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Derivative Liability
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Dec. 31, 2013
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| Derivative Liability [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE LIABILITY | NOTE 6. DERIVATIVE LIABILITY
As of December 31, 2013, the Company had reserved 69,682,783 shares of common stock for issuance upon exercise of the Company’s outstanding warrants. The Company had reserved 33,764,706 shares of common stock for issuance upon exercise of the Company’s outstanding convertible debt as of December 31, 2013.
In connection with the June and August Convertible Notes offerings, the Company entered into an Amendment and Waiver Agreement (collectively, the “Amendment Agreement”) the holders of substantially all of the securities issued in connection with the Company’s Bridge Notes (as defined below), PPO Units (as defined below), short-term loans and PPO and Bridge Broker Warrants (as defined below) with the holders (collectively, the “Holders”) pursuant to which the Company reduced the exercise prices of all of its outstanding Series A, Series B, Series C, Series D and Series E common stock purchase warrants (collectively, the “Warrants”) as follows: the exercise price per share of the Series A warrants that had an initial exercise price of $0.25 was reduced to $0.01; the exercise price per share of the Series B warrants that had an initial exercise price of $0.50 was reduced to $0.015; the exercise price per share of the Series C warrants that had an initial exercise price of $1.00 was reduced to $0.03; and the exercise price per share of the Series D and Series E warrants that had an initial exercise price of $0.25 was reduced to $0.01. As the triggering event for the re-pricing of the warrants was the June Convertible Notes offering, the effect of the reduction in the respective exercise prices was reflected in the June 30, 2013 statement of operations and accompanying balance sheet.
In consideration of the exercise price reductions, the Holders agreed to permanently waive all past and future exercise price and share number anti-dilution adjustment provisions that would otherwise be triggered by share issuances by the Company at prices less than the purchase, exercise or conversion price of any securities acquired by the Holders in the offerings or underlying any of such securities.
Bridge Notes
Upon the completion of the Merger, $1,925,030 in bridge notes (the “Bridge Notes”) converted into PPO Units. The holders of the Bridge Notes received 7,700,120 five-year bridge warrants (the “Bridge Warrants”), each exercisable to purchase one share of the Company’s Common Stock. 3,850,060 of the Bridge Warrants were originally exercisable at $0.25 per share (the “Series A Warrants”) and 3,850,060 of the Bridge Warrants (the “Series B Warrants”) were originally exercisable at $0.50 per share. As of August 29, 2013, the Series A warrants were modified to be exercisable at $0.01 per share and the Series B warrants were modified to be exercisable at $0.015 per share. Except as to exercise price, the Bridge Warrants are identical, in all material respects to the Investor Warrants (as defined below).
Licensor Warrants
The Company also issued to the certain licensors warrants to purchase an aggregate of 10,000,000 shares of the Company’s common stock for a term of ten years at an original exercise price of $0.24 per share (the “Licensor Warrants”). The exercise price and number of shares of common stock issuable upon exercise of the Licensor Warrants may be adjusted in certain circumstances including stock splits and stock dividends (but excluding future issuances of the Company’s equity securities, regardless of whether or not such issuance is for no consideration or for consideration per share less than $0.24). The Licensor Warrants are exercisable on a cashless basis at any time prior to their
expiration. Except as otherwise described herein, the Licensor Warrants are identical in all material respects to the Investor Warrants. On May 8, 2013, the Company reduced the exercise price of the Licensor Warrants to $0.12 in consideration of value received.
Private Placement Offering
Concurrently with the closing of the Merger, the Company completed an initial closing of a private placement offering (the “Offering”) wherein 500,000 units (the “PPO Units”) were sold, at a price of $0.25 per PPO Unit, for a total cash consideration of $125,000. Each PPO Unit consists of one share of the Company’s common stock and a warrant to purchase one share of the Company’s common stock (the “Investor Warrants”). The Investor Warrants are exercisable for a period of five years at a purchase price of $1.00 per share of the Company’s common stock. If at any time during the two year period following the closing of the Offering the Company issues additional shares of common stock for consideration per share of less than $0.25 (the “Reduced Price”), then the Company agreed to issue to the investors in the Offering, concurrently with such issue and without any additional consideration from the investors, a number of additional shares of the Company’s common stock and Investor Warrants equal to the difference between (A) the purchase price of the PPO Units being subscribed for divided by the Reduced Price and (B) the number of shares of the Company’s common stock included in the units being subscribed for in the subsequent offering. In addition, on July 12, 2012, the Company effected the conversion of $1,925,030 in Bridge Notes. The Bridge Notes were converted into 7,700,120 PPO Units and 7,700,120 five-year Investor Warrants each exercisable to purchase one share of the Company’s common stock. As of August 29, 2013, the Investor Warrants were modified to be exercisable at $0.03 per share.
On July 20, 2012, the Company completed the second closing of the Offering through the sale of 124,000 PPO Units (for aggregate gross proceeds of $31,000) consisting of 124,000 shares of common stock and 124,000 five-year Investor Warrants with an exercise price of $1.00.
On July 31, 2012, the Company completed the third closing of the Offering through the sale of 1,639,920 PPO Units (for aggregate gross proceeds of $409,980) consisting of 1,639,920 shares of common stock and 1,639,920 five-year Investor Warrants with an exercise price of $1.00.
On August 24, 2012, the Company completed the fourth closing of the Offering through the sale of 500,000 PPO Units (for aggregate gross proceeds of $125,000) consisting of 500,000 shares of common stock and 500,000 five-year Investor Warrants with an exercise price of $1.00.
On September 10, 2012, the Company completed the fifth closing of the Offering through the sale of 80,000 PPO Units (for aggregate gross proceeds of $20,000) consisting of 80,000 shares of common stock and 80,000 five-year Investor Warrants with an exercise price of $1.00.
On December 6, 2012, the Company completed the sixth closing of the Offering through the sale of 600,000 PPO Units (for aggregate gross proceeds of $150,000) consisting of 600,000 shares of common stock and 600,000 five-year Investor Warrants with an exercise price of $1.00.
On December 10, 2012, the Company completed the seventh closing of the Offering through the sale of 200,000 PPO Units (for aggregate gross proceeds of $50,000) consisting of 200,000 shares of common stock and 200,000 five-year Investor Warrants with an exercise price of $1.00.
On December 12, 2012, the Company completed the eighth closing of the Offering through the sale of 100,000 PPO Units (for aggregate gross proceeds of $25,000) consisting of 100,000 shares of common stock and 100,000 five-year Investor Warrants with an exercise price of $1.00.
On February 8, 2013, the Company completed the ninth closing of the Offering through the sale of 200,000 PPO Units (for aggregate gross proceeds of $50,000) consisting of 200,000 shares of common stock and 200,000 five-year Investor Warrants with an exercise price of $1.00.
As of August 29, 2013, the Investor Warrants, aggregating to 11,664,040 warrants, or the “Series C” Warrants, were modified to be exercisable at $0.03 per share.
In connection with the July 12, 2012 PPO closing, the Company issued an aggregate of 656,010 five year broker warrants with an exercise price of $0.25 per share. Effective as of December 31, 2013, 119,962 broker warrants have been cancelled with the repurchase of 999,680 shares. In connection with the July 20, 2012, July 31, 2012, August 24, 2012, and September 10, 2012 closings, the Company issued an aggregate of 187,514 five-year broker warrants with an exercise price of $0.25 per share. In connection with the December 6, 2012, December 10, 2012, and December 12, 2012 closings, the Company issued an aggregate of 72,000 five-year broker warrants with an exercise price of $0.25 per share. In connection with the February 8, 2013 closing, the Company issued 16,000 five-year broker warrants with an exercise price of $0.25 per share. As of August 29, 2013, the broker warrants, aggregating to 851,549 warrants, were modified to be exercisable at $0.01 per share.
Short - Term Loans
In connection with two short-term notes that were issued on September 7, 2012 and an additional short-term note that the Company issued on September 24, 2012, for an aggregate principal amount of $300,000, the Company issued 1,200,000 warrants to holders of these notes (the “Series D Warrants”). These warrants are exercisable for a period of five years at a purchase price of $0.25 per share of the Company’s common stock. These warrants contain certain anti-dilution and other customary terms.
On March 28, 2013, in connection with a repayment of a short-term shareholder note, the Company issued an additional 150,000 five-year warrants to the holder to compensate the holder as the shareholder note was past due. The fair value of the warrants was $9,482 using a Black-Scholes model with the following assumptions: expected volatility of 70%, risk free interest rate of 0.83%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability and debt discount on the balance sheet. These warrants are exercisable for a period of five years at a purchase price of $0.25 per share of the Company’s common stock. These warrants contain certain anti-dilution and other customary terms.
As of August 29, 2013, the Series D warrants were modified to be exercisable at $0.01 per share.
Convertible Note Warrants
In connection with the Convertible Note offering on December 21, 2012, the Company issued 8,000,000 Convertible Note Warrants. 4,000,000 Convertible Note Warrants were exercisable at $0.50 and 4,000,000 Convertible Note Warrants were exercisable at $1.00.
The fair value of the warrants at issuance was estimated at $686,192 using a Black-Scholes model with the following assumptions: expected volatility of 60%, risk free interest rate of 0.95%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability and debt discount on the balance sheet.
Convertible Note Broker Warrants
In connection with the Convertible Note offering, the Company issued 1,600,000 Convertible Note Broker Warrants. 800,000 Convertible Note Broker Warrants are exercisable at $0.50 and 800,000 Convertible Note Warrants are exercisable at $1.00.
The fair value of the warrants at issuance was estimated at $137,238 using a Black-Scholes model with the following assumptions: expected volatility of 60%, risk free interest rate of 0.95%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability and deferred financing cost on the balance sheet.
Debt Conversion Feature
The Convertible Note offering on December 21, 2012 included a Debt Conversion Feature (see Note 5).
The fair value of the Debt Conversion Feature was estimated, using Level 3 inputs, at $663,528 using a Black-Scholes model with the following assumptions: expected volatility of 60%, risk free interest rate of 0.95%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry.
June and August Convertible Note Warrants
In connection with the June Convertible Note offering on June 20, 2013, the Company issued 24,705,882 June Convertible Note Warrants, which are exercisable at $0.082 and contain weighted average anti-dilution protections.
The fair value of the warrants at issuance was estimated at $752,126 using a Black-Scholes valuation model with the following assumptions: expected volatility of 55%, risk free interest rate of 1.685%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability and debt discount on the balance sheet.
In connection with the August Convertible Note offering on August 29, 2013, the Company issued 9,058,824
August Convertible Note Warrants, which are exercisable at $0.082 and contain weighted average anti-dilution protections.
The fair value of the warrants at issuance was estimated at $85,293 using a Black-Scholes valuation model with the following assumptions: expected volatility of 65%, risk free interest rate of 1.9%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded as a debt discount on the balance sheet.
June Convertible Note Broker Warrants
In connection with the June Convertible Note offering on June 20, 2013, the Company issued 1,912,195 Convertible Note Broker Warrants. The Convertible Note Broker Warrants are exercisable at $0.082.
The fair value of the warrants at issuance was estimated at $60,886 using a Black-Scholes valuation model with the following assumptions: expected volatility of 55%, risk free interest rate of 1.685%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability and deferred financing cost on the balance sheet.
Founder Warrants
In connection with the acquisition of the Third License on April 17, 2013, the Company issued 2,500,000 warrants. The warrants are exercisable at $0.13.
The fair value of the warrants at issuance was estimated at $210,349 using a Black-Scholes valuation model with the following assumptions: expected volatility of 55%, risk free interest rate of 1.685%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability and deferred financing cost on the balance sheet.
Consultant Warrants
On April 8, 2013, the Company issued 500,000 five-year warrants with an exercise price of $0.25 to a consultant, engaged effective as of the same date for consulting services to the Company. The warrants shall vest ratably in arrears over six 30-day periods beginning on April 8, 2013, with one-sixth of the warrants vesting on each successive thirtieth day following April 8, 2013, subject to the termination of the consulting agreement prior thereto.
The fair value of the warrants at issuance was estimated at $42,625 using a Black-Scholes valuation model with the following assumptions: expected volatility of 65%, risk free interest rate of 1.57%, expected life of five years and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability and deferred financing cost on the balance sheet.
Debt Conversion Feature
The June and August Convertible Note offerings included a Debt Conversion Feature (see Note 5).
The fair value of the Debt Conversion Feature of the June 20, 2013 closing was estimated, using Level 3 inputs, at $491,051 using a Black-Scholes model with the following assumptions: expected volatility of 55%, risk free interest rate of 1.685%, expected life of eighteen months and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry.
The fair value of the Debt Conversion Feature of the August 29, 2013 closing was estimated, using Level 3 inputs, at $25,827 using a Black-Scholes model with the following assumptions: expected volatility of 65%, risk free interest rate of 1.9%, expected life of eighteen months and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry.
Fair Value Measurement
The fair value at issuance of those warrants granted during the quarter ended September 30, 2012 was estimated at $3,788,687 using a Black-Scholes model with the following assumptions: expected volatility of 70%, risk free interest rate of 0.83%, expected life of 5.0 – 10.0 years, based upon the term of the warrant, and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability section of the balance sheet.
The fair value at issuance of those warrants granted during the quarter ended December 31, 2012 was $888,596 using a Black-Scholes model with the following assumptions: expected volatility of 60%, risk free interest rate of 0.95%, expected life of 0.8 - 5.0 years, based upon the term of the warrant, and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability section of the balance sheet.
The fair value at issuance of those warrants granted during the quarter ended March 31, 2013 was estimated at $297,716 using a Black-Scholes model with the following assumptions: expected volatility of 55%, risk free interest rate of 1.005%, expected life of 5.0 years, based upon the term of the warrant, and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability section of the balance sheet.
The fair value at issuance of those warrants granted during the quarter ended June 30, 2013 was estimated at $1,067,196 using a Black-Scholes model with the following assumptions: expected volatility of 55%, risk free interest rate of 1.685%, expected life of eighteen months to 10 years, based upon the term of the warrant, and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty and personal care industry. The fair value of the warrants was recorded in the long-term liability section of the balance sheet.
The Company’s warrant liability was valued at December 31, 2013 using a Black-Scholes valuation model with
the following assumptions: expected volatility of 80%, risk free interest rate of 2.1%, expected life of fourteen months – 10 years, based upon the term of the warrant or convertible note, and no dividends. Expected volatility was based on the volatility of similar public entities in the beauty industry. The following table is a roll forward of the fair value of the warrant liability:
The fair value of the Company’s outstanding warrants and derivative instruments was estimated at $527,606 and $1,660,440 as of December 31, 2013 and June 30, 2013. The (gain) / loss in the fair value of the warrants of $(1,245,925) and $346,627 for the six months ended December 31, 2013 and December 31, 2012, respectively, was recognized as a (gain) / loss in the derivative liability section on the accompanying condensed consolidated statement of operations. The (gain) / loss in the fair value of the warrants was $(375,334) and $406,803 for the three months ended December 31, 2013 and December 31, 2012, respectively.
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