Derivative Liability

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liability

Note 6 - Derivative Liability

The Notes issued by the Company and discussed in Note 5 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 are 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. Changes in the fair value recorded are 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 June 30, 2019, the Company's liabilities that are measured at fair value are as follows:

	June 30, 2019				December 31, 2018
	Level 3		Total		Level 3		Total
	US$ thousands		US$ thousands		US$ thousands		US$ thousands
Fair value of derivative liability		263		263		345		345

Change in value of derivative liability during 2019 are as follows:

	US$ thousands
Derivative liability fair value at December 31, 2018		345
Gain on derivative liability		(82	)
Derivative liability fair value at June 30, 2019		263

The following table presents the assumptions that were used for the model as of June 30, 2019:

	June 30, 2019			December 31, 2018
Convertible Option Fair Value of approximately	$	263,000		$	345,000
Annual Risk-free Rate		1.75	%		2.47	%
Volatility		117.22	%		115.35	%
Expected Term (years)		1.84			2.34
Convertible Notes Face Value	$	3,254,900		$	3,266,700
Expected annual yield on Regular Notes		28.77	%		28.77	%
Price of the Underlying Stock	$	0.76		$	0.42

The Company recognized a gain on derivative liability of $460,000 for the three months ended June 30, 2019 and a gain on derivative liability of $82,000 for the six months ended June 30, 2019. The Company recognized a gain on derivative liability of $968,000 for the three months ended June 30, 2018 and a loss on derivative liability of $2,566,000 for the six months ended June 30, 2018. A slight change in an unobservable input like volatility could have a significant impact on the fair value measurement of the derivative liability.