Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Fair Value

v3.19.3
Derivative Financial Instruments and Fair Value
3 Months Ended
Mar. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Fair Value

Note 11 – Derivative Financial Instruments and Fair Value

 

The following table sets forth the financial assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2019 and December 31, 2018:

 

    Level 1     Level 2     Level 3     Total  
As of December 31, 2018:                                
Embedded conversion options   $ -     $ -     $ 350,260     $ 350,260  
Total   $ -     $ -     $ 350,260     $ 350,260  
                                 
As of March 31, 2019:                                
Embedded conversion options   $ -     $ -     $ 455,336     $ 455,336  
Total   $ -     $ -     $ 455,336     $ 455,336  

 

The Company utilized the following methods to value its derivative liabilities as of March 31, 2019 and December 31, 2018, for embedded conversion options valued at $455,336 and $350,260, respectively. The Company determined the fair value by comparing the discounted conversion price per share (85% of market price, subject to a floor in certain cases) 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. 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 three months ended March 31, 2019:

 

Balance at December 31, 2018   $ 350,260  
Change in fair value of debentures     105,076  
Balance at March 31, 2019   $ 455,336  

 

During the three months ended March 31, 2019, the conversion of preferred stock triggered a further reduction in the exercise prices of any debentures and warrants containing ratchet features that had not already ratcheted down to their floor. In accordance with U.S. GAAP, the incremental fair value of the debentures and warrants was measured, ignoring the down round provision, using Black Scholes. The following assumptions were utilized in the Black Scholes valuation models: risk free rates ranging from 2.4% to 2.6% and volatility ranging from 189.5% to 273.1% and weighted average life of 0.3 to 3.2 years. The incremental value of $123.9 million was recorded as a deemed dividend for the three months ended March 31, 2019. Deemed dividends are also discussed in Notes 1 and 3.

 

During the three months ended March 31, 2019, the Company recorded interest expense of $4.1 million, which was the fair value of the modification of warrants during the period (the terms of the modification are discussed in Note 13). 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 of risk free rate of 2.46%, volatility of 204.4% and expected term of .24 years, and the post-modification term and related assumptions of risk free rate of 2.49%, volatility of 259.4% and expected term of .48 years, the change in the fair value of the warrant instruments as a result of the modification was estimated.

 

For the three months ended March 31, 2018, the total loss realized on instruments valued using Level 3 valuations was $139.8 million. The loss in the three months ended March 31, 2018 resulted primarily from the significant reduction in the exercise prices of outstanding warrants as a result of the down round provisions. The Company utilized the following methods to value its derivative liabilities for the three months ended March 31, 2018: (i) for embedded conversion options valued at $1.0 million, 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; (ii) for warrants valued at $151.4 million, the Company determined the fair value by using a binomial model and Monte Carlo simulations; and (iii) for warrants valued at $0.1 million and embedded conversion options valued at $0.2 million, the Company determined the fair value using the Black-Scholes option pricing model. All inputs for the derivative liabilities are observable and, therefore, there is no sensitivity in the valuation to unobservable inputs.

 

In September 2018, the Company’s board of directors approved two reverse stock splits of the Company’s common stock, one of which was effected on November 12, 2018 (the second was never effected), which provided sufficient authorized and unissued shares to allow for otherwise equity classified instruments to be classified in equity. As a result, the fair value of these instruments was evaluated for reclassification. As a result of the evaluation, during the third quarter of 2018, the Company reclassified the derivative liabilities previously reported as a current liability to derivative income.

 

On October 4, 2019, the Board of Directors authorized the issuance and sale of certain shares of Series K Convertible Preferred Stock to Alcimede LLC pursuant to the terms of an Exchange Agreement. The Board considered all options to secure additional financing required to continue operations and determined this authorization to be necessary to secure needed financing in the required time frame. As a result of this authorization, as of the date of filing this report, the Company believes that it has the ability to have sufficient authorized shares of its common stock to cover all potentially dilutive common shares outstanding.