Fair Value Measurements

6 Months Ended

Jun. 30, 2018

14. Fair Value Measurements

Convertible Senior Notes

The fair value of the Convertible Senior Notes was $60.6 million on issuance. The fair value was determined based on Level 3 inputs, including assumed volatility of 45.0%. The Company carries the Convertible Senior Notes at face value less an unamortized discount on its consolidated balance sheet, and presents the fair value for required disclosure purposes only. At June 30, 2018, the carrying value of the Convertible Senior Notes, excluding unamortized debt issue costs, approximates the fair value. For further information on the Convertible Senior Notes see Note 8.

Derivative Liabilities

The Company’s common stock warrant liability represents the only asset or liability classified financial instrument measured at fair value on a recurring basis in the unaudited interim consolidated balance sheets. The fair value measurement is determined by using Level 3 inputs due to the lack of active and observable markets that can be used to price identical assets. Level 3 inputs are unobservable inputs and should be used to determine fair value only when observable inputs are not available. Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally generated data and assumptions being used to price the asset or liability.

Fair value of the common stock warrant liability is based on the Black-Scholes pricing model which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions.

The Company used the following assumptions for its liability-classified common stock warrants:


	Six months ended
	June 30, 2018	June 30, 2017
Risk-free interest rate	1.64% - 2.43%	1.01% - 2.01%
Volatility	18.40% - 81.69%	62.0% - 108.77%
Expected average term	0.01 - 1.53	0.64 - 5.23

There was no expected dividend yield for the warrants granted.

If factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Generally, as the market price of our common stock increases, the fair value of the warrants increase, and conversely, as the market price of our common stock decreases, the fair value of the warrants decrease. Also, a significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in significantly higher fair value measurements; and a significant decrease in volatility would result in significantly lower fair value measurements.

The following table shows the activity in the common stock warrant liability (in thousands):


	Six months ended
Common stock warrant liability	June 30, 2018		June 30, 2017
Beginning of period	$	4,391	$	11,387
Change in fair value of common stock warrants		(1,592)		14,576
Issuance of common stock warrants		—		4,905
Exercise of common stock warrants		—		(27,089)
End of period	$	2,799	$	3,779

Equity Instruments

The fair value measurement of the Company’s equity-classified common stock warrants further described in Note 11, Warrant Transaction Agreements, is determined by using Level 3 inputs due to the lack of active and observable markets that can be used to price identical instruments.

Fair value of the equity-classified common stock warrants is based on the Monte Carlo pricing model which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions.

The Company used the following assumptions for its equity-classified common stock warrants:


	Six months ended
	June 30, 2018	June 30, 2017
Risk-free interest rate	2.72% - 2.80%	2.36%
Volatility	85.00%	85.00%
Expected average term	8.76-9.30	9.76-10.00

The Monte Carlo pricing models used in the determination of the fair value of the equity-classified warrants also incorporate assumptions involving future revenues associated with Amazon and Walmart, and related timing.

The following table represents the fair value per warrant on the execution date of the transaction agreements and as of June 30, 2018:


		Amazon Warrant Shares		Walmart Warrant Shares
Issuance date - first tranche	$	1.15	$	1.88
As of vesting date - second tranche, first installment		2.16		—
As of period end - second tranche		1.71		1.56

- 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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