XML 69 R10.htm IDEA: XBRL DOCUMENT v2.4.1.9
Fair Value Measurements
3 Months Ended
Mar. 31, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements
5. Fair Value Measurements 
 
The following tables summarize the Company's assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Common stock warrants
 
$
23,392
 
$
-
 
$
-
 
$
23,392
 
Total
 
$
23,392
 
$
-
 
$
-
 
$
23,392
 
 
 
December 31, 2014
 
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Common stock warrants
 
$
30,278
 
$
-
 
$
-
 
$
30,278
 
Total
 
$
30,278
 
$
-
 
$
-
 
$
30,278
 
 
Prior to the Merger, the Company issued senior secured promissory notes (the “Senior Secured Notes”), with an aggregate principal amount of $5,000,000 which were redeemable upon an event of default. The Senior Secured Notes were later exchanged in favor of amended senior secured promissory notes (the “Amended Secured Convertible Notes”), resulting in an extinguishment of the related derivative liability for the prior Senior Secured Notes. The Company then issued new secured convertible notes (the “New Secured Convertible Notes”, and together with the Amended Secured Convertible Notes, the “Secured Convertible Notes”) with an aggregate principal amount of $3,000,000 which may be redeemed upon an event of default. 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. The Secured Convertible Notes were paid in full on October 2, 2014, resulting in an extinguishment of the related derivative liability, see Note 6 below.
 
In May 2013, the Company sold Series A-1 redeemable convertible preferred stock (“Series A-1 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 March 31, 2015, the threshold price was $0.289 per share. The anti-dilution protection requires the Company to issue the holders of Series A-1 Preferred Stock shares of common stock or in the event that not enough shares of common stock are authorized and unissued, 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 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-1 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 exercise price was reduced to its floor of $2.27 as a result of the sale of the Fortress Shares in October 2014. 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 March 31, 2015 was estimated using the following assumptions:
 
Expected volatility
 
60
%
Risk free rate
 
1.05
%
Dividend yield
 
0
%
Expected term (in years)
 
3.8226
 
 
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 three months ended March 31, 2014 and March 31, 2015:
 
 
 
 
 
Series A-1
 
 
 
 
 
Convertible
 
Preferred
 
Common
 
 
 
Notes Payable
 
Stock
 
Stock
 
 
 
Derivative Liability
 
Derivative 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
 
 
(416,675)
 
 
(51,526)
 
 
(6,125)
 
Balance at March 31, 2014
 
$
189,300
 
$
5,400
 
$
460,581
 
  
 
 
 
 
Series A-1
 
 
 
 
 
Convertible
 
Preferred
 
Common
 
 
 
Notes Payable
 
Stock
 
Stock
 
 
 
Derivative Liability
 
Derivative Liability
 
Warrants
 
Balance at December 31, 2014
 
$
-
 
$
-
 
$
30,278
 
Change in fair value
 
 
-
 
 
-
 
 
(6,886)
 
Balance at March 31, 2015
 
$
-
 
$
-
 
$
23,392