| Fair Value Measurements |
4. Fair Value Measurements We record our consolidated financial assets and liabilities at fair value. The accounting standard for fair value provides a framework for measuring fair value, and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting standard establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
| | • | Level 1-Quoted prices in active markets for identical assets or liabilities. We consider a market to be active when transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| | • | Level 2-Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | • | Level 3-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 valuation of Level 3 assets or liabilities requires the use of significant management judgments or estimation. |
Our fair value hierarchies for our financial assets and liabilities which require fair value measurement on a recurring basis are as follows:
| | | Total | | | Quoted Prices in
Active Markets for
Identical Items
Level 1 | | | Significant Other
Observable Inputs
Level 2 | | | Significant
Unobservable
Inputs
Level 3 | |
| | | | | | | | | | | | | |
| March 31, 2014 | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Warrant liability | | $ | 88,050,250 | | | $ | - | | | $ | - | | | $ | 88,050,250 | |
| Convertible debt | | | - | | | | - | | | | - | | | | - | |
| Total liabilities measured at estimated fair value | | $ | 88,050,250 | | | $ | - | | | $ | - | | | $ | 88,050,250 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2013 | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Warrant liability | | $ | 377,747 | | | $ | - | | | $ | - | | | $ | 377,747 | |
| Convertible debt | | | 5,062,417 | | | | - | | | | - | | | | 5,062,417 | |
| Total liabilities measured at estimated fair value | | $ | 5,440,164 | | | $ | - | | | $ | - | | | $ | 5,440,164 | |
The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities, which were measured at fair value on a recurring basis.
| | | Warrant liability | | | Convertible debt | |
| Beginning balance December 31, 2013 | | $ | 377,747 | | | $ | 5,062,417 | |
| Transfer to equity upon settlement | | | (377,747 | ) | | | (5,062,417 | ) |
| Fair value of warrants on date of issuance | | | 10,613,550 | | | | - | |
| Change in fair value of warrants during the period | | | 77,436,700 | | | | - | |
| Ending balance March 31, 2014 | | $ | 88,050,250 | | | $ | - | |
The fair value of each warrant was determined using a lattice pricing model using the following assumptions:
| | | Three months
ended March 31, |
| | | 2014 |
| | | |
| Dividend yield | | - |
| Risk-free interest rate | | 0.81-0.90% |
| Current share price | | $0.60 - $3.19 |
| Expected term (in years) | | 2.80-3.00 |
| Volatility | | 79.0% |
| Periodic rate | | 0.24-0.25% |
| Periods in the model | | 10 |
During the three months ended March 31, 2014 the Level 3 warrant liability and convertible debt outstanding as of December 31, 2013 were settled in transactions related to the Merger. See Note 3, The Merger, Offering and Other Related Transactions.
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