Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

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Derivative Liabilities
9 Months Ended
Sep. 30, 2015
Derivative Liabilities [Abstract]  
Derivative Liabilities

6.  Derivative Liabilities

 

We completed a private placement in September 2011 for the sale of units consisting of shares of common stock and warrants to purchase our common stock. Both the common shares and the warrants contain anti-dilutive, or down round, price protection. We recorded derivative liabilities related to the down round price protection on the common shares and the warrants.

 

The down round price protection on the common shares expired in August 2012, and the down round price protection for the warrants terminates when the warrants expire or are exercised.

 

Our derivative liabilities at September 30, 2015 and December 31, 2014 both relate to these warrants.

 

The fair values of our derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a Monte Carlo simulation discussed below.

 

At September 30, 2015 and December 31, 2014, we recorded current derivative liabilities of $7,679 and $42,659, respectively, which are detailed by instrument type in the table below.

 

The net change in fair value of the derivative liabilities for the three months ended September 30, 2015 and 2014 was a gain/(loss) of $41,795 and $(2,354), respectively.

 

The net change in fair value of the derivative liabilities for the nine months ended September 30, 2015 and 2014 was a gain of $34,980 and $55,438, respectively.

 

The following table presents the derivative liabilities by instrument type as of September 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

Derivative Value by Instrument Type

   

2015

   

2014

Warrants

   

$

7,679 

   

$

42,659 

   

   

$

7,679 

   

$

42,659 

 

The following table presents details of our derivative liabilities from December 31, 2014 to September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2014

   

 

 

 

$

42,659 

Change in fair value of derivative liabilities

   

 

 

 

 

(34,980)

Balance September 30, 2015

   

 

 

 

$

7,679 

 

An independent valuation expert calculated the fair value of the compound embedded derivatives using a complex, customized Monte Carlo simulation model suitable to value path dependent American options. The model uses the risk neutral methodology adapted to value corporate securities. This model utilized subjective and theoretical assumptions that can materially affect fair values from period to period.

 

Key inputs and assumptions used in valuing our derivative liabilities are as follows:

 

For issuances of warrants:

 

·

Stock prices on all measurement dates were based on the fair market value

·

Down round protection is based on the subsequent issuance of warrants with exercise prices less than $1.00 per share

·

The probability of a future equity financing event triggering the down round protection was estimated at 0%

·

Computed volatility of 112.2%

·

Risk free rate of 0.01%