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Fair Value of Financial Assets and Liabilities - Derivative Instruments | 12 Months Ended
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Dec. 31, 2015
Fair Value of Financial Assets and Liabilities - Derivative Instruments [Abstract] |
Fair Value of Financial Assets and Liabilities - Derivative Instruments | 4. Fair Value of Financial Assets and Liabilities – Derivative Instruments ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes among the following:
|  | Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
|  | Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.
|  | Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain financial instruments and contracts, such as detachable common stock warrants and the issuance of preferred stock with detachable common stock warrants with features that are either i) not afforded equity classification or ii) embody risks not clearly and closely related to host contracts. These instruments are required to be carried as derivative liabilities, at fair value. The Company estimates fair values of these derivatives utilizing Level 3 inputs. The Company uses the Monte Carlo valuation technique for derivatives as it embodies all of the requisite assumptions (including trading volatility, remaining term to maturity, market price, strike price, risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments, including Level 3 instruments, require the use of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are volatile and sensitive to changes in our trading market price, the trading market price of various peer companies and other key assumptions. Since derivative financial instruments are initially and subsequently carried at fair value, our income will reflect this sensitivity of internal and external factors. Items measured at fair value on a recurring basis include common stock warrants, and embedded derivatives related to the Company’s redeemable convertible preferred stock. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. The following fair value hierarchy table presents information about each major category of the Company's financial liabilities measured at fair value on a recurring basis:
|  | Quoted Prices in |  |  |  |  |  |  |  |  |
|  | Active Markets |  | Significant Other |  | Significant |  |  |
|  | for Identical |  | Observable Inputs |  | Unobservable |  |  |
|  | Items (Level 1) |  | (Level 2) |  | Inputs (Level 3) |  | Total
December 31, 2015 |  |  |  |  |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Series B redeemable convertible preferred stock |  | $ | - |  | $ | - |  | $ | 1,493,000 |  | $ | 1,493,000
Warrant liability |  |  | - |  |  | - |  |  | 6,000 |  |  | 6,000
Total liabilities |  | $ | - |  | $ | - |  | $ | 1,499,000 |  | $ | 1,499,000
December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Series B redeemable convertible preferred stock |  | $ | - |  | $ | - |  | $ | 12,320,000 |  | $ | 12,320,000
Warrant liability |  |  | - |  |  | - |  |  | 5,826,000 |  |  | 5,826,000
Total liabilities |  | $ | - |  | $ | - |  | $ | 18,146,000 |  | $ | 18,146,000
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy for the years ended December 31, 2015 and 2014. The following table sets forth a summary of changes in the fair value of the Company's Series B redeemable convertible preferred stock derivative and warrant liabilities, which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy, wherein fair value is estimated using significant unobservable inputs:
|  |  |  |  | Series B
|  | Warrant |  | Redeemable
|  | Liability |  | Preferred Stock
Balance, December 31, 2014 |  | $ | 5,826,000 |  | $ | 12,320,000
Issuances |  |  | 4,210,000 |  |  | -
Exercises |  |  | (677,000) |  |  | -
Conversions to common stock |  |  | - |  |  | (1,497,000)
Warrants reclassified from liabilities to equity due to amendment of warrants |  |  | (5,462,000) |  |  | -
Warrants reclassified from liabilities to equity due to increase in authorized shares |  |  | (3,281,000) |  |  | -
Changes in estimated fair value |  |  | (610,000) |  |  | (9,330,000)
Balance as of December 31, 2015 |  | $ | 6,000 |  | $ | 1,493,000
The fair value of the warrants on the date of issuance and on each re-measurement date for warrants classified as liabilities is estimated using the Monte Carlo valuation model. For this liability, the Company develops its own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company’s common stock, stock price volatility, the contractual term of the warrants, risk–free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants is considered a Level 3 measurement. The following assumptions were used at December 31, 2015 and December 31, 2014:
|  | December 31, 2015 |  | December 31, 2014
|  | Series (1) |  | Series (1)
|  |  |  |  |  |  |  |  |  | June |  | July |  | December
|  | 2011 |  | 2011 |  | 2013 |  | 2013 |  | 2013
Volatility |  |  | 112 | % |  |  | 155 | % |  |  | 155 | % |  |  | 155 | % |  |  | 151 | %
Expected term (years) |  |  | 0.98 |  |  |  | 1.98 |  |  |  | 3.49 |  |  |  | 3.54 |  |  |  | 3.98 |
Risk-free interest rate |  |  | 0.64 | % |  |  | 0.67 | % |  |  | 1.23 | % |  |  | 1.25 | % |  |  | 1.37 | %
Dividend yield |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | %
Exercise price |  | $ | 23.00 |  |  | $ | 23.00 |  |  | $ | 7.00 |  |  | $ | 7.00 |  |  | $ | 12.50 |
Common stock closing price |  | $ | 3.98 |  |  | $ | 10.50 |  |  | $ | 10.50 |  |  | $ | 10.50 |  |  | $ | 10.50 |
| (1) | See Note 11 – Warrants below for further description of the respective series of warrants.
The warrant liability is recorded on the accompanying consolidated balance sheets and is marked-to-market at each reporting period, with the change in fair value recorded as a component of change in fair value of warrant liability on the Company’s statements of operations. The fair value of the Series B preferred stock derivative liability on each measurement date is estimated using the Monte Carlo valuation model. For this liability, the Company develops its own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company’s common stock, stock price volatility, the expected term of the Series B Preferred, risk–free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the Series B preferred conversion liability is considered a Level 3 measurement. The following assumptions were used at December 31, 2015 and December 31, 2014:
|  | December 31, 2015 |  | December 31, 2014
Volatility |  |  | 108 to 117 | % |  |  | 91 | %
Expected term (years), weighted average |  |  | 0.50 to 2.50 |  |  |  | 1.25 |
Risk-free interest rate |  |  | 0.49 to 1.19 | % |  |  | 0.36 | %
Dividend yield |  |  | 0.00 | % |  |  | 0.00 | %
Exercise price |  | $ | 7.00 |  |  | $ | 7.00 |
Common stock closing price |  | $ | 3.98 |  |  | $ | 10.50 |
The Series B preferred stock derivative liability is recorded on the accompanying consolidated balance sheet and is marked-to-market each reporting period, with the change in fair value recorded as a component of change in fair value of Series B preferred stock derivative liability on the Company’s statements of operations.

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