Annual report pursuant to Section 13 and 15(d)

Derivatives

v3.8.0.1
Derivatives
12 Months Ended
Dec. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives

Note 5 - Derivatives

 

The Company has determined that certain warrants the Company issued contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices. These provisions could result in modification of the warrants’ exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The warrants granted in connection with two issuances of the Company’s common stock contain anti-dilution provisions that provide for a reduction in the exercise price of such warrants in the event that future common stock or common stock equivalents are issued at a price per share that is less than the exercise price of such warrant at the time. The amount of any such adjustment is determined in accordance with the provisions of the warrants and depend upon the number of shares of common stock issued and the exercise price of the warrant at the time.

 

Activities for derivative warrant instruments during the years ended December 31, 2017 and 2016 were as follows:

 

    Shares
subject to
warrants
    Fair Value  
             
Balance, December 31, 2015     1,627,369     $ 2,848,902  
Transfer from liability to equity classification     (12,109 )     (17,455 )
Change in fair value     -       (2,530,764 )
Balance, December 31, 2016     1,615,260       300,683  
Modification of warrants     -       19,356  
Expiration of derivative warrants     (1,558,048 )     -  
Change in fair value     -       (304,123 )
Balance, December 31, 2017     57,212     $ 15,916  

 

On March 14, 2017, the Company canceled derivative warrants to purchase 57,212 common shares of the Company, dated December 19, 2012 and issued a new warrant to purchase 57,212 common shares of the Company, see Note 7. As a result of the replacement, the Company recorded an additional expense of $19,356 for the incremental value of the derivative warrant.

 

During the year ended December 31, 2016, 183,718 warrants were exercised, of which 12,109 were derivative warrants. The fair value of these derivative warrants totaling $17,455 were measured on the various exercise dates and reclassified to additional paid-in capital.

 

The fair values of the derivative warrants were calculated using a binomial valuation model with the following assumptions at each balance sheet date.

 

    December 31,     December 31,  
    2017     2016  
             
Market value of common stock on measurement date (1)   $ 0.66     $ 0.88  
Adjusted exercise price   $ 1.67     $ 2.34  
Risk free interest rate (2)     2.09 %     0.85 %
Warrant lives in years     4.1 years       2.0 years  
Expected volatility (3)     80 %     61 – 69 %
Expected dividend yield (4)     -       -  
Probability of stock offering in any period over 5 years (5)     100 %     100 %
Offering price (6)   $ 0.50     $ 1.25  

 

(1) The market value of common stock at the above measurement dates is 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 volatilities of the Company’s common stock traded in NYSE American.

 

(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.