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Warrants and Derivative Liabilities | 12 Months Ended
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Dec. 31, 2019
Warrants And Derivative Liabilities [Abstract] |
Warrants and Derivative Liabilities | 3. Warrants and Derivative Liabilities Warrants There are significant judgments and estimates inherent in the determination of the fair value of the Company’s warrants. These judgments and estimates include assumptions regarding the Company’s future operating performance, the time to completing a liquidity event and the determination of the appropriate valuation methods. If the Company had made different assumptions, the fair value of the warrants could have been significantly different (See Note 2). Warrants vested and outstanding as of December 31, 2019 are summarized as follows:
|  |  |  |  |  |  |  | Number of Warrantsv |
|  | Exercise |  |  | Term |  |  | Vested and |
Source |  | Price |  |  | (Years) |  |  | Outstanding |
Pre 2015 Common Stock Warrants |  | $ | 1.00 |  |  | 6—10 |  |  |  | 4,000,000 |
2015 Common Stock Warrants |  | $ | 1.15—5.00 |  |  | 5—10 |  |  |  | 442,000 |
Common Stock Warrants to Series B Stockholders |  | $ | 0.00 |  |  |  | 5 |  |  |  | 1,031,250 |
2016 Common Stock Warrants to Service Providers |  | $ | 1.15 |  |  |  | 10 |  |  |  | 40,000 |
2016 Series C Common Stock Warrants to Placement Agent |  | $ | 0.40 |  |  |  | 5 |  |  |  | 125,000 |
2017 Series D Common Stock Warrants to Placement Agent |  | $ | 0.25 |  |  |  | 5 |  |  |  | 480,000 |
2017 Common Stock Warrants to Service Provider |  | $ | 0.41 |  |  |  | 5 |  |  |  | 125,000 |
2018 Emerald Financing Warrants |  | $ | 0.10 |  |  |  | 5 |  |  |  | 3,400,000 |
Emerald Multi Draw Credit Agreement Warrants |  | $ | 0.50 |  |  |  | 5 |  |  |  | 7,500,000 |
2019 Common Stock Warrants |  | $ | 0.35 |  |  |  | 5 |  |  |  | 8,000,000 |
Total warrants vested and outstanding as of December 31, 2019 |  |  |  |  |  |  |  |  |  |  | 25,143,250 |
2019 Common Stock Warrants During the year ended December 31, 2019, the Company issued 8,000,000 fully vested common stock warrants to investors, in conjunction with the November 2019 Common Stock Offering discussed below (See Note 5). The warrants are equity classified at issuance and the Company allocated an aggregate of $722,208 of the gross proceeds to the warrants on a relative fair value basis. The warrants vested immediately and had an estimated aggregate fair value of $1,130,400 utilizing the Black-Scholes option pricing model with the following assumptions:
|  | At Issuance |
Dividend yield |  |  | 0.00 | %
Volatility factor |  |  | 93.08 | %
Risk-free interest rate |  |  | 1.62 | %
Expected term (years) |  |  | 5.0 |
Underlying common stock price |  | $ | 0.22 |
Emerald Multi-Draw Credit Agreement Warrants During the year ended December 31, 2019, the Company issued 5,000,000 fully vested common stock warrants to Emerald Health Sciences, in conjunction with advances under the Credit Agreement discussed below (See Note 4). The warrants are equity classified at issuance and the Company allocated an aggregate of $716,110 of the gross proceeds to the warrants on a relative fair value basis. The proceeds allocated to the warrants were recorded as discounts to each advance and are being amortized over the term of the debt. The warrants vested immediately and had an estimated aggregate fair value of $1,830,573 utilizing the Black-Scholes option pricing model with the following assumptions:
|  | At Issuance |
Dividend yield |  |  | 0.00 | %
Volatility factor |  | 91.6—92.1 | %
Risk-free interest rate |  | 2.23—2.51 | %
Expected term (years) |  |  | 5.0 |
Underlying common stock price |  | $0.33—0.69 |
On November 1, 2018, the Company issued 2,500,000 fully vested common stock warrants to Emerald Health Sciences, in conjunction with the first advance on the Credit Agreement discussed below (See Note 4). The warrants are equity classified at issuance and the Company allocated $315,080 of the gross proceeds to the warrants on a relative fair value basis. The proceeds allocated to the warrants was recorded as a discount to the November 1, 2018 advance and are being amortized over the term of the debt. The warrants vested immediately and had an estimated fair value of $593,629 utilizing the Black-Scholes option pricing model with the following assumptions:
|  | At Issuance |
Dividend yield |  |  | 0.00 | %
Volatility factor |  |  | 92.5 | %
Risk-free interest rate |  |  | 2.96 | %
Expected term (years) |  |  | 5.0 |
Underlying common stock price |  | $ | 0.36 |
2018 Emerald Financing Warrants In January and February 2018, the Company issued an aggregate of 40,800,000 and 3,400,000 fully vested common stock warrants to Emerald Health Sciences and an accredited investor, respectively, in conjunction with the Emerald Financing discussed below (See Note 5). The Company reviewed the warrants for liability or equity classification under the guidance of ASC 480-10, Distinguishing Liabilities from Equity, and concluded that these warrants should be classified as liabilities. See the additional discussion below, Derivative Liabilities- Emerald Financing Warrant Liability. On December 20, 2019, Emerald Health Sciences paid the aggregate exercise price of $4,080,000 in the form of a reduction of the corresponding amount of obligations outstanding under the Credit Agreement to exercise 40,800,000 Emerald Financing Warrants. Derivative Liabilities The following tables summarize the activity of derivative liabilities for the periods indicated:
|  | Year Ended December 31, 2019 |
|  | December 31, 2018, Fair Value of Derivative Liabilities |  |  | Fair Value of Derivative Liabilities Issued |  |  | Change in Fair value of Liabilities |  |  | Reclassification of Derivatives to Equity or Extinguishment |  |  | December 31, 2019, Fair Value of Derivative Liabilities |
Emerald Multi Draw Credit Agreement - compound derivative liability (1) |  | $ | 219,453 |  |  | $ | 516,058 |  |  | $ | (484,147 | ) |  | $ | (160,567 | )* |  | $ | 90,797 |
Emerald Financing - warrant liability (2) |  |  | 15,251,413 |  |  |  | — |  |  |  | (9,042,066 | ) |  |  | (5,933,323 | ) |  |  | 276,024 |
Series B - warrant liability (3) |  |  | 487,500 |  |  |  | — |  |  |  | (208,546 | ) |  |  | (144,375 | ) |  |  | 134,579 |
Total derivative liabilities |  | $ | 15,958,366 |  |  | $ | 516,058 |  |  | $ | (9,734,759 | ) |  | $ | (6,238,265 | ) |  | $ | 501,400 |
Less, noncurrent portion of derivative liabilities |  |  | (219,453 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (90,797 | )
Current balance of derivative liabilities |  | $ | 15,738,913 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 410,603 |
*This amount has been included in the calculation of the extinguishment loss recorded in connection with the prepayment of the Emerald Credit Agreement as described in Note 4 below.
|  | Year Ended December 31, 2018 |
|  | December 31, 2017, Fair Value of Derivative Liabilities |  |  | Fair Value of Derivative Liabilities Issued |  |  | Change in Fair value of Derivative Liabilities** |  |  | Reclassification of Derivatives to Equity |  |  | December 31, 2018, Fair Value of Derivative Liabilities |
Emerald Multi Draw Credit Agreement - compound derivative liability (1) |  | $ | — |  |  | $ | 204,102 |  |  | $ | 15,351 |  |  | $ | — |  |  | $ | 219,453 |
Emerald Financing - warrant liability (2) |  |  | — |  |  |  | 10,424,634 |  |  |  | 4,826,779 |  |  |  | — |  |  |  | 15,251,413 |
Series B - warrant liability (3) |  |  | 551,322 |  |  |  | — |  |  |  | 1,476,044 |  |  |  | (1,539,866 | ) |  |  | 487,500 |
Emerald Convertible Promissory Note - conversion liability (4) |  |  | 265,000 |  |  |  | 360,000 |  |  |  | 185,000 |  |  |  | (810,000 | ) |  |  | — |
Series B Preferred Stock - conversion liability (5) |  |  | 6,715 |  |  |  | — |  |  |  | — |  |  |  | (6,715 | ) |  |  | — |
Total derivative liabilities |  | $ | 823,037 |  |  | $ | 10,988,736 |  |  | $ | 6,503,174 |  |  | $ | (2,356,581 | ) |  | $ | 15,958,366 |
Less, noncurrent portion of derivative liabilities |  |  | (551,322 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (219,453 | )
Current balance of derivative liabilities |  | $ | 271,715 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 15,738,913 |
**The change in fair value of derivative liabilities for the year ended December 31, 2018, relate partially to the Company determining it had sufficient trading activity to utilize the actual volatility of the trading of the Company’s common stock as an input to the volatility assumption when computing the fair value of derivative liabilities. The volatility assumption was updated as of October 1, 2018 to incorporate the Company’s own volatility with six similar companies to develop a blended average. The Company had previously estimated the volatility assumption by averaging the volatility of six similar entities which had resulted in a lower volatility. The increase in value of the volatility assumption has led to a higher valuation of the derivative liabilities as disclosed below. Emerald Multi-Draw Credit Agreement Compound Derivative Liability (1) In connection with the advances under the Credit Agreement (See Note 4), the Company bifurcated a compound derivative liability related to a contingent interest feature and acceleration upon default provision (contingent put option) provided to Emerald Health Sciences. The Company’s estimate of fair value of the compound derivative liability was determined by using a differential cash flows valuation model, wherein the fair value of the underlying debt facility and its conversion right are estimated both with and without the presence of the contingent interest feature, holding all other assumptions constant. The resulting difference between the estimated fair values in both scenarios is the estimated fair value of the compound derivative. The fair value of the underlying debt facility is estimated by calculating the expected cash flows with consideration of the estimated probability of a change in control transaction, defined as an event of default by the agreement, and applying the expected default interest rate from the date of such default through maturity. The expected cash flows are then discounted back to the reporting date using a benchmark market yield. The conversion right component of the compound derivative is measured using a standard Black-Scholes model for each payment period. Because Emerald Health Sciences would forgo the contingent interest if the contingent put option was exercised upon an event of default, the value ascribed to the contingent put option within the compound derivative is de minimis. Emerald Financing Warrant Liability (2) In January and February 2018, the Company issued 44,200,000 warrants to purchase common stock in conjunction with the Emerald Financing discussed above. The warrants vest immediately and have an exercise price of $0.10 per share with a term of five years and are exercisable in cash or through a cashless exercise provision. The warrants contain an anti-dilution protection feature provided to the investors if the Company subsequently issues or sells any shares of common stock, stock options, or convertible securities at a price less than the exercise price of $0.10. The exercise price is automatically adjusted down to the price of the instrument being issued. In addition, the warrants contain a contingent put option if the Company undergoes a subsequent financing that results in a change in control. The warrant holders also have the right to participate in subsequent financing transactions on an as-if converted basis. In December 2019, Emerald Health Sciences paid the aggregate exercise price of $4,080,000 in the form of a reduction of the corresponding amount of obligations outstanding under the Credit Agreement to exercise 40,800,000 Emerald Financing Warrants. Under the Warrant Exercise Agreement between the Company and Emerald Health Sciences, the proceeds from the warrants were first applied directly to the accrued interest balance at the exercise date with the remainder applied to the oldest outstanding principal balances under the Credit Agreement. Immediately prior to exercise, the warrants were adjusted to fair value which considered the closing trading price on the exercise date (See Note 4). The Company reviewed the warrants for liability or equity classification under the guidance of ASC 480-10, Distinguishing Liabilities from Equity, and concluded that the warrants should be classified as a liability and re-measured to fair value at the end of each reporting period. The Company also reviewed the warrants under ASC 815, Derivatives and Hedging/Contracts in Entity’s Own Equity, and determined that the warrants also meet the definition of a derivative. With the assistance of a third-party valuation specialist, the Company valued the warrant liabilities utilizing the Monte Carlo valuation method pursuant to the accounting guidance of ASC 820-10, Fair Value Measurements. On the closing dates, the Company estimated that the fair value of the warrants issued on January 19, 2018 and February 16, 2018 was $4,717,211 and $5,707,423, respectively. The warrant liabilities were valued using Monte Carlo simulations conducted at the closing dates of January 19, 2018 and February 16, 2018 and at the balance sheet dates using the following assumptions:
|  | December 31, 2019 |  |  | December 31, 2018 |  |  |  | At Issuance |
Dividend yield |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | %
Volatility factor |  | 79.5 | % |  |  | 92.1—92.4 | % |  |  | 70.0 | %
Risk-free interest rate |  |  | 1.62 | % |  | 2.49 | % |  |  | 2.45—2.60 | %
Expected term (years) |  | 3.13 |  |  |  | 4.05—4.13 |  |  |  | 5.0 |
Underlying common stock price |  | $ | 0.13 |  |  | $ | 0.40 |  |  | $ | 0.29—0.30 |
Because fair value assigned to the warrants exceeded the proceeds received in the Emerald Financing, none of the consideration was allocated to common stock and the Company recorded an adjustment for the difference between the fair value of the warrant liabilities and the total proceeds received to other expense in the Consolidated Statements Comprehensive Income (Loss) for the year ended December 31, 2018 as follows:
|  | Closing |  |  |  |
|  | January 2018 |  |  | February 2018 |  |  | Total |
Initial fair value of Emerald Financing Warrant Liability |  | $ | 4,717,211 |  |  | $ | 5,707,423 |  |  | $ | 10,424,634 |
Less: proceeds from the Emerald Financing |  |  | 1,500,000 |  |  |  | 1,750,000 |  |  |  | 3,250,000 |
Excess over proceeds adjustment |  |  | 3,217,211 |  |  | $ | 3,957,423 |  |  | $ | 7,174,634 |
In addition, because the aggregate proceeds were allocated to the fair value of the Emerald Financing warrant liability, issuance costs totaling $137,192 were charged to other expense during the year ended December 31, 2018. Series B Warrant Liability (3) In conjunction with the Redeemable Convertible Series B Preferred Stock financing, the Company issued the 2015 Series B Financing Warrants originally exercisable at a price of $1.15 per share. The warrants are exercisable in cash or through a cashless exercise provision and contain certain cash redemption rights. The Series B warrants also had a “down-round” protection feature if the Company subsequently issued or sold any shares of common stock, stock options, or convertible securities at a price less than the current exercise price. The down round provision was triggered and automatically adjusted down to $0.10 on December 28, 2017, after the Company entered into the Convertible Promissory Note (See Note 4) and again to $0.00 on January 19, 2018, as a result of the Emerald Financing (See Note 5). The strike price for these warrants is now permanently reset. However, because the remaining warrant holders still have certain cash redemption rights upon the occurrence of certain fundamental transactions, as defined in the Series B warrant agreements, the warrants continue to require liability classification. Subsequent to the repricing that occurred as a result of the Emerald Financing, the warrants have been valued using a Black Scholes Merton Option Pricing Model. To compute the fair value of the warrants, the Company utilized the following assumptions in the Black Scholes Merton Option Pricing Model for the periods indicated:
|  | As of December 31, |
|  | 2019 |  |  | 2018 |
Dividend yield |  |  | 0.00 | % |  |  | 0.00 | %
Volatility factor |  |  | 79.2 | % |  |  | 93.0 | %
Risk-free interest rate |  | 1.60 | % |  |  | 2.79 | %
Expected term (years) |  | 0.64 |  |  |  | 1.64—1.65 |
Underlying common stock price |  | $ | 0.13 |  |  | $ | 0.40 |
In January 2018, 987,000 Series B warrants were exercised at a price of $0.10 resulting in cash proceeds to the Company of $98,700. Prior to exercise, these Series B Warrants were adjusted to fair value using a Black Scholes Merton Option Pricing Model which considered the closing trading price on the exercise dates. For the year ended December 31, 2019 and for the period from January 19, 2018 through December 31, 2018, 187,500 and 4,231,750 Series B warrants were exercised for no consideration. Prior to exercise, these Series B Warrants were adjusted to fair value using a Black Scholes Merton Option Pricing Model which considered the closing trading price on the exercise dates. Because the exercise price of these options had been reset to $0.00, the fair value derived from the valuation model approximated the market value of the Company’s common stock on the exercise dates. Emerald Convertible Promissory Note Conversion Liability (4) In connection with the Convertible Promissory Note (See Note 4), the Company bifurcated a conversion liability related to an embedded conversion feature with a down-round protection provision. The Company valued the conversion liability pursuant to the accounting guidance of ASC 820-10, Fair Value Measurements, as of the financing date of each closing utilizing the Black Scholes valuation model and the following assumptions:
|  | January 19, 2018 |  |
Dividend yield |  |  | 0.00 | % |
Volatility factor |  |  | 70.00 | % |
Risk-free interest rate |  |  | 1.29 | % |
Expected term (years) |  |  | 0.003 |  |
Underlying common stock price |  | $ | 0.19 |  |
The fair value of the conversion liability on January 19, 2018 was $360,000. In connection with the Emerald Financing discussed in Note 5 below, the Convertible Promissory Note was converted, and the conversion liability was extinguished with the debt. Series B Preferred Stock Conversion Liability (5) On August 20, 2015, in connection with the Redeemable Convertible Series B Preferred Stock financing, the Company bifurcated a conversion liability related to the down-round protection provided to the Series B investors. The value of this embedded derivative was determined utilizing a “with and without” method by valuing the Series B Preferred Stock with and without the down-round protection. During the first fiscal quarter of 2018, all the remaining Series B Preferred Stock was converted to common stock and as a result, the Series B conversion liability was reduced to zero. The reduction of this liability totaling $6,715 was recorded to equity during the year ended December 31, 2018.

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