|
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 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 Company’s Stock Offering and 2012 Common Stock Offering, the Convertible Notes (previously issued and converted) 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 March 31, 2014 were as follows:
| |
|
Units |
|
|
Fair Value |
|
| |
|
|
|
|
|
|
Balance, December 31, 2013 |
|
|
1,968,623 |
|
|
$ |
6,707,255 |
|
| |
|
|
|
|
|
|
|
|
Transfer from liability classification to equity classification |
|
|
(46,025 |
) |
|
|
(139,565 |
) |
| |
|
|
|
|
|
|
|
|
Change in fair value |
|
|
- |
|
|
|
12,561,071 |
|
| |
|
|
|
|
|
|
|
|
Balance, March 31, 2014 |
|
|
1,922,598 |
|
|
$ |
19,128,761 |
|
During the quarter ended March 31, 2014, 46,025 warrants were exercised. The fair value of these warrants totaling $139,565 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 modified binomial valuation model with the following assumptions at each balance sheet date.
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
Market value of common stock on measurement date (1) |
|
$ |
12.45 |
|
|
$ |
5.89 |
|
Adjusted exercise price |
|
$ |
9.95 |
|
|
$ |
2.48 |
|
Risk free interest rate (2) |
|
|
1.32 |
% |
|
|
1.27 |
% |
Warrant lives in years |
|
0.5 years |
|
|
0.5 years |
|
Expected volatility (3) |
|
|
71 |
% |
|
|
73 |
% |
Expected dividend yield (4) |
|
|
- |
|
|
|
- |
|
Probability of stock offering in any period over 5 years (5) |
|
|
- |
|
|
|
25 |
% |
Range of percentage of existing shares offered (6) |
|
|
- |
|
|
|
35 |
% |
Offering price range (7) |
|
$ |
9 |
|
|
$ |
9 |
|
| |
(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 March 31, 2014. |
| |
(2) |
The risk-free interest rate was determined by management using the Treasury Bill 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) |
Management estimates that the range of percentages of existing shares offered in each stock offering will be 0% and 35% of the shares outstanding at March 31, 2014 and December 31, 2013, respectively. |
| |
(7) |
Represents the estimated offering price range in future offerings as determined by management. |
|