Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Liabilities

Note 8. 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 September 30, 2018 and December 31, 2017 ($ in thousands):

	Fair value measured at September 30, 2018
	Total carrying value at September 30,		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	$	3,409	$	—	$	3,409	$	—
Investments at Hoth	$	1,700	$	—	$	—	$	1,700
Investments at TheBit Daily	$	25	$	—	$	—	$	25
Investments at DatChat	$	1,000	$	—	$	—	$	1,000
Liabilities
Fair value of warrant liabilities	$	262	$	—	$	—	$	262

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

There were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 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 September 30, 2018 and December 31, 2017 is as follows:

Date of valuation	September 30, 2018		December 31, 2017
Risk-free interest rate		2.81%		1.98%
Expected volatility		69.41% - 106.63%		100.00% - 132.21%
Expected life (in years)		2.19-2.31		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 nine months ended September 30, 2018 and 2017 that are measured at fair value on a recurring basis ($ in thousands):

	Fair Value of Level 3 financial liabilities
	September 30, 2018			September 30, 2017
Beginning balance	$	822		$	702
Fair value adjustment of warrant liabilities		(560	)		259
Ending balance	$	262		$	961

The Company owns approximately 34% of common shares in Hoth as of September 30, 2018. The value of the Company’s investment in Hoth increased by approximately $0.7 million during the nine months ended September 30, 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 nine months ended September 30, 2018 and 2017 that are measured at fair value on a recurring basis:

	Fair Value of Level 3 investment
	September 30,		September 30,
	2018		2017
Beginning balance	$	1,020	$	—
Purchase of investment in TheBit Daily LLC at fair value		25		—
Purchase of investment in DatChat at fair value		1,000
Fair value of Hoth upon issuance		—		675
Change in fair value of Hoth		680		345
Ending balance	$	2,725	$	1,020

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.

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 September 30, 2018 and December 31, 2017 is as follows:

Date of valuation	September 30, 2018			December 31, 2017
Risk-free interest rate		2.24	%		1.39	%
Expected volatility		75.00	%		75.00	%
Expected life (in years)		1.00			1.00

The investment in Hoth Therapeutics was valued using a hybrid probability weighted expected return method, with scenarios including (1) Hoth continuing to operate as a private company through an estimated potential exit date, and (2) Hoth undergoing an IPO in the near future. The private-company scenario utilizes a reverse option pricing method (backsolve) based on the recent Series A transaction. Key inputs to the backsolve, in addition to the Series A price, include volatility (75.00%) and expected maturity (1.0 years). The IPO scenario is based on initial value indications proposed by investment bankers. The primary inputs, in addition to the pre-money value indications, include the estimated time to IPO (end of November) and a discount rate of 15%. The valuation conclusion is sensitive to the probability weightings assigned to each scenario. The weightings (1/3 IPO scenario, 2/3 private company scenario), were determined according to management expectations regarding exit opportunities, based on what was known or knowable as of September 30, 2018.

The costs of its investment in the BitDaily and DatChat approximate fair value as there have been no significant changes to its investment since the date of purchase.

Intangible Assets Measured at Fair Value on a Non-Recurring Basis using Level 3 Inputs

The following tables presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (in thousands):

	Net carrying value at December 31,  2017		Impairment Charges - Nine months ended September 30, 2018
Assets
Patent Portfolios, net	$	1,500	$	1,051

	Net carrying value at December 31,  2017		Impairment Charges - Nine months ended September 30, 2017
Assets
Patent Portfolios, net	$	3,578	$	—

The Company’s intangible assets are measured at fair value on a non-recurring basis using Level 3 inputs. See Note 7 for valuation techniques for patents.