Derivative Liability

12 Months Ended

Dec. 31, 2018

Derivative Liability [Abstract]

Derivative Liability

Note 8 - Derivative Liability

The Notes issued by the Company and discussed in Note 7 contain a convertible option that gives rise to a derivative liability.

The debt instrument the Company issued includes a make-whole provision, which provides that in the event of conversion by the investor under certain circumstances, the issuer is required to deliver to the holder additional consideration beyond the settlement of the conversion obligation.

Because time value make-whole provisions are not clearly and closely related to the debt host and would meet the definition of a derivative if considered freestanding, they should be evaluated under the indexation guidance to determine whether they would be afforded the scope exception pursuant to ASC 815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of the embedded conversion feature.

The Company has measured its derivative liability at fair value and recognized the derivative value as a current liability and recorded the derivative value on its balance sheet. The fair value of the shares to be issued upon conversion of the Notes was recorded as a derivative liability, with the change in the fair value recorded as a gain or loss in the accompanying statement of operations.

The valuation of the Notes was done by using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’ terms and other parameters the Company identified as relevant for the valuation of the Notes’ Fair Value.

The Binomial Model used the forecast of the Company share price during the Note’s contractual term.

As of December 31, 2018, the Company’s liabilities that are measured at fair value are as follows:

	December 31, 2018				December 31, 2017
	Level 3		Total		Level 3		Total
	US$ thousands		US$ thousands		US$ thousands		US$ thousands
Fair value of derivative liability		345		345		1,866		1,866

Change in fair value of derivative liability during 2017 are as follows:

	US$ thousands
Derivative liability fair value at December 31, 2016		895
Loss on derivative liability		971
Derivative liability fair value at December 31, 2017		1,866

Change in fair value of derivative liability during 2018 are as follows:

	US$ thousands
Derivative liability fair value at December 31, 2017		1,866
Gain on derivative liability		(1,521	)
Derivative liability fair value at December 31, 2018		345

The following table presents the assumptions that were used for the model as of December 31, 2018 and 2017:

	December 31, 2018			December 31, 2017
Convertible Option Fair Value of approximately		345,000			1,866,000
Annual Risk-free Rate		2.47	%		2.03	%
Volatility		115.35	%		68.04	%
Expected Term (years)		2.34			3.34
Convertible Notes Face Value		3,266,700			3,358,900
Expected annual yield on Regular Notes		28.77	%		28.77	%
Price of the Underlying Stock		0.42			2.16

During the years ended December 31, 2018, 2017, and 2016, the Company recorded loss, (unrealized gains) of approximately ($1,531,000, net), $971,000, and ($731,000, net), respectively, within the Statements of Operations on derivative liability. A slight change in an unobservable input like volatility could have a significant impact on the fair value measurement of the derivative liability.