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Fair Value Measurements
 12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

12. Fair Value Measurements

 

The Company’s financial instruments consist of Level 1 and Level 3 assets as of December 31, 2018. As of December 31, 2018, the Company’s cash and cash equivalents of $2,406,596, were Level 1 assets and included savings deposits, overnight investments, and other liquid funds with financial institutions.

 

The Company accounts for certain warrants and the embedded conversion features of the 8% Promissory Notes and 10% Convertible Debentures (both as described in Note 13) as derivative liabilities, which requires that the Company carry such amount in its consolidated balance sheets as a liability at fair value, as adjusted at each reporting period-end.

 

The Company determined, due to their greater complexity, prior to the reset provision (as described in Note 13), the fair value of the L2 Warrants (as described in Note 17) and the embedded conversion feature with respect to the 8% Promissory Notes, as of the date of repayment, and 10% Convertible Debentures, as of the date of conversion, using appropriate valuation models derived through consultations with the Company’s independent valuation firm. The Company determined the fair value of the Strome Warrants (as described in Note 17) utilizing the Black-Scholes valuation model as further described below. After the reset provision, the Company determined the fair value of the L2 Warrants utilizing the Black-Scholes valuation model as further described below since such valuation model meets the fair value measurement objective based on the substantive characteristics of the instrument. These warrants and the embedded conversion features are classified as Level 3 within the fair-value hierarchy. Inputs to the valuation model include the Company’s publicly quoted stock price, the stock volatility, the risk-free interest rate, the remaining life of the warrants, notes and debentures, the exercise price or conversion price, and the dividend rate. The Company uses the closing stock price of its common stock over an appropriate period of time to compute stock volatility. These inputs are summarized as follows:

 

L2 Warrants – Valuation model: Black-Scholes option-pricing; expected life: 4.44 years; risk-free interest rate: 2.49%; volatility factor: 124.40%; dividend rate: 0.0%; transaction date closing market price: $0.48; exercise price: $0.50.

 

Strome Warrants – Valuation model: Black-Scholes option-pricing; expected life: 4.45 years; risk-free interest rate: 2.49%; volatility factor: 124.22%; dividend rate: 0.0%; transaction date closing market price: $0.48; exercise price: $0.50.

 

B. Riley Warrants – Valuation model: Black-Scholes option-pricing; expected life: 6.80 years; risk-free interest rate: 2.59%; volatility factor: 121.65%; dividend rate: 0.0%; transaction date closing market price: $0.48; exercise price: $1.00.

 

The following table represents the carrying amount, valuation and roll-forward of activity for the Company’s warrants accounted for as a derivative liability and classified within Level 3 of the fair-value hierarchy for the year ended December 31, 2018:

 

   

L2

Warrants

     Strome Warrants     B. Riley Warrants     Total Warrant Derivative Liabilities  
Carrying amount at January 1, 2018   $ -     $ -     $ -     $ -  
Issuance of warrants on June 11, 2018     312,837       -       -       312,837  
Issuance of warrants on June 15, 2018     288,149       1,344,648       -       1,632,797  
Issuance of warrants on October 18, 2018     -       -       382,725       382,725  
Change in valuation of warrant derivative liabilities     (182,772 )     (756,677 )     (24,675 )     (964,124 )
Carrying amount at December 31, 2018   $ 418,214     $ 587,971     $ 358,050     $ 1,364,235  

 

For the year ended December 31, 2018, the change in valuation of warrant derivative liabilities as described in the above table of $964,124 was recognized within other income on the consolidated statements of operations. The L2 Warrants were fully exercised on a cashless basis subsequent to December 31, 2018 (see Note 24).

 

The Company did not have any warrant derivative liabilities as of December 31, 2017.

 

The following table represents the carrying amount, valuation and a roll-forward of activity for the conversion option features, buy-in features, and default remedy features, as deemed appropriate for each instrument (collectively the embedded derivative liabilities), with respect to the 8% Promissory Notes, 10% Convertible Debentures, 10% OID Convertible Debentures, 12% Convertible Debentures (refer to Note 15 for each instrument), and Series G Preferred Stock (as described in Note 16) accounted for as embedded derivative liabilities and classified within Level 3 of the fair-value hierarchy for the year ended December 31, 2018:

 

    8% Promissory Notes     10% Convertible Debentures     10% OID Convertible Debentures     12% Convertible Debentures     Series G Preferred Stock     Total Embedded Derivative Liabilities  
Carrying amount at December 31, 2017   $ -     $ -     $ -     $ -     $ 72,563     $ 72,563  
Recognition of embedded derivative liabilities (conversion option feature) on June 11, 2018     78,432       -       -       -       -       78,432  
Recognition of embedded derivative liabilities (conversion option feature) on June 15, 2018     81,169       471,002       -       -       -       552,171  
Recognition of embedded derivative liabilities (buy-in features and default remedy feature) on October 18, 2018     -       -       49,000       -       -       49,000  
Recognition of embedded derivative liabilities (conversion option feature, buy-in feature, and default remedy feature) on December 12, 2018     -       -       -       4,760,000       -       4,760,000  
Gain on extinguishment of embedded derivative liabilities upon extinguishment of host instrument     (29,860 )     (1,042,000 )     (25,000 )     -       -       (1,096,860 )
Change in valuation of embedded derivative liabilities     (129,741 )     570,998       (24,000 )     2,627,000       (72,563 )     2,971,694  
Carrying amount at December 31, 2018   $ -     $ -     $ -     $ 7,387,000     $ -     $ 7,387,000  

 

 

For the year ended December 31, 2018, the change in valuation of embedded derivative liabilities as described in the above table of $2,971,694 was recognized as other expense on the consolidated statements of operations. For the year ended December 31, 2017, the change in valuation of embedded derivative liabilities for the embedded conversion feature for the Series G Preferred Stock of $64,614 was recognized as other income on the consolidated statements of operations.

 

In addition, the fair value requirement at each period-end for the Series G Preferred Stock embedded conversion feature was no longer required for the year ended December 31, 2018 since it is not considered a derivative liability, therefore, the carrying amount of $72,563 as of December 31, 2017 was recognized as other income of $72,563 during the year ended December 31, 2018 on the consolidated statements of operations.