Quarterly report pursuant to Section 13 or 15(d)

Warrant Liability

v3.8.0.1
Warrant Liability
9 Months Ended
Sep. 30, 2017
Warrant Liability [Abstract]  
Warrant Liability
Warrant Liability
 
On February 9, 2017, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, as representative of the several underwriters identified therein (collectively, the “Underwriters”), pursuant to which we sold in a registered public offering (the “Offering”), 3,710,000 units, priced at a public offering price of $1.35 per unit (the closing price that day was $1.50), with each unit consisting of: (i) one share of common stock, (ii) a five-year Series A warrant to purchase 0.50 of a share of common stock, (iii) a 90-day Series B warrant to purchase one share of common stock, and (iv) a five-year Series C warrant to purchase 0.50 of a share of common stock. The Series C warrants in a unit could only be exercised to the extent and in proportion to a holder of the Series C warrants exercising its Series B warrants included in the unit. The Series A and Series C warrant have an exercise price of $1.50 per share of common stock. The Series B warrant had an exercise price of $1.35 per share of common stock.
 
Under the terms of the Underwriting Agreement, we granted the Underwriters a 45-day option to purchase an additional 556,500 shares of common stock and/or an additional 556,500 warrant combination (comprised of an aggregate of 278,250 Series A warrants, 556,500 Series B warrants and 278,250 Series C warrants), in any combinations thereof, from us to cover over-allotments at the public offering price per share of $1.349 and public offering price per warrant combination of $.001, respectively, less the underwriting discounts and commissions. Upon the closing of the Offering, the Underwriters exercised the over-allotment option with respect to $278,100 warrant combinations. We received approximately $4.5 million in net proceeds from the Offering, after deducting underwriting discounts and commissions and estimated offering expenses.
 
The basis of value is fair value, which is defined pursuant to Accounting Standards Codification (“ASC”) 820 to be “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company estimated the fair value of the Warrants under ASC 820 as of February 14, 2017 for financial reporting purposes. We used the Black-Scholes option pricing model (“BSM”) to determine the fair value of the Series A and Series B Warrants and a Monte Carlo simulation (“MCM”) with regard to the Series C Warrants in consideration of path dependent vesting terms of the contract. Both the BSM and MCM models are acceptable in accordance with GAAP. The BSM requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average term of the Warrant. The MCM simulates the Company’s common stock price from the valuation date through the Series B Warrant and the unvested Series C Warrant expiration dates using Geometric Browman Motion on a risk-neutral basis – thereby impacting the likelihood that the Series B Warrants would have been exercised and, subsequently, the Series C Warrants would then vest. As disclosed, all Series B and unvested Series C warrants expired on May 15, 2017.
 
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the Warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date.
 
Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the Warrants. Where appropriate, we used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price during 2016-2017.


 
The assumptions used in the BSM and MCM models for the Warrants are as follows:
 
 
 
Nine Months Ended September 30, 2017
 
Year Ended December 31,
2016
Risk-free interest rate
 
1.68%-1.86%
 
Volatility
 
80.00%-160.11%
 
Expected life (years)
 
0.5-5.0
 
Dividend yield
 
—%
 


A summary of our Warrant activity and related information follows:

Description
 
Number of
Shares Under
Warrant
 
Range of
Warrant Price
per Share
 
Weighted
Average
Exercise Price
 
Weighted Average
Remaining
Contractual Life (Years)
Balance at January 1, 2017
 

 

 

 

Granted
 
8,235,923

 
$1.35-$1.50

 
$
1.43

 
1.6

Exercised
 
(2,703,434
)
 

 
$
1.46

 

Expired
 
(5,087,717
)
 

 
$
1.40

 

Balance at September 30, 2017
 
444,772

 

 
$
1.46

 
4.63

Vested and Exercisable at September 30, 2017
 
444,772

 
$1.35-$1.50

 
$
1.46

 
4.63



Warrant Activity During 2017:

On February 14, 2017, 8,235,923 Warrants were granted, as discussed above.
 
On March 24, 2017, 596,300 Series B Warrants were exercised for an equivalent amount of common shares which vested 298,150 Series C Warrants.
 
On March 31, 2017, the Warrants were revalued with a fair value determination of $3.08 million which included a fair value adjustment of $1.06 million which was included as a gain from the change in fair value of warrant liability in “Other Income” in the accompanying financial statements.
 
On May 15, 2017, approximately 3.4 million and 1.7 million Series B and Series C Warrants, respectively, expired, which reduced our warrant liability by $1.24 million in the accompanying financial statements.
 
On June 28, 2017, 1,295,995 Series A Warrants were exercised. On the same date, 295,650 Series C Warrants were exercised.
 
On June 30, 2017, 12,250 Series A Warrants were exercised.
 
On June 30, 2017, the Warrants were revalued with a fair value determination of $1.2 million which included a fair value adjustment of $3.3 million which was included as loss from the change in fair value of warrant liability in “Other income (expense)” in the accompanying financial statements.

During the quarter ended September 30, 2017, 500,739 Series A warrants and 2,500 Series C warrants were exercised with cash proceeds of approximately $0.8 million.
 
Series B and Series C Warrants
 
The Series B Warrants and the unvested Series C Warrants expired May 15, 2017. Therefore, the associated warranty liability of $1.24 million was extinguished on May 15, 2017 as no other Series B Warrants were exercised prior to that date.