Note 6 - Fair Value Measurement

 

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative contingently issuable warrant liability ($ in thousands):

 

		Contingently Issuable Warrants
Fair value, January 1, 2016		$	-
Warrant liability associated with NCS debt			634
Change in fair value			159
Issuance of 138,462 warrants with a par value strike price			(793)
Fair value, December 31, 2016		$	-

 

If the Company has an initial public offering and raises sufficient equity capital so that it has cash equal to five times the amount of the portion of the proceeds of the NSC Note transferred to it, then NSC will receive a warrant to purchase the Company’s stock equal to 25% of the outstanding note divided by the lowest price the Company sells its equity in its first third party financing. The warrants issued will have a term of 10 years and an exercise price equal to the par value of the Company’s common stock.  In accordance with ASC 815, the Company classifies the fair value of the warrant that may have been granted in connection with the NSC Note transferred to the Company as a derivative liability as there was a potential that the Company would not have a sufficient number of authorized common shares available to settle this instrument. The Company valued this warrant using a Black-Scholes model and used estimates for an expected dividend yield, a risk-free interest rate, and expected volatility together with management’s estimate of the probability of issuance of the warrant. At each reporting period, as long as the warrant was potentially issuable and there was a potential for an insufficient number of authorized shares available to settle the warrant, the warrant was revalued and any difference from the previous valuation date would be recognized as a change in fair value in the Company’s Statements of Operations.

 

In the fourth quarter of 2016, due to the financings described in Note 8, sufficient equity capital was raised so that the Company had cash equal to five times the amount of the portion of the proceeds of the NSC Note transferred to it. The Company issued 138,462 warrants with an exercise price of par value and a ten-year term.

 

The Company's liability for common shares issuable liability was measured using significant unobservable (Level 3) inputs.

 

The following table represents the activity for the Company's liability for common shares issuable for the years ended December 31, 2017 and 2016 ($ in thousands):

 

		Common Shares Issuable Liability
January 1, 2016 Balance		$	-
Liabilities reclassified			1,682
Change in fair value of liabilities reclassified			-
Liabilities reclassified to equity			-
December 31, 2016 Balance		$	1,682
Liabilities reclassified			-
Change in fair value of liabilities reclassified			-
Liabilities reclassified to equity			(1,682)
December 31, 2017 Balance		$	-