Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. The Company issued certain convertible note whose conversion price contains reset provisions based on a discounted future market price. However, since the number of shares to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In addition, the Company also granted certain warrants that included a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder.

As a result, the conversion feature of the notes and the fundamental transaction clause of these warrants are accounted for as a derivative liability in accordance with ASC 815 and are being re-measured every reporting period with the change in value reported in the statement of operations.

The derivative liabilities were valued using a Binomial pricing model with the following average assumptions:

The expected life of the note and warrants was based on the remaining contractual term of the instruments. The Company uses the historical volatility of its Common Stock to estimate the future volatility for its Common Stock. The expected dividend yield was based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future. The risk-free interest rate was based on rates established by the Federal Reserve Bank.

As of December 31, 2018, the outstanding fair value of the derivative liability amounted to $2,576,000.

During the year ended December 31, 2019, the Company recorded derivative liabilities of $388,000 as a result of the issuance of a convertible note and $6,173,000 as a result of the issuance of the August Warrants issued as part of the Company’s Series A Preferred Stock offering, or an aggregate of $6,561,000. The Company recorded a charge of ($1,862,000) to account for the changes in the fair value of these derivative liabilities for the year ended December 31, 2019. In addition, the Company also recorded a gain on debt extinguishment of $2,227,000 to account for the extinguishment of derivative liabilities associated with the settlement of all convertible debt accounted as derivative liability. At December 31, 2019, the fair value of the derivative liability amounted to $5,048,000.

During the year ended December 31, 2020, the Company recorded a derivative liability of $3,951,000 as a result of the issuance of 2,303,861 warrants to acquire common stock to Series A Preferred stockholders that contained a fundamental transaction clause (see Note 12). The Company recorded a charge of ($574,000) to account for the changes in the fair value of these derivative liabilities during year ended December 31, 2020. In addition, 95,000 shares of the Series A warrants that were accounted as derivative liability were exercised. As result, the Company computed the fair value of the corresponding derivate liability one last time which amounted to $159,000 and the pursuant to current accounting guidelines, the extinguishment was accounted as part of equity.

At December 31, 2020, the fair value of the derivative liability amounted to $8,266,000. The details of derivative liability transactions for the year ended December 31, 2020 are as follows: