Note 11 – Warrant derivative liability

 

On December 12, 2018, the Company closed a private placement offering (the “December Offering”) of 1,425,641 units (the “Units”), each unit consisting of (i) one share of the Company’s common stock and (ii) a warrant to purchase one half of a share of common stock. The Units were offered at a fixed price of $1.95 per Unit for gross proceeds of $2.8 million. Costs associated with the December Offering were $0.1 million, and net proceeds were $2.7 million. The December Offering generated $2.6 million of net proceeds that were received by the Company during the year ended December 31, 2018 for the sale of 1,400,000 Units, and $0.1 million of the net proceeds were received on January 8, 2019 for the sale of 25,641 Units. The warrants are exercisable anytime from the date of issuance over a two-year period and carried an initial exercise price of $3.90 per share.

The warrants include an option to settle in cash in the event of a change of control of the Company and a reset feature if the Company issues shares of common stock with a strike price below the exercise price of the warrants, which requires the Company to record the warrants as a derivative liability. The Company calculates the fair value of the derivative liability through a Monte Carlo Model that values the warrants based upon a probability weighted discounted cash flow model.

During January 2020, the Company issued shares below the exercise price of the warrants acquired on May 6, 2019. Pursuant to the warrant agreement, the Company issued an additional 1,003,232 warrants on March 17, 2020 to certain of its warrant holders at an exercise price of $1.62 and modified the exercise price of the existing warrants to

$1.62.

 

During June 2020, the Company issued common stock equivalents below the exercise price of the warrants issued on March 17, 2020. Pursuant to the warrant agreement, the Company will issue an additional 1,990,624 warrants to certain of its warrant holders at an exercise price of $0.75 and will modify the exercise price of the existing warrants to $0.75.

 

The warrants are valued based on future assumptions and, as the reset triggers were known events on June 30, 2020 and December 31, 2019, the Company included the triggers in the valuations performed as of June 30, 2020 and December 31, 2019.

 

The following schedule shows the fair value of the warrant derivative liability as of June 30, 2020 and December 31, 2019, and the change in fair value during the three and six months ended June 30, 2020:

The valuation of the warrants is subject to uncertainty as a result of the unobservable inputs. If the volatility rate or risk-free interest rate were to change, the value of the warrants would be impacted.

 

As of June 30, 2020, the Company would be required to pay $4.4 million if all warrants were settled in cash or issue 3,706,679 shares if all warrants were settled in shares.