Options and Warrants

6 Months Ended

Jun. 30, 2014

6.	OPTIONS AND WARRANTS

On April 30, 2014, the merger date between MacroSolve and Drone Aviation Holding Corp. and effective date of the Merger Exchange Ratio, there were a total of 36,814 vested and 24,723 unvested options carried over to the reverse merger with Drone Aviation Corp. on June 3, 2014 with strike prices ranging from $1.67 to $126.40. No options were issued between June 3 and June 30, 2014.

On April 30, 2014, the merger date between MacroSolve and Drone Aviation Holding Corp. and effective date of the Merger Exchange Ratio, there were a total of 673,683 warrants carried over to the reverse merger with Drone Aviation Corp. on June 3, 2014 with strike prices ranging from $2.53 to $16.57. During May 2014, the Company issued a total of 1,700,000 warrants for services. The warrants have a term of three years, and exercise price of $0.01. As further described above in Note #4, on June 3, 2014, the Company issued 2,700,000 warrants to purchase one share of common stock at an exercise price of $1.00 per warrant share to investors in the Series E preferred stock. The exercise price of $1.00 per warrant may be adjusted any time during the first twenty-four months from issuance under the terms of a Favored Nations Provision contained in the warrant. If at any time during that twenty-four month period the Company should issue common stock or convertible securities at a price lower than $1.00 per share, unless the warrant holder consents to such lower price issuance, then the exercise price of the warrant shall be automatically reduced to reflect such other lower price and the number of warrant securities shall be adjusted to reflect such lower price. The warrants expire on June 3, 2017. No warrants were issued between June 3 and June 30, 2014.

Because these warrants have full reset adjustments tied to future issuances of equity securities by the Company, they are subject to derivative liability treatment under ASC 815-40-15 “Determining whether an Instrument (or Embedded feature) is Indexed to an Entity's Own Stock.” ASC 815-40-15 requires as of the date the warrant is issued, the derivative liability to be measured at fair value and re-evaluated at the end of each reporting period.

As of June 3, 2014, the fair value of the warrants derivative liability is $2,159,824 – see Note #4. As of June 30, 2014, the fair value of the warrants derivative liability is $2,429,805 and the Company recognized a loss on derivative liability of $269,981 for the six months ended June 30, 2014. The fair value of the derivative liability was estimated at the date of grant and the end of each reporting period using a Black-Scholes option pricing model.