Derivative Liability

12 Months Ended

Dec. 31, 2015

Derivative Liability

Derivative Liability

In October and November of 2015, the Company issued 9,583,333 three-year warrants in connection with Convertible Notes associated with our November 2015 Private Placement. The exercise price of the warrants is protected against down-round financing throughout the term of the warrant. Pursuant to ASC Topic 815, the fair value of the warrants of approximately $1,491,000 was recorded as a derivative liability on the issuance dates. The estimated fair values of the warrants were computed at issuance using a Monte Carlo option pricing models, with the following assumptions: stock price volatility 70%, risk-free rate 1.66%, annual dividend yield 0% and expected life 5.0 years.

In July and August of 2014, the Company issued 21,802,793 five-year warrants in connection with Convertible Notes associated with our July 2014 Private Placement. The exercise price of the warrants is protected against down-round financing throughout the term of the warrant. Pursuant to ASC Topic 815, the fair value of the warrants of approximately $3,697,000 was recorded as a derivative liability on the issuance dates. The estimated fair values of the warrants were computed at issuance using a Monte Carlo option pricing models, with the following assumptions: stock price volatility 90%, risk-free rates 1.58%-1.79%, annual dividend yield 0% and expected life 5.0 years.

During the fourth quarter of fiscal 2015 the Company entered into amendment agreements with certain warrant holders from the July 2014 Private Placement, which removed the down-round pricing protection provision, resulting in 3,215,837 of these warrants being reclassified from liability instruments to equity instruments. The Company also recognized a reduction in the warrant liability based on the fair value as of the modification date for the warrants that were amended, with a corresponding increase in additional paid-in capital.

The Company revalued the warrants as of the end of each reporting period, and the estimated fair value of the outstanding warrant liabilities was $4,716,000 and $3,712,000 as of December 31, 2015 and December 31, 2014, respectively. 

Increases or decreases in fair value of the derivative liability are included as a component of other income (expense) in the accompanying consolidated statements of operations for the respective period.   The changes to the derivative liability for warrants were approximately $39,000 and $15,000 for the

years ended December 31, 2015 and 2014, respectively.

Various factors are considered in the pricing models we use to value the warrants, including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk free interest rate. Future changes in these factors may have a significant impact on the computed fair value of the warrant liability. As such, we expect future changes in the fair value of the warrants to continue and may vary significantly from year to year. The warrant liability and revaluations have not had a cash impact on our working capital, liquidity or business operations.

Warrants classified as derivative liabilities are recorded at their estimated fair value (see Note 7, below) at the issuance date and are revalued at each subsequent reporting date. We will continue to revalue the derivative liability on each subsequent balance sheet date until the securities to which the derivative liabilities relate are exercised or expire.

The estimated fair value of the warrants were computed as of December 31, 2015 and as of December 31, 2014 using Black-Scholes and Monte Carlo option pricing models, using the following assumptions:

	December 31, 2015			December 31, 2014
Stock price volatility		70	%		90	%
Risk-free interest rates		1.76	%		1.65	%
Annual dividend yield		0	%		0	%
Expected life	3.6-4.9 years			4.7 years

In addition, Management assessed the probabilities of future financing assumptions in the valuation models.