Annual report pursuant to Section 13 and 15(d)

Derivative Liability and Fair Value Measurements

v3.6.0.2
Derivative Liability and Fair Value Measurements
12 Months Ended
Dec. 31, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Liability and Fair Value Measurements
Note 8 — Derivative Liability and Fair Value Measurements
 
The Company recognized a derivative liability for the warrants to purchase shares of its common stock issued in connection with the equity offering and related debt conversions on August 5, 2013. These warrants have a cashless exercise provision and an exercise price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions) along with full-ratchet anti-dilution provisions. In accordance with ASC 815-10-25 Derivatives and Hedging we measured the derivative liability using a Monte Carlo Options Lattice pricing model at the warrants’ issuance date and subsequently remeasured the liability on each reporting date.
 
Accordingly, at the end of each quarterly reporting date the derivative fair market value is remeasured and adjusted to current market value. As at December 31, 2016 and 2015 a total of 38,100 and 45,100 warrants were outstanding that contained a full-ratchet anti-dilution provision. In connection with the Series A Private Placement on January 2, 2015 (see Note 11), holders of approximately 86% of outstanding warrants issued by the Company in its public offering and in connection with the conversion by certain holders of the Company’s outstanding debt in connection with the Company’s public offering (collectively, the “Public Offering Warrants”) agreed to irrevocably waive their rights to anti-dilution protection under Section 2(b) of the Public Offering Warrants in the event the Company issues additional securities at a per share price lower than the exercise price of the Public Offering Warrants (the “Public Offering Warrant Waiver”). As a result, the related derivative liability was reversed to zero and reclassified into stockholders’ equity under Additional Paid-In Capital.
 
The Company recognized a derivative liability during the year ended December 31, 2014 for the $3,000,000 of senior convertible notes with a conversion price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions). In accordance with ASC 815-10-25, we measured the derivative liability of this embedded conversion option using a Monte Carlo Options Lattice pricing model at the June 3, 2014 issuance date as $1,938,988. The value of the derivative liability at issuance was recorded as a discount against the notes in the Long-Term Debt section of the balance sheet. Accordingly, at the end of each quarterly reporting date, the derivative fair market value was remeasured and adjusted to current market value.
 
In connection with the Series A Private Placement on January 2, 2015, each of the holders of notes issued by the Company on June 3, 2014 (the “June 2014 Notes”) agreed to irrevocably waive their rights to anti-dilution protection under Section 5(b) of the June 2014 Notes in the event the Company issues additional securities at a per share price lower than the conversion price of the June 2014 Notes (the “June 2014 Note Waiver”). As a result this derivative liability was reversed to zero and reclassified into stockholders’ equity under Additional Paid-In Capital.
 
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2016 and 2015:
 
2016:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Warrant Liability
 
$
173,131
 
$
 
$
 
$
173,131
 
Total liabilities measured at fair value (Long-Term)
 
$
173,131
 
$
 
$
 
$
173,131
 
 
2015:
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Warrant Liability
 
$
240,786
 
$
 
$
 
$
240,786
 
Total liabilities measured at fair value (Long-Term)
 
$
240,786
 
$
 
$
 
$
240,786
 
 
Changes in the fair value of the warrant liability were as follows:
 
Fair value – December 31, 2014
 
$
13,541,138
 
 
 
 
 
 
Reclassification of warrant exercises to Additional Paid-in Capital
 
 
(2,855,463)
 
Change in fair value for the period of warrant derivative liability
 
 
1,098,465
 
Reclassification of embedded debt conversion price adjustment provision liability to Additional Paid-in Capital upon waiver of certain anti-dilutive provisions
 
 
(2,806,942)
 
Reclassification of warrant exercise price adjustment provision liability to Additional Paid-in Capital upon waiver of certain anti-dilutive provisions
 
 
(8,736,412)
 
 
 
 
 
 
Fair value – December 31, 2015
 
$
240,786
 
 
 
 
 
 
Reclassification of warrant exercises to Additional Paid-in Capital
 
 
(32,911)
 
Change in fair value for the period of warrant derivative liability
 
 
(34,744)
 
Fair value – December 31, 2016
 
$
173,131
 
 
For the years ending December 31, 2016 and 2015, since the embedded conversion option as described above was permanently waived on January 2, 2015, the value was reduced to zero.  
 
The Monte Carlo Options Lattice pricing model was used to estimate the fair value of warrants outstanding and reflected the following assumptions:
 
 
 
December 31,
 
 
December 31,
 
 
 
2016
 
 
2015
 
Assumptions for Pricing Model:
 
 
 
 
 
 
 
 
Expected term in years
 
 
1.22
 
 
 
2.60
 
Volatility range for years
 
 
100
%
 
 
103
%
Risk-free interest rate
 
 
1.47
%
 
 
1.06
%
Expected annual dividends
 
 
None
 
 
 
None
 
 
 
 
 
 
 
 
 
 
Value of warrants outstanding:
 
 
 
 
 
 
 
 
Fair value of warrants
 
$
173,131
 
 
$
240,786