DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for derivative financial instruments in accordance with ASC 815-40, “Derivative and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”), instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Hercules Warrants are classified as liability instruments due to an anti-dilution provision that provides for a reduction to the exercise price of the Hercules Warrants if the Company issues additional equity or equity linked instruments within six months from the execution of the agreement at an effective price per share less than the exercise price then in effect.

Hercules Warrants

On July 29, 2015, the Company and Immune Pharmaceuticals USA Corp. entered into a Loan and Security Agreement with Hercules to borrow $4.5 million with a Company option to borrow an additional $5.0 million prior to June 15, 2016, subject to the achievement of certain clinical milestones and satisfaction of certain other conditions. In connection with the Hercules Loan, the Company has issued to Hercules a five-year warrant to purchase an aggregate of 214,853 shares of its common stock (or 279,412 shares if the Company closes on the additional $5.0 million), at an exercise price of $1.70 per share, subject to certain adjustments, including, if lower, the effective price of any financing occurring six months after the issuance date (the “Hercules Warrants”) (see Note 9).

The Company determined the fair value of the Hercules Warrants of $0.3 million on July 29, 2015 using the Binomial Lattice pricing model and recorded that amount as part of debt discount in the consolidated balance sheets since considered as part of the cost of the financing which will be amortized over the life of the loan using the effective interest method. The Hercules Warrants are re-measured at each balance sheet date until the expiration of the anti-dilution provision on January 29, 2016. The fair value of the Hercules Warrants as of December 31, 2015 was $0.1 million and the Company recorded a gain on the change in the estimated fair value of the Hercules Warrants of $0.2 million for the year ended December 31, 2015, which was recorded in non-operating expense in the consolidated statements of operations.

Discover Series D Convertible Preferred Stock

The Company issued Series D Preferred Stock to Discover, with a fixed conversion price of $2.50 per share and automatic conversion to common stock at six and a half years. Discover can convert at any time and at conversion it will receive a conversion premium equal to the amount of dividends it would have received if the shares had been held to term. The Series D Preferred Stock dividend rate includes an adjustment feature that fluctuates inversely to the changes in the value of the Company’s common stock price. The conversion premium and dividends are redeemed upon conversion of the Series D Preferred Stock.  The Company determined that the conversion premium and dividends with the noted features require liability treatment. Accordingly, the conversion premium and the dividend feature have been bifurcated from the convertible preferred stock and are carried as a derivative liability at fair value. Changes in the fair value of this derivative liability are recognized in earnings each reporting period. At issuance, the fair value of the total derivative liability was $8.0 million, and this amount has been recorded as a deemed dividend. As conversions occur, the associated derivative liability will be settled and recorded as a deemed dividend. Discover converted 300 Series D Preferred Stock during the year ended December 31, 2015, the associated derivative liability was settled for $1.8 million and has been reflected as a deemed dividend in additional paid-in capital. The Company recorded a loss on the change in the estimated fair value of the Discover derivative liability of $0.3 million for the year ended December 31, 2015, which was recorded in non-operating expense in the consolidated statements of operations. The fair value of the Discover derivative liability as of December 31, 2015 was $6.5 million (see Note 11).

March 2014 Warrants

The Company's derivative instruments as of December 31, 2014 included warrants issued in March 2014 (“March 2014 Warrants”), which were recorded as a liability at fair value. The warrants were revalued at each reporting date through the consolidated statements of operations as non-operating expense. The Company recorded a loss on a change in the estimated fair value of the March 2014 Warrants of $0.6 million for the year ended December 31, 2014. When the warrants were amended in August 2014, the Company incurred a $3.1 million charge, and the warrants were classified as equity instruments in the consolidated balance sheets.

The March 2014 Warrants were valued using the Monte-Carlo simulation as these warrants included down-round protection clauses. The Hercules Warrants were valued using the Binomial Lattice options pricing model.  The assumptions used during the years ended December 31, 2015 and 2014 are as follows:

	2015			2014
Fair value of common stock		$ 0.73 – 1.18		$	4.11
Expected life (in years based on the term of the warrants)		4.58			2.03-2.08
Risk-free interest rate		1.33% - 1.66	%		0.46%-0.52	%
Expected volatility		91.55% - 93.16	%		74.8	%
Dividend yield		0.00	%		0.00	%

Expected volatility is based on an analysis of the Company’s volatility, as well as the volatilities of  peer companies. The risk free interest rate is based on the U.S. Treasury security rates for the remaining term of the warrants at the measurement date. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future.

The Series D Preferred Stock derivative liability was valued using the Binomial Lattice options pricing model. The assumptions used at December 31, 2015 were as follows:

	December 31, 2015
Face value of Series D Preferred Stock	$	10,000
Conversion price	$	2.50
Dividend period (in years)		6.50
Dividend yield		15.00	%