Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements (Notes)

v3.19.3
Fair Value Measurements (Notes)
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
A hierarchy for inputs used in measuring fair value is in place that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. The hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. Three levels within the hierarchy may be used to measure fair value:
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Inputs include data points that are observable such as 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 inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs are generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect an entity’s own estimates of assumptions that market participants would use in pricing the asset or liability.
In conjunction with the debt financings completed in October 2016 and January 2018, the Company issued two warrants for the purchase of up to an aggregate of 1,239,286 shares of the Company's common stock, which remained unexercised and outstanding at September 30, 2019. The warrant issued in conjunction with the October 21, 2016 debt financing (Hale warrant) for the purchase of up to 314,286 shares of the Company's common stock expires on October 21, 2026, has an exercise price of $2.80 per share and is transferable. The warrant issued in conjunction with the January 12, 2018 debt financing (ESW warrant) for the purchase of up to 925,000 shares of the Company's common stock expires on January 12, 2028, has an exercise price of $1.96 per share and is transferable. Additionally, on August 31, 2018, the Company issued a warrant to a sales partner, iStudy Co., Ltd., (iStudy warrant) for the purchase of up to 100,000 shares of the Company's common stock; the warrant expires on August 31, 2028, has an exercise price of $2.43 per share and is transferable. The Hale warrant and ESW warrant contain a cash settlement feature upon the occurrence of a certain events, essentially the sale of the Company as defined in the warrant agreements. Upon a sale of the Company, the holder of the iStudy warrant may exercise the warrant or may elect to receive the same consideration as it would have been entitled to receive upon the occurrence of such transaction if it had been the holder of the shares then issuable upon such exercise of the warrant. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the dates of issuance was recorded in the Company’s condensed consolidated balance sheets as a liability.
The warrant liability was recorded in the Company's condensed consolidated balance sheets at its fair value on the respective dates of issuance and is revalued on each subsequent balance sheet date until such instrument is exercised or expires, with any changes in the fair value between reporting periods recorded as other income or expense. The Company recorded non-cash income of $973,000 and non-cash expense of $401,000 for the three months ended September 30, 2019 and 2018, respectively, and non-cash expense of $752,000 and $292,000 for the nine months ended September 30, 2019 and 2018, respectively, resulting from the change in fair value of the warrant liability. The increase in fair value for the three months ended September 30, 2018, the nine months ended September 30, 2019 and the nine months ended September 30, 2018 was primarily driven by corresponding increases in the Company’s stock price of 23%, 72% and 14% for the respective periods. The decrease in fair value during the three months ended September 30, 2019 was primarily driven by a decrease in the Company’s stock price of 21% during the period.
The Company estimates the fair value of this liability using option pricing models that are based on the individual characteristics of the warrants on the valuation date, which include assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions used could have a material impact on the resulting fair value. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.
The Company’s liabilities measured at fair value on a recurring basis and the fair value hierarchy utilized to determine such fair values is as follows at September 30, 2019 and December 31, 2018 (in thousands):
 
 
 
Fair Value Measurements Using
 
Total Fair
Value at
September 30, 2019
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Derivative warrant liability - ESW warrant
$
2,603

 
$

 
$

 
$
2,603

Derivative warrant liability - Hale warrant
793

 

 

 
793

Derivative warrant liability - iStudy
154

 

 

 
154

Derivative warrant liability
$
3,550

 
$

 
$

 
$
3,550

 
 
 
Fair Value Measurements Using
 
Total Fair
Value at
December 31, 2018
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities:
 
 
 
 
 
 
 
Derivative warrant liability - ESW warrant
$
2,015

 
$

 
$

 
$
2,015

Derivative warrant liability - Hale warrant
750

 

 

 
750

Derivative warrant liability - iStudy
33

 

 

 
33

Derivative warrant liability
$
2,798

 
$

 
$

 
$
2,798


The Company classified the warrant liability as Level 3 due to the lack of relevant observable market data over fair value inputs such as the probability-weighting of the various scenarios in the arrangements. The following table represents a rollforward of the fair value of the Level 3 instruments (significant unobservable inputs):
Balance at December 31, 2018
 
$
2,798

Change in fair value
 
752

Balance at September 30, 2019
 
$
3,550