Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

Derivative Liabilities
9 Months Ended
Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Liabilities

Note 2 - Derivative Liabilities


Historically, the Company accounted for certain instruments, which do not have fixed settlement provisions, as derivative instruments in accordance with FASB ASC 815-40, Derivative and Hedging – Contracts in Entity’s Own Equity. This was due to an anti-dilution provision for the warrants that provides for a reduction to the exercise price if the Company issues equity or equity-linked instruments in the future at an effective price per share less than the exercise price then in effect for the warrant (“down round provision”). As such, the warrants were re-measured at each balance sheet date based on estimated fair value. Changes in estimated fair value were recorded as non-cash adjustments within other income (expense), net, in the Company’s accompanying Consolidated Statements of Operations. The Company recorded a gain on the change in the estimated fair value of warrants of $0.4 million for the three months ended September 30, 2017 and a gain on the change in the estimated fair value of warrants of $0.3 million for the nine months ended September 30, 2017.


As of April 1, 2018, the Company early adopted ASU 2017-11, which revised the guidance for instruments with down-round provisions. As such, the Company treats outstanding warrants as free-standing equity-linked instruments that are recorded to equity in the Consolidated Balance Sheet as of January 1, 2018.


In accordance with the guidance presented in the ASU 2017-11, the fair value of the derivative liability balance for 57,212 warrants as of December 31, 2017 of $16 thousand was reclassified by means of a cumulative-effect adjustment to equity as of January 1, 2018. These warrants had an original exercise price of $2.34. The exercise price is adjusted based on a formula whenever the Company issues, or is deemed to have issued, any common shares for no consideration or a consideration per share less than the exercise price of warrants.


Prior to the Company’s adoption of ASU 2017-11, the exercise price of the warrants was reset to $1.25 as a result of various offerings. The difference of $5 thousand between the fair value of the warrants with the exercise price prior to the price reset and the fair value of the warrants with the exercise price after the price reset was accounted for as a deemed dividend. The impact of the adoption was as follows:


Derivative liabilities   $ (15,916 )
Additional paid-in capital     66,154  
Accumulated deficit     (50,238 )
Total stockholders’ equity   $ 15,916  


The fair value of the derivative warrants was calculated using a binomial valuation model with the following assumptions at December 31, 2017:


Market value of common stock on measurement date (1)   $ 0.66  
Adjusted exercise price   $ 1.67  
Risk free interest rate (2)     2.09 %
Warrant lives in years     4.1 years  
Expected volatility (3)     80 %
Expected dividend yield (4)     -  
Probability of stock offering in any period over 5 years (5)     100 %
Offering price estimated as of December 31, 2017 (6)   $ 0.50  


(1) The market value of common stock at the above measurement dates was based on the Company’s closing price quoted on the NYSE American.


(2) The risk-free interest rate was determined by the Company’s management using the Treasury Bill rate as of the respective measurement date.


(3) The volatility was estimated using the historical volatility of the Company’s common stock.


(4) Management does not expect to pay dividends for the foreseeable future.


(5) Management determines the probability of future stock offering at each evaluation date.
(6) Represents the estimated offering price in future offerings as determined by management.