Fair Value

6 Months Ended

Jun. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value

Note 12: Fair Value

The Company is required under GAAP to disclose information about the fair value of all the Company’s financial instruments, whether or not these instruments are measured at fair value on the Company’s consolidated balance sheets.

The Company estimates that the fair values of cash and cash equivalents, other assets, accounts payable and accrued expenses approximate their carrying values due to the short-term maturities of these items. The Company also has certain warrants with a cash settlement feature in the unlikely occurrence of a Fundamental Transaction, namely (1) a merger or consolidation with another person; (2) sale of substantially all of its assets; (3) holders of common stock sell 50% or more of outstanding shares; (4) the Company effects an exchange of all its securities for other securities, cash or property, and (5) the Company effects a stock purchase agreement or business combination for more than 50% of outstanding shares. The fair value of the redeemable warrants (“Warrants”) related to the Company’s August 2016, February 2017, June 2017, August 2017 and April 2018 common stock and warrant issuance, are calculated using a Monte Carlo Simulation. While the Monte Carlo Simulation is one of a number of possible pricing models, the Company has determined it to be industry accepted and fairly presented the fair value of the Warrants. As an additional factor to determine the fair value of the Put’s liability, the occurrence probability of a Fundamental Transaction event was factored into the valuation.

The Company recomputes the fair value of the Warrants at the issuance date and the end of each quarterly reporting period. Such value computation includes subjective input assumptions that are consistently applied each period. If the Company were to alter its assumptions or the numbers input based on such assumptions, the resulting fair value could be materially different.

The Company utilized the following assumptions to estimate the fair value of the August 2016 Warrants:

	June 30,			December 31,
	2018			2017
Underlying price per share	$	0.32		$	0.35
Exercise price per share	$	1.88		$	1.88
Risk-free interest rate		2.64	%		2.05	%
Expected holding period		3.18			3.70
Expected volatility		70	%		65	%
Expected dividend yield		-			-

The Company utilized the following assumptions to estimate the fair value of the February 2017 Warrants:

	June 30,			December 31,
	2018			2017
Underlying price per share	$	0.32		$	0.35
Exercise price per share	$	0.69-0.75		$	0.69-$0.75
Risk-free interest rate		2.69	%		2.10	%
Expected holding period		4.09-4.10			4.10
Expected volatility		70	%		65	%
Expected dividend yield		-			-

The Company utilized the following assumptions to estimate the fair value of the June 2017 Warrants:

	June 30,			December 31,
	2018			2017
Underlying price per share	$	0.32		$	0.35
Exercise price per share	$	0.63		$	0.63
Risk-free interest rate		2.68	%		2.14	%
Expected holding period		3.92			4.4
Expected volatility		70	%		65	%
Expected dividend yield		-			-

The Company utilized the following assumptions to estimate the fair value of the August 2017 Warrants:

	June 30,			December 31,
	2018			2017
Underlying price per share	$	0.32		$	0.35
Exercise price per share	$	0.45		$	0.45
Risk-free interest rate		2.66	%		1.33%-2.11	%
Expected holding period		3.68			0.2-4.2
Expected volatility		70	%		65	%
Expected dividend yield		-			-

The Company utilized the following assumptions to estimate the fair value of the April 2018 Warrants:

	June 30,			April 24,
	2018			2018
Underlying price per share	$	0.32		$	0.34
Exercise price per share	$	0.39		$	0.39
Risk-free interest rate		2.56%-2.74	%		2.56%-2.86	%
Expected holding period		2.32-5.32			2.5-5.5
Expected volatility		70	%		70	%
Expected dividend yield		-			-

The significant assumptions using the Monte Carlo Simulation approach for valuation of the Warrants are:

(i)	Risk-Free Interest Rate. The risk-free interest rates for the Warrants are based on U.S. Treasury constant maturities for periods commensurate with the remaining expected holding periods of the warrants.
(ii)	Expected Holding Period. The expected holding period represents the period of time that the Warrants are expected to be outstanding until they are exercised. The Company utilizes the remaining contractual term of the Warrants at each valuation date as the expected holding period.
(iii)	Expected Volatility. Expected stock volatility is based on daily observations of the Company’s historical stock values for a period commensurate with the remaining expected holding period on the last day of the period for which the computation is made.
(iv)	Expected Dividend Yield. Expected dividend yield is based on the Company’s anticipated dividend payments over the remaining expected holding period. As the Company has never issued dividends, the expected dividend yield is $0.00 and this assumption will be continued in future calculations unless the Company changes its dividend policy.
(v)	Expected Probability of a Fundamental Transaction. The possibility of the occurrence of a Fundamental Transaction triggering a Put right is extremely remote. As discussed above, a Put right would only arise if a Fundamental Transaction 1) is an all cash transaction; (2) results in the Company going private; or (3) is a transaction involving a person or entity not traded on a national securities exchange. The Company believes such an occurrence is highly unlikely because:

a.	The Company only has one product that is FDA approved but which will not be available for commercial sales for 18 months at the earliest;
b.	The company flagship product is approved in Argentina for Severely Debilitated CFS patients
c.	The Company may have to perform additional clinical trials for FDA approval of its flagship product;
d.	Industry and market conditions continue to include a global market recession, adding risk to any transaction;
e.	Available capital for a potential buyer in a cash transaction continues to be limited;
f.	The nature of a life science company is heavily dependent on future funding and high costs, including research & development;
g.	The Company has minimal revenues streams which are insufficient to meet the funding needs for the cost of operations or construction at their manufacturing facility; and
h.	The Company’s Rights Agreement and Executive Agreements make it less attractive to a potential buyer.

With the above factors utilized in analysis of the likelihood of the Put’s potential Liability, the Company estimated the range of probabilities related to a Put right being triggered as:

Range of Probability	Probability
Low		0.5	%
Medium		1.0	%
High		5.0	%

The Monte Carlo Simulation has incorporated a 5.0% probability of a Fundamental Transaction to date for the life of the securities.

(vi)	Expected Timing of Announcement of a Fundamental Transaction. As the Company has no specific expectation of a Fundamental Transaction, for reasons stated above, the Company used a discrete uniform probability distribution over the Expected Holding Period to model the potential announcement of a Fundamental Transaction occurring during the Expected Holding Period.
(vii)	Expected 100 Day Volatility at Announcement of a Fundamental Transaction. An estimate of future volatility is necessary as there is no mechanism for directly measuring future stock price movements. Daily observations of the Company’s historical stock values for the 100 days immediately prior to the Warrants’ grant dates, with a floor of 100%, were utilized as a proxy for the future volatility.
(viii)	Expected Risk-Free Interest Rate at Announcement of a Fundamental Transaction. The Company utilized a risk-free interest rate corresponding to the forward U.S. Treasury rate for the period equal to the time between the date forecast for the public announcement of a Fundamental Transaction and the Warrant expiration date for each simulation.
(ix)	Expected Time Between Announcement and Consummation of a Fundamental Transaction. The expected time between the announcement and the consummation of a Fundamental Transaction is based on the Company’s experience with the due diligence process performed by acquirers, and is estimated to be six months. The Monte Carlo Simulation approach incorporates this additional period to reflect the delay Warrant Holders would experience in receiving the proceeds of the Put.

While the assumptions remain consistent from period to period (e.g., using historical stock prices), the numbers input change from period to period (e.g., the actual historical prices input for the relevant period). The carrying amount and estimated fair value of the above Warrants was approximately $2,095,000 at June 30, 2018 and $962,000 at December 31, 2017.

The Company applies FASB ASC 820 that defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The guidance does not impose any new requirements around which assets and liabilities are to be measured at fair value, and instead applies to asset and liability balances required or permitted to be measured at fair value under existing accounting pronouncements. The Company measures its warrant liability for those warrants with a cash settlement feature at fair value.

FASB ASC 820-10-35-37 establishes a valuation hierarchy based on the transparency of inputs used in the valuation of an asset or liability. Classification is based on the lowest level of inputs that is significant to the fair value measurement. The valuation hierarchy contains three levels:

● Level 1 – Quoted prices are available in active markets for identical assets or liabilities at the reporting date. Generally, this includes debt and equity securities that are traded in an active market.

● Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Generally, this includes debt and equity securities that are not traded in an active market.

● Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. As of June 30, 2018, the Company has classified the warrants with cash settlement features as Level 3. Management evaluates a variety of inputs and then estimates fair value based on those inputs. As discussed above, the Company utilized the Monte Carlo Simulation Model in valuing these warrants.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as:

	(in thousands) As of June 30, 2018
	Total		Level 1		Level 2		Level 3
Assets:
Marketable securities	$	674	$	674	$	-	$	-
Liabilities:
Redeemable warrants	$	2,095		-		-	$	2,095

	(in thousands) As of December 31, 2017
	Total		Level 1		Level 2		Level 3
Assets:
Marketable securities	$	695	$	695	$	-	$	-
Liabilities:
Redeemable warrants	$	962		-		-	$	962

The changes in Level 3 Liabilities measured at fair value on a recurring basis are summarized as follows (in thousands):

Balance at December 31, 2017	$	962
Warrants exercised and cancelled		(222	)
Warrants issued		1,486
Fair value adjustments		(131	)
Balance at June 30, 2018	$	2,095