Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Fair Value

v3.20.2
Derivative Financial Instruments and Fair Value
3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Fair Value

Note 11 – Derivative Financial Instruments and Fair Value

 

The estimated fair value of financial instruments was determined by the Company using available market information and valuation methodologies considered to be appropriate. At March 31, 2020 and December 31, 2019, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximated 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 March 31, 2020 and December 31, 2019:

 

    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 March 31, 2020:                                
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, 2020 and December 31, 2019 for embedded conversion options that were valued at $455,336. 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. There was no change in the value of embedded conversion options in the three months ended March 31, 2020 as there was no change in the conversion price during the period.

 

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 deemed dividends 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.

 

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.