Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Fair Value

v3.20.2
Derivative Financial Instruments and Fair Value
9 Months Ended
Sep. 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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.

 

During the three and nine months ended September 30, 2020, the conversions 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 0.09% to 0.12%, volatility ranging from 134.3% to 208.2% and weighted average lives ranging from .25 to 1.49 years. The incremental value of $59.8 million was recorded as deemed dividends in both the three and nine months ended September 30, 2020, respectively.

 

During the nine months ended September 30, 2019, the conversions 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%, volatility ranging from 189.5% to 273.1% and weighted average lives ranging from 0.3 to 3.2 years. The incremental value of $123.9 million was recorded as a deemed dividend for the nine months ended September 30, 2019. Deemed dividends are also discussed in Notes 1 and 3.

 

During the nine months ended September 30, 2019, the Company recorded interest expense of $9.5 million, 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 ranging from .48 years to 2.89 years, the changes in the fair value of the warrant instruments as a result of the modifications were estimated.