Derivative Financial Instruments and Fair Value
|9 Months Ended|
Sep. 30, 2018
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
|Derivative Financial Instruments and Fair Value||
Note 17 – Derivative Financial Instruments and Fair Value
In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
The estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies considered to be appropriate. At September 30, 2018 and December 31, 2017, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximate their fair values due to their short-term nature.
The following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2017 and September 30, 2018:
For the three and nine months ended September 30, 2018, total income (loss) on instruments valued using Level 3 valuations was $109.3 million and $13.7 million, respectively.
The Company reclassified the derivative liability previously reported at December 31, 2017 as long term to current liability for the second quarter 2018. On September 23, 2018, the Company’s board of directors approved a reverse split of its common stock, which would provide sufficient authorized and unissued shares to allow for otherwise equity classified instruments to be classified in equity. As of September 23, 2018, the fair value of these instruments was evaluated for reclassification. As a result of the evaluation, the Company reclassified the derivative liability previously reported as a current liability to derivative income.
The Company utilized the following methods to value its derivative liabilities for the nine months ended September 30, 2018, for embedded conversion options valued at $357,797. The Company determined the fair value by comparing the discounted conversion price per share (85% of market price) multiplied by the number of shares issuable at the balance sheet date to the actual price per share of the Company’s common stock multiplied by the number of shares issuable at that date with the difference in value recorded as a liability. In addition, the Company valued the modification in the term of the March 2017 Series B Warrants at $8,603,067 using Monte Carlo simulations. All inputs for the derivative liabilities are observable and, therefore, there is no sensitivity in the valuation to unobservable inputs.
The following table reconciles the changes in the liabilities categorized within Level 3 of the fair value hierarchy for the nine months ended September 30, 2018:
In addition to the loss on change in fair value of debentures and warrants, during the nine months ended September 30, 2018, the Company recorded a loss on the exchange of convertible debentures into shares of its Series I-2 Preferred Stock of $1,471,121.
On September 14, 2018, the expiration date of certain warrants was extended by 180 days. The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification date. Using the pre-modification term and related assumptions, and the post-modification term and related assumptions, the fair value of the warrant instruments was estimated for embedded conversion options on each conversation date. This was done by comparing the fair value of shares issued upon conversion to the amount of principal and interest converted.
On September 28, 2018, subsequent to the board approval of the reverse split and resulting reclassification of the warrants from liabilities to equity, the conversion of certain convertible notes triggered a further reduction in the exercise prices of any warrants containing a ratchet feature that had not already ratcheted down to their floor. In accordance with US GAAP, the incremental fair value of the warrants was measured, ignoring the down-round provision, using Black Scholes.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef