Fair Value Measurements

6 Months Ended

Jun. 30, 2016

Fair Value Measurements

Fair Value Measurements

12.Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:

· Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;

· Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable including quoted prices for similar instruments in active markets and quoted prices for identical or similar instruments in markets that are not active; and

· Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

Assets and liabilities measured at fair value on the Company’s balance sheet on a recurring basis include the following at June 30, 2016 and December 31, 2015 (in thousands):

	Fair Value Measurement at June 30, 2016
	Level 1	Level 2	Level 3
Liabilities:
Warrant liability	-	-	$	360
Bifurcated derivative liability	-	-	$	1,182

	Fair Value Measurement at December 31, 2015
	Level 1	Level 2	Level 3
Liabilities:
Warrant liability	-	-	$	3,072

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the six months ended June 30, 2016.

The following is a reconciliation of the warrant liability, included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets, measured at fair value using Level 3 inputs (in thousands):

	Six Months Ended
	June 30,
	2016		2015
Balance at beginning of period	$	3,072	$	1,474
Issuance of common stock warrants	-		845
Exercise of common stock warrants	(1,124)		-
Remeasurement of common stock warrants	(1,588)		272
Balance at end of period	$	360	$	2,591

The following is a reconciliation of the embedded derivative measured at fair value using significant unobservable inputs, Level 3 (in thousands):

	Six Months Ended June 30,
	2016
Balance at beginning of period	$	-
Transfers in and/or out of Level 3	-
Initial valuation of bifurcated derivative liability	3,936
Remeasurement of bifurcated derivative liability	(2,754		)
Balance at end of period	$	1,182

Upon amendment of the Kanis debt on April 1, 2016, the convertible debt required bifurcation and accounting at fair value.  The resulting embedded derivative is comprised of a conversion option, the exercise of which would require shareholder approval, as well as a call option the Company may exercise in the event of a Liquidity Event.  The call option would be at a 25% discount to the Liquidity Event price. The company uses a Monte Carlo simulation model to estimate the fair value of the embedded derivative portion of the Kanis debt. 

The valuation methodology as described above requires considerable judgment and may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes the valuation method is appropriate and consistent with other market participants, the use of different methodology or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The fair values of the Company’s cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities approximate carrying values due to the short maturity of these instruments. The fair value of the line of credit approximates its carrying value due to the variable interest rates. The fair value of the convertible promissory notes payable calculated using a net present value model was $1.1 million at June 30, 2016.  The fair value of the director note calculated using a net present value model was $0.5 million at June 30, 2016 and the fair value of the Kanis debt using a net present value model was $7.4 million at June 30, 2016.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.