Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.10.0.1
Fair Value Measurements
3 Months Ended
Jun. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The Company’s financial liabilities as of the issuance date of the convertible notes on the initial measurement date of September 28, 2016 are presented below at fair value and were classified within the fair value hierarchy as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Balance at Inception
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
3,693

 
$
3,693

Warrant liability
 

 

 
1,223

 
1,223

Total
 
$

 
$

 
$
4,916

 
$
4,916

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the liability. Considerable judgment is necessary to interpret market data and determine an estimated fair value. The use of different market assumptions or valuation methods may have a material effect on the estimated fair values. Fair value of the Notes is determined using the residual method of accounting whereby, first, a portion of the proceeds from the issuance of the Notes is allocated to derivatives embedded in the Notes and the warrants issued in connection with the issuance of the Notes, and the proceeds so allocated are accounted for as a convertible note embedded derivative liability and warrant liability, respectively, and second, the remainder of the proceeds from the issuance of the Notes is allocated to the convertible notes, resulting in an original debt discount amounting to $4,916. The convertible notes will remain on the consolidated balance sheet at historical cost, accreted up for the amount of cumulative amortization of the debt discount over the life of the debt. The method of determining the fair value of the convertible note embedded derivative liability and warrant liability are described subsequently in this note. Market risk associated with the convertible note embedded derivative liability and warrant liability relates to the potential reduction in fair value and negative impact to future earnings from an increase in price of the Company's common stock. Please refer to Note 8. "Debt" for more information.
The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.
As of June 30, 2018 and March 31, 2018, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Balance as of June 30, 2018
 
 
 
 
 
 
 
 
(Unaudited)
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
3,056

 
$
3,056

Warrant liability
 

 

 
2,410

 
2,410

Total
 
$

 
$

 
$
5,466

 
$
5,466

 
 
Level 1
 
Level 2
 
Level 3
 
Balance as of March 31, 2018
Financial Liabilities
 
 
 
 
 
 
 
 
Convertible note embedded derivative liability
 
$

 
$

 
$
4,676

 
$
4,676

Warrant liability
 

 

 
3,980

 
3,980

Total
 
$

 
$

 
$
8,656

 
$
8,656

Convertible Note Embedded Derivative Liability
We evaluated the terms and features of our convertible notes and identified embedded derivatives (conversion options that contain “make-whole interest” provisions, fundamental change provisions, or down round conversion price adjustment provisions; collectively called the "convertible note embedded derivative liability") requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the embedded derivatives met the criteria for bifurcation and separate accounting. ASC 815-10-15-83 (c) states that if terms implicitly or explicitly require or permit net settlement, then it can readily be settled net by means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement. The conversion features related to the convertible notes consists of a “make-whole interest” provision, fundamental change provision, and down round conversion price adjustment provisions, which if the convertible notes were to be converted, would put the convertible note holder in a position not substantially different from net settlement. Given this fact pattern, the conversion features meet the definition of embedded derivatives and require bifurcation and accounting at fair value.
The convertible note embedded derivative liability represent the fair value of the conversion option, fundamental change provision, and "make-whole" provisions, as well as the down round conversion price adjustment or conversion rate adjustment provisions of the convertible notes. There is no current observable market for these types of derivatives and, as such, the Company determined the fair value of the derivative liability using a lattice approach that incorporates a Monte Carlo simulation valuation model. A Monte Carlo simulation valuation model considers the Company's future stock price, stock price volatility, probability of a change of control and the trading information of the Company's common stock into which the notes are or may become convertible. The Company marks the derivative liability to market at the end of each reporting period due to the conversion price not being indexed to the Company's own stock.
Changes in the fair value of the convertible note embedded derivative liability is reflected in our consolidated statements of operations as “Change in fair value of convertible note embedded derivative liability.”
The following table provides a reconciliation of the beginning and ending balances for the convertible note embedded derivative liability measured at fair value using significant unobservable inputs (Level 3):
 
 
Level 3
Balance at March 31, 2018
 
$
4,676

Change in fair value of convertible note embedded derivative liability
 
(1,620
)
Balance at June 30, 2018
 
$
3,056


Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the loss and gain, respectively. During the three months ended June 30, 2018, the Company recorded a gain from change in fair value of convertible note embedded derivative liability of $1,620 due to the decrease in the Company's closing stock price during the current quarter from $2.01 to $1.51. During the three months ended June 30, 2017, the Company recorded a loss from change in fair value of convertible note embedded derivative liability of $1,308 due to the increase in the Company's closing stock price from March 31, 2017 to June 30, 2017 from $0.94 to $1.03.
The market-based assumptions and estimates used in valuing the convertible note embedded derivative liability include amounts in the following amounts:
 
June 30, 2018
Stock price volatility
65
%
Probability of change in control
1.75
%
Stock price (per share)
$1.51
Expected term
2.25 years

Risk-free rate (1)
2.51
%
Assumed early conversion/exercise price (per share)
$2.73
(1) The Monte Carlo simulation assumes the continuously compounded equivalent (CCE) interest rate of 1.0% based on the average of the 2-year and 3-year U.S. Treasury securities as of the valuation date. 
Changes in valuation assumptions can have a significant impact on the valuation of the convertible note embedded derivative liability. For example, all other things being equal, a decrease/increase in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk-free interest rates increases/decreases the valuation of the liabilities.
Warrant Liability
The Company issued detachable warrants with the convertible notes issued on September 28, 2016. The Company accounts for its warrants issued in accordance with US GAAP accounting guidance under ASC 815 applicable to derivative instruments, which requires every derivative instrument within its scope to be recorded on the balance sheet as either an asset or liability measured at its fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that these warrants did not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as long-term liabilities. The warrants are subject to re-measurement at each balance sheet date, with any change in fair value recognized as a component of other income (expense), net in the statements of operations. We estimated the fair value of these warrants at the respective balance sheet dates using a lattice approach that incorporates a Monte Carlo simulation that considers the Company's future stock price. Option pricing models employ subjective factors to estimate warrant liability; and, therefore, the assumptions used in the model are judgmental.
Changes in the fair value of the warrant liability is primarily related to the change in price of the underlying common stock of the Company and is reflected in our consolidated statements of operations as “Change in fair value of warrant liability.”
The following table provides a reconciliation of the beginning and ending balances for the warrant liability measured at fair value using significant unobservable inputs (Level 3):
 
 
Level 3
Balance at March 31, 2018
 
$
3,980

Change in fair value of warrant liability
 
(1,570
)
Balance at June 30, 2018
 
$
2,410


Due to the valuation of the derivative liability being highly sensitive to the trading price of the Company's stock, the increase and decrease in the trading price of the Company's stock has the impact of increasing the loss and gain, respectively. Due to the Company's closing stock price decreasing during the three months ended June 30, 2018, from $2.01 to $1.51, the Company recorded a gain from change in fair value of the warrant liability of $1,570. During the three months ended June 30, 2017, the Company recorded a loss from change in fair value of the warrant liability of $464 due to the increase in the Company's closing stock price from March 31, 2017 to June 30, 2017 from $0.94 to $1.03.
The market-based assumptions and estimates used in valuing the warrant liability include amounts in the following amounts:
 
June 30, 2018
Stock price volatility
65
%
Probability of change in control
1.75
%
Stock price (per share)
$1.51
Expected term
2.25 years

Risk-free rate (1)
2.51
%
Assumed early conversion/exercise price (per share)
$2.73
(1) The Monte Carlo simulation assumes the continuously compounded equivalent (CCE) interest rate of 1.0% based on the average of the 2-year and 3-year U.S. Treasury securities as of the valuation date. 
Changes in valuation assumptions can have a significant impact on the valuation of the warrant liability. For example, all other things being equal, a decrease/increase in our stock price, probability of change of control, or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk-free interest rates increases/decreases the valuation of the liabilities.