Fair Value Measurements

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements

5.          Fair Value Measurements

 

The following table summarizes the Company's assets and liabilities measured at fair value on a recurring basis at June 30, 2014:

	Fair Value		(Level 1)		(Level 2)		(Level 3)
Convertible promissory notes payable derivative liability	$	385,000	$	-	$	-	$	385,000
Common stock warrants		348,963		-		-		348,963
Total	$	733,963	$	-	$	-	$	733,963

As discussed in Note 6, prior to the Merger, the Company issued secured promissory notes (the “Senior Secured Notes”) which were redeemable upon an event of default. The Senior Secured Notes were later exchanged in favor of new convertible notes (the “Amended Secured Convertible Notes”) , resulting in an extinguishment of the related derivative liability for the prior Senior Secured Notes. Also discussed in Note 6, the Company also then issued certain additional new convertible notes (the “New Secured Convertible Notes”) which may be redeemed upon an event of default (together with the Amended Secured Convertible Notes, the “Secured Convertible Notes”). Since the Secured Convertible Notes were issued at a substantial discount and the event of default clause may require accelerated repayment, the Secured Convertible Notes include an embedded derivative that is not clearly and closely related to the host contract. Accordingly, the Company bifurcated the embedded derivative from the host contract and recognized a derivative liability at fair value upon issuance of the Secured Convertible Notes. The Company estimated the fair value of the derivative liability using a valuation model which included the weighted probability of the amount of redemption and the time until redemption occurs over the note term.

In May 2013, the Company sold Series A-1 redeemable convertible preferred stock which contained provisions for anti-dilution protection in the event the Company issues common stock at a price below a price per share formula, as defined. At June 30, 2014, the threshold price was $1.14 per share. The anti-dilution protection requires the Company to issue the holders of Series A-1 shares of common stock or in the event of unavailable authorized shares of common stock, cash. The anti-dilution provision represents an embedded derivative as it is not clearly and closely related to the host contract. Accordingly, the Company bifurcated the embedded derivative from the host contract and recognized a derivative liability at fair value upon issuance of the Series A-1 redeemable convertible preferred stock. The Company estimated the fair value of the derivative liability using the Monte Carlo option pricing valuation model which included a probability weighted present value calculation. Post Merger, the Series A redeemable convertible preferred stock are no longer redeemable. Therefore, these were transferred to Series A preferred stock within the Stockholders' equity.

As discussed in Note 7, in January 2014, the Company issued warrants to purchase 238,412 shares common stock at an exercise price of $3.04 to a placement agent. The exercise price is subject to adjustment and the warrants may be exercised without cash consideration in lieu of forfeiting a portion of shares. Accordingly, the Company recognized a derivative liability at fair value upon issuance of the warrants. The Company estimated the fair value of the derivative liability using the Black-Scholes option pricing model. The fair value of the derivative liability as of June 30, 2014 was estimated using the following assumptions:

Expected volatility	65	%
Risk free rate	1.46	%
Dividend yield	0	%
Expected term (in years)	4.58

The assumptions utilized were derived in a similar manner as discussed in Note 7 related to the fair value of stock options.

The Company revalues the derivative liabilities at the end of each reporting period using the same models as at issuance, updated for new facts and circumstances, and recognizes the change in the fair value in the statements of operations as other income (expense). The following sets forth a summary of changes in fair value of the Company’s level 3 liabilities measured on a recurring basis for the six months ended June 30, 2014:

	Convertible		Series A-1 Preferred
	Notes Payable		Stock		Common
	Derivative		Derivative		Stock
	Liability		Liability		Warrants
Balance at December 31, 2013	$	534,975	$	56,926	$	-
Extinguishment		(118,300)		-		-
Fair value at issuance		189,300		-		466,706
Change in fair value		(220,975)		(56,926)		(117,743)
Balance at June 30, 2014	$	385,000	$	-	$	348,963