Note 5 - 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. 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 three months ended June 30, 2017 were as follows:

 

		Shares subject to warrants				Fair Value
Balance, December 31, 2016			1,615,260			$	300,683
Modification of warrants			-				19,356
Change in fair value			-				106,403
Balance, June 30, 2017			1,615,260			$	426,442

 

During the six months ended June 30, 2017, 9,364 warrants were exercised on a cashless basis, of which none were derivative warrants.

 

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. 

 

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

 

		June 30,				December 31,
		2017				2016
Market value of common stock on measurement date (1)		$	1.22			$	0.88
Adjusted exercise price		$	2.34			$	2.34
Risk free interest rate (2)			1.14-1.81	%			0.85	%
Warrant lives in years			2.0~4.6 years				2.0 years
Expected volatility (3)			73 - 82	%			61 - 69	%
Expected dividend yield (4)			-				-
Probability of stock offering in any period over 5 years (5)			100	%			100	%
Offering price (6)		$	0.75			$	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 MKT.

 

(2)	The risk-free interest rate was determined by 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 MKT market.

 

(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.