Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments and Fair Value

v3.20.1
Derivative Financial Instruments and Fair Value
12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Fair Value

Note 12 – 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:

 

  Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
     
  Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).
     
  Level 3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including our own assumptions.

 

The estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies considered to be appropriate. At December 31, 2019 and 2018, 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, 2019 and 2018:

 

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

The following table reconciles the changes in the liabilities categorized within Level 3 of the fair value hierarchy for the years ended December 31, 2018 and 2019:

 

Balance at December 31, 2017   $ 12,435,250  
Gain on change in fair value of debentures and warrants (1)     (15,167,335 )
Fair value of warrants exercised     (4,619,150 )
Fair value of debentures converted     (1,408,901 )
Fair value of debentures exchanged for Series I-2 Preferred Stock     (1,420 )
Modification of warrants     8,603,069  
Convertible debt     508,747  
Balance at December 31, 2018   $ 350,260  
Change in fair value of debentures     105,076  
Balance at December 31, 2019   $ 455,336  

 

  (1) In addition to the gain on change in fair value of debentures and warrants of $15.2 million during the year ended December 31, 2018, the Company recorded a loss on the exchange of convertible debentures for shares of its Series I-2 Preferred Stock of approximately $1.5 million, as more fully discussed in Note 13. Therefore, the total change in the fair value of derivative instruments for the year ended December 31, 2018 was a net gain of $13.7 million.

 

The Company utilized the following methods to value its derivative liabilities as of December 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

 

During the year ended December 31, 2019, the Company extended the exercise period of the outstanding Series B Warrants (Series B Warrants are more fully discussed in Notes 12 and 14) twice, once to September 2019 and the second time to March 31, 2022 and recorded interest expense of $9.5 million, which represented the aggregate fair value of the modifications. 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.

 

During the year ended December 31, 2018, the Company extended the exercise period of the outstanding Series B Warrants twice, once to March 21, 2019 and the second time to June 21, 2019 and recorded an additional discount on the Series B Warrants of approximately $8.6 million as a result of the extensions, $6.4 million of which was included in interest expense in 2018 and the remainder was included in interest expense in 2019. The Company used the Black Scholes model to calculate the fair value of the warrants as of the modification dates. Using the pre-modification term and related assumptions of risk free rates ranging from 1.91% to 2.32%, volatility ranging from 184.0% to 296.3% and weighted average remaining life of .33 years, and the post-modification terms and related assumptions of risk free rates ranging from 2.09% to 2.56%, volatility ranging from 208.2% to 249.1% and weighted average remaining life of .65 years, the change in the fair value of the warrant instruments as a result of the modifications was estimated on each date.

 

During the years ended December 31, 2019 and 2018, the conversions of preferred stock and debentures 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 in the year ended December 31, 2019: 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 following assumptions were utilized in the Black Scholes valuation models in the year ended December 31, 2018: risk free rates ranging from 2.47% to 2.98%, volatility ranging from 167% to 257% and a weighted-average remaining life of 2.87 years. The incremental value of the debentures and warrants of $123.9 million and $231.8 million, respectively, was recorded as deemed dividends for the years ended December 31, 2019 and 2018. Deemed dividends are also discussed in Notes 2 and 3.

 

Effective June 9, 2020, the Company’s shareholders approved an amendment to the Company’s Certificate of Incorporation, as amended, to effect a reverse stock split of all of the outstanding shares of the Company’s common stock, at a specific ratio from 1-for-100 to 1-for-10,000, and to grant authorization to its Board of Directors to determine, in its discretion, the specific ratio and timing of the reverse split at any time on or before December 31, 2020, subject to the Board of Directors’ discretion to abandon such amendment. 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.