Quarterly report pursuant to Section 13 or 15(d)

Derivative Liability

Derivative Liability
3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Liability



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 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 warrants are classified as liabilities and are bifurcated from the debt host and accounted for as a derivative liability in accordance with ASC 815 and will be re-measured at the end of 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:


    March 31, 2020     Upon Issuance     December 31, 2019  
Stock Price   $ 1.26     $ 1.70     $ 1.55  
Exercise Price   $ 1.66     $ 1.55     $ 1.88  
Expected Life     3.27       5.0       3.53  
Volatility     211 %     212 %     216 %
Dividend Yield     0 %     0 %     0 %
Risk-Free Interest Rate     2.22 %     2.47 %     1.64 %
Fair Value   $ 6,907,000     $ 3,951,000     $ 5,048,000  


The expected life of the warrants was based on the remaining contractual term. 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, 2019, the Company had recorded a derivative liability of $5,048,000.


During the period ended March 31, 2020, the Company recorded derivative liability of $3,951,000 as a result of the issuance of warrants to Series A Preferred stockholders (see Note 11). The Company also recorded a change in fair value of ($2,092,000) to account for the changes in the fair value of these derivative liabilities during the period ended March 31, 2020. At March 31, 2020, the fair value of the derivative liability amounted to $6,907,000. The details of derivative liability transactions as of and for the periods ended March 31, 2020 and 2019 are as follows:


    March 31, 2020     March 31, 2019  
Beginning Balance   $ 5,048,000     $ 2,576,000  
Fair value upon issuance of notes payable and warrants     3,951,000       388,000  
Change in fair value     (2,092,000 )     (944,000 )
Ending Balance   $ 6,907,000     $ 2,020,000