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FAIR VALUE MEASUREMENTS
 9 Months Ended
Sep. 30, 2015
Notes to Financial Statements  
NOTE 5. FAIR VALUE MEASUREMENTS

Certain assets and liabilities that are measured at fair value on a recurring basis are measured in accordance with FASB ASC Topic 820-10-05, Fair Value Measurements. FASB ASC Topic 820-10-05 defines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurements for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis in the financial statements.

 

The statement requires fair value measurement be classified and disclosed in one of the following three categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following represents a reconciliation of the changes in fair value of warrants measured at fair value using Level 3 inputs during the nine months ended September 30, 2015: 

 

(in $ thousands)   2013 Investor Warrants     2013 Placement Agent Warrants     2010 Investor Warrants     2010 Placement Agent Warrants     Total  
                                         
Balance, December 31, 2014   $ 10,546     $ 998     $ 1,065     $ 4     $ 12,613  
                                         
Issuances     -       -       -       -       -  
                                         
Exchange of warrants (1)     (10,546 )     -       -       -       (10,546 )
                                         
Exercise of warrants     -       -       (1,081 )     -       (1,081 )
                                         
Change in fair value     -       (732 )     16       (4 )     (720 )
                                         
Balance, September 30, 2015 (2)   $ -     $ 266     $ -     $ -     $ 266  

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  (1) Represents the fair value carrying amount of 3,500,000 Series A Preferred shares and 5,250,000 warrants exchanged for 3,588,139 shares of Series B Preferred stock exercisable into 7,176,298 shares of common stock.
     
  (2) The warrants are valued using a trinomial lattice valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the model at September 30, 2015 included the market price of our common stock, an expected dividend yield of zero, the remaining period to the expiration date of the warrants, expected volatility of our common stock over the remaining life of the warrants of 52.5%, estimated based on a review of our historical volatility, and risk-free rates of return of 1.37% for the 2013 warrants based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the warrants. We also take into consideration a probability assumption for anti-dilution.