Fair Value of Financial Assets and Liabilities

3 Months Ended

Mar. 31, 2018

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

Note 7. Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The Company uses three levels of inputs that may be used to measure fair value:

Level 1 - quoted prices in active markets for identical assets or liabilities 

Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable 

Level 3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

The following table presents the Company’s assets and liabilities that are measured at fair value at March 31, 2018 and December 31, 2017 ($ in thousands):

	Fair value measured at March 31, 2018
	Total carrying value at March 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	2018		(Level 1)		(Level 2)		(Level 3)
Assets
Marketable securities - mutual and exchange traded funds	$	5,574	$	—	$	5,574	$	—
Investments at fair value	$	1,045	$	—	$	—	$	1,045
Liabilities
Fair value of warrant liabilities	$	634	$	—	$	—	$	634

	Fair value measured at December 31, 2017
	Total carrying value at December 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	2016		(Level 1)		(Level 2)		(Level 3)
Assets
Marketable securities - mutual and exchange traded funds	$	3,998	$	—	$	3,998	$	—
Investments at fair value	$	1,020	$	—	$	—	$	1,020
Liabilities
Fair value of warrant liabilities	$	822	$	—	$	—	$	822

There were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2018.

Level 2 Valuation Techniques

The fair values of Level 2 marketable securities are determined using one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 Valuation Techniques

Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the Company’s consolidated statements of operations.

The Series A and Series B warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility. The warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions at the Company or require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities.

A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of March 31, 2018 and December 31, 2017 is as follows:

Warrants
Date of valuation	March 31, 2018	December 31, 2017
Risk-free interest rate	2.39%	1.98%
Expected volatility	100.00% - 135.30%	100.00% - 132.21%
Expected life (in years)	2.69-2.81	2.94 - 3.06
Expected dividend yield	—	—

The risk-free interest rate was based on rates established by the Federal Reserve. For the July 2015 Warrants, the expected volatility in the Black-Scholes model is based on an expected volatility of 100% for both periods which represents the percentage required to be used when valuing the cash settlement feature as contractually stated in the form of warrant. The general expected volatility is based on standard deviation of the Company’s underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock, and does not expect to pay dividends on its common stock in the future.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended March 31, 2018 and 2017 that are measured at fair value on a recurring basis ($ in thousands):

	Fair Value of Level 3 financial liabilities
	March 31, 2018			March 31, 2017
Beginning balance	$	822		$	702
Fair value adjustment of warrant liabilities		(188	)		122
Ending balance	$	634		$	824

The Company owns approximately 36% of common shares in Hoth as of March 31, 2018. The value of the Company’s investment in There were no changes in Hoth’s inputs to value its investment during the three months ended March 31, 2018.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets for the three months ended March 31, 2018 and 2017 that are measured at fair value on a recurring basis:

	Fair Value of Level 3 financial liabilities
	March 31, 2018		March 31, 2017
Beginning balance	$	1,020	$	—
Purchase of investment in TheBit Daily LLC at fair value		25		—
Ending balance	$	1,045	$	—

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected, are recognized as change in fair value of investment in the Consolidated Statements of Operations.

A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s valuation in Hoth that are categorized within Level 3 of the fair value hierarchy at the date of issuance and as of March 31, 2018 and December 31, 2017 is as follows:

Date of valuation	March 31, 2018			December 31, 2017
Risk-free interest rate		1.39	%		1.39	%
Expected volatility		75.00	%		75.00	%
Expected life (in years)		0.75			1.00