Annual report pursuant to Section 13 and 15(d)

Derivative Liability and Fair Value Measurements

v3.3.1.900
Derivative Liability and Fair Value Measurements
12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Liability and Fair Value Measurements
Note 9 – 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, we measured the derivative liability using a Monte Carlo Options Lattice pricing model at their 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, 2015 and 2014 a total of 45,100 and 4,730,992 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 13), 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 Nil 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 is 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 Nil 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, 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
 
 
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, 2014:
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note Conversion Feature Liability
 
$
2,806,942
 
$
 
$
 
$
2,806,942
 
Warrant Liability
 
 
10,734,196
 
 
 
 
 
 
10,734,196
 
Total liabilities measured at fair value (Long-Term)
 
$
13,541,138
 
$
 
$
 
$
13,541,138
 
 
Fair value – December 31, 2013
 
$
12,035,815
 
 
 
 
 
 
Reclassification of warrant exercises to Additional Paid-in Capital
 
 
(2,127,405)
 
Change in fair value for the period of warrant derivative liability
 
 
825,786
 
Convertible debt issued with an embedded conversion price adjustment provision
 
 
1,938,988
 
Extinguishment of liability upon conversion of debt
 
 
(500,261)
 
Change in fair value of debt conversion price adjustment for the period
 
 
1,368,215
 
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
 
 
For the period ending December 31, 2015, since the embedded conversion option as described above was permanently waived on January 2, 2015, the value reduced to zero. For the period ending December 31, 2014, the Monte Carlo Options Lattice pricing model was used to estimate the fair value of the embedded conversion option on the convertible notes issued during this period. The following summary table shows the assumptions used to compute the fair value of the embedded conversion option when granted at issuance and as of December 31, 2014:
 
 
 
December 31,
 
 
At Issuance –
 
 
 
2014
 
 
June 3, 2014
 
Assumptions for Pricing Model:
 
 
 
 
 
 
 
 
Expected term in years
 
 
2.67
 
 
 
3.00
 
Volatility range for years 1 to 5
 
 
81
%
 
 
57
%
Expected annual dividends
 
 
None
 
 
 
None
 
 
 
 
 
 
 
 
 
 
Value of convertible debt price adjustment:
 
 
 
 
 
 
 
 
Fair value of debt embedded conversion price adjustment option
 
$
2,806,942
 
 
$
1,938,988
 
 
The Monte Carlo Options Lattice pricing model was used to estimate the fair value of warrants outstanding:
 
 
 
December 31,
 
 
December 31,
 
 
 
2015
 
 
2014
 
Assumptions for Pricing Model:
 
 
 
 
 
 
 
 
Expected term in years
 
 
2.60
 
 
 
3.21 to 3.78
 
Volatility range for years
 
 
103
%
 
 
81 to 89%
 
Risk-free interest rate
 
 
1.06
%
 
 
0.83 to 1.11%
 
Expected annual dividends
 
 
None
 
 
 
None
 
 
 
 
 
 
 
 
 
 
Value of warrants outstanding:
 
 
 
 
 
 
 
 
Fair value of warrants
 
$
240,786
 
 
$
10,734,196