
Risk-free rate		1	%
Dividend yield (per share)		0	%

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of December 31, 2016 and 2015 (in thousands):

	Fair value measured at December 31, 2016
			Quoted prices in active		Significant other		Significant
	Fair value at		markets		observable inputs		unobservable inputs
	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Derivative liability	$	4,862	$	-	$	-	$	4,862
Share-settled debt (in default)		5,200						5,200
Total fair value	$	10,062	$	-	$	-	$	10,062

Fair value measured at December 31, 2015

Quoted prices in active

Significant other

Significant

Fair value at

markets

observable inputs

unobservable inputs

December 31, 2015

(Level 1)

(Level 2)

(Level 3)

Derivative liability

27,982

There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2016 and 2015, respectively.

The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management.

The following table presents changes in Level 3 liabilities measured at fair value for the years ended December 31, 2016 and 2015. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (in thousands).

	Warrant		Share-settled
	Liability		Debt (in Default)		Total
Balance – January 1, 2015	$	44,742	$	-	$	44,742
Change in fair value		(15,676)		-		(15,676)
Cashless warrants exercise		(521)		-		(521)
Warrants exercised for cash		(264)		-		(264)
Redeemable security settlement		(299)		-		(299)
Balance – December 31, 2015		27,982		-		27,982
Extinguishment of derivative liabilities related to Cognate		(10,131)				(10,131)
Extinguishment of warrant liabilities related to warrants exercised for cash		(415)				(415)
Warrants granted		5,317				5,317
Share-settled debt assumed from Cognate		-		5,680		5,680
Conversion of share-settled debt		-		(480)		(480)
Change in fair value		(17,891)		-		(17,891)
Balance – December 31, 2016	$	4,862	$	5,200	$	10,062

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy for the years ended December 31, 2016 and 2015 is as follows:

Date of valuation	December 31, 2016			December 31, 2015
Strike price	$	0.60		$	3.49
Contractual term (years)		4.7			3.1
Volatility (annual)		98	%		87	%
Risk-free rate		2	%		1	%
Dividend yield (per share)		0	%		0	%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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