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 June 30, 2019 and December 31, 2018:

The Company utilized the following methods to value its derivative liabilities as of June 30, 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 six months ended June 30, 2019:

During the six months ended June 30, 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 six months ended June 30, 2019. Deemed dividends are also discussed in Notes 1 and 3.

During the three and six months ended June 30, 2019, the Company recorded interest expense of $5.4 million and $9.5 million, respectively, which represented the fair value of the modification of warrants during the periods as more fully discussed in Note 13. The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification dates. Using the pre-modification terms and related assumptions of risk free rates ranging from 2.44% to 2.46%, volatility ranging from 182.9% to 204.4% and weighted average remaining lives of .24 years to .36 years, and the post-modification terms and related assumptions of risk free rates ranging from 2.23% to 2.49%, volatility ranging from 198.3% to 259.4% and weighted average remaining lives of .48 years to 2.89 years, the changes in the fair value of the warrant instruments as a result of the modifications were estimated.

For the three and six months ended June 30, 2018, the Company realized income of $44.2 million and a loss of $95.6 million, respectively, on instruments valued using Level 3 valuations. The income in the three months ended June 30, 2018 was primarily due to the decrease in the spread between the price of our common stock and the exercise/conversion prices of the derivatives from March 31, 2018 to June 30, 2018. The loss in the six months ended June 30, 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 and six months ended June 30, 2018: (i) for embedded conversion options valued at $507,438, 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 $102.4 million, the Company determined the fair value by using a binomial model and Monte Carlo simulations; and (iii) for warrants valued at $12,999 and embedded conversion options valued at $56,803, the Company determined the fair value using the Black-Scholes option pricing model. In addition, the Company valued the modification in the term of the March 2017 Series B Warrants at $256,417 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 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. The Series K Preferred Stock is more fully described in Note 19.