9. FAIR VALUE

FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our condensed consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and

Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.

Common Stock Warrant Liabilities.

Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated statement of operations.

2016 Warrant Liability

The Company assumed the 2016 Warrant Liability in the Merger and it represents the fair value of Transgenomic warrants issued in January 2016, of which, 5,368 warrants remain outstanding as of September 30, 2018.

In March 2018, a portion of the 2016 Warrant Liability was part of a settlement agreement pursuant to a lawsuit that was filed against the Company by one of the warrant holders. As such, approximately $0.4 million of the warrant liability, representing 20,216 warrants, was canceled on the date of the settlement agreement and replaced by and amounts now recorded as other current liabilities or other long-term liabilities. For further detail, see discussion of the Crede Agreement in Note 5 – Other Current Liabilities.

The 2016 Warrant Liability is considered a Level 3 financial instrument and was valued using the Monte Carlo methodology. As of September 30, 2018, assumptions and inputs used in the valuation of the 2016 Warrant Liability include: remaining life to maturity of 2.25 years; annual volatility of 188%; and a risk-free interest rate of 2.81%.

2018 Warrant Liabilities

In April 2018, the Company issued 3,648,352 of April 2018 Warrants and 232,000 of Advisor Warrants and in the third quarter of 2018, the Company issued 2,945,055 of Q3 2018 Warrants. All of these warrants issuances were classified as warrant liabilities (the “2018 Warrant Liabilities”). See Note 4 Long-Term Debt And Convertible Notes for further discussion of each warrant.

The 2018 Warrant Liabilities are considered Level 3 financial instruments and were valued using the Black Scholes model. As of September 30, 2018, assumptions used in the valuation of the 2018 Warrant Liabilities include: remaining life to maturity of 0.55 to 4.97 years; annual volatility of 96% to 155%; and risk free rate of 2.36% to 2.94%

During the three and nine months ended September 30, 2018, the change in the fair value of the warrant liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:


Dollars in Thousands
	Three Months Ended September 30, 2018
		2016 Warrant Liability		2018 Warrant Liabilities		Total Warrant Liabilities
Beginning balance at July 1	$	124	$	882	$	1,006
Additions:		-		720		720
Total (gain) loss:
Revaluation recognized in earnings		-		(176)		(176)
Modification recognized in earnings		-		143		143
Deductions – warrant liability settlement		-		-		-
Balance at September 30	$	124	$	1,569	$	1,693


Dollars in Thousands
	Nine Months Ended September 30, 2018
		2016 Warrant Liability		2018 Warrant Liabilities		Total Warrant Liabilities
Beginning balance at January 1	$	841	$	-	$	841
Additions:		-		1,925		1,925
Total (gain) loss:
Revaluation recognized in earnings		(261)		(499)		(760)
Modification recognized in earnings		-		143		143
Deductions – warrant liability settlement		(456)		-		(456)
Balance at September 30	$	124	$	1,569	$	1,693

Derivative Liabilities.

Certain of our issued and outstanding convertible notes contain features that are considered derivative instruments and are required to bifurcated from the debt host and accounted for separately as derivative liabilities. The estimated fair value of the derivatives will be remeasured at each reporting date and any change in estimated fair value of the derivatives will be recorded as non-cash adjustments to earnings. The gains or losses included in earnings are reported in other income (expense) in our condensed consolidated statement of operations.

Bridge Notes Redemption Feature

At the time of the April 2018 Bridge Note issuance, the Company recorded a derivative instrument as a liability with an initial fair value of approximately $0.1 million. At the time of the Q3 2018 Bridge Note issuances, the Company recorded additional derivative instruments as liabilities with initial fair values totaling $0.1 million. The valuations were performed using the “with and without” approach, whereby the Bridge Notes were valued both with the embedded derivative and without, and the difference in values was recorded as the derivative liability. See Note 4 Long-Term Debt And Convertible Notes for further discussion.

Conversion Option

The Company recorded derivative liabilities related to the Conversion Option of the Exchange Notes issued in September 2018 with an initial fair value of approximately $0.2 The valuations were performed using the Monte Carlo methodology. See Note 4 Long-Term Debt And Convertible Notes for further discussion.

During the three and nine months ended September 30, 2018, the change in the fair value of the derivative liabilities were comprised of the following:


	Three Months Ended September 30, 2018
		Bridge Notes Redemption Feature		Conversion Option		Total Derivative Liabilities
Beginning balance at July 1	$	143	$	-	$	143
Additions:		69		241		310
Total (gain) loss:
Revaluation recognized in earnings		(96)		(20)		(116)
Balance at September 30	$	116	$	221	$	337


	Nine Months Ended September 30, 2018
		Bridge Notes Redemption Feature		Conversion Option		Total Derivative Liabilities
Beginning balance at January 1	$	-	$	-	$	-
Additions:		212		241		453
Total (gain) loss:
Revaluation recognized in earnings		(96)		(20)		(116)
Balance at September 30	$	116	$	221	$	337