Annual report pursuant to Section 13 and 15(d)

Derivatives

v2.4.1.9
Derivatives
 12 Months Ended
Dec. 31, 2014
Derivatives [Abstract]  
Derivatives

Note 6 – Derivatives

 

The Company has determined that certain warrants the Company has issued contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and 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 the issuance of the 2012 Common Stock Offering, and the placement agent warrants contain anti-dilution provisions that provide for a reduction in the exercise price of such warrants in the event that future common stock (or securities convertible into or exercisable for common stock) is issued (or becomes contractually issuable) at a price per share (a “Lower Price”) 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 warrant agreement and depends upon the number of shares of common stock issued (or deemed issued) at the Lower Price and the extent to which the Lower Price is less than the exercise price of the warrant at the time.

 

Activities for derivative warrant instruments during the years ended December 31, 2014 and 2013 were as follows:

 

    Shares subject to warrants     Fair Value  
             
Balance, December 31, 2012     5,146,338     $ 3,574,958  
                 
Transfer from liability to equity classification     (3,177,715 )     (1,047,095 )
                 
Change in fair value     -       4,179,392  
                 
Balance, December 31, 2013     1,968,623     $ 6,707,255  
                 
Transfer from liability to equity classification     (319,294 )     (2,203,443 )
                 
Change in fair value     -       2,206,099  
                 
Balance, December 31, 2014     1,649,329     $ 6,709,911  

 

During the year ended December 31, 2014, 2,501,993 warrants were exercised, of which 319,294 were derivative warrants. The fair value of these derivative warrants totaling $2,203,443 were measured on the various exercise dates and reclassified to additional paid-in capital.

 

During the year ended December 31, 2013, certain derivative warrants expired or were exercised. The fair value of these derivative warrants totaling $1,047,095 were measured on the expiration or exercise date and reclassified to additional paid-in capital.

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

 

    December 31,     December 31,  
    2014     2013  
             
Market value of common stock on measurement date (1)   $ 5.89     $ 5.89  
Adjusted exercise price   $ 2.48     $ 2.48  
Risk free interest rate (2)     1.10 %     1.27 %
Warrant lives in years     3.0 years       0.5 years  
Expected volatility (3)     71 %     73 %
Expected dividend yield (4)     -       -  
Probability of stock offering in any period over 5 years (5)     100 %     25 %
Offering price (6)   $ 4.50     $ 9.00  

 

(1) The market value of common stock at the above measurement dates is based on the Company’s trading price quoted on the OTC Markets for December 31, 2013 and on the NYSE MKT for December 31, 2014.

  

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

 

(3) Because the Company does not have adequate trading history to determine its historical trading volatility, the volatility factor was estimated by management using the historical volatilities of comparable companies in the same industry and region.

 

(4) Management determined the dividend yield to be 0% based upon its expectation that it will not 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.