Quarterly report pursuant to Section 13 or 15(d)

Derivative Liabilities

v3.8.0.1
Derivative Liabilities
9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Liabilities
  6. Derivative Liabilities

 

As discussed in Note 4, on June 30, 2016, the Company entered into amendments with Brainlab, with respect to the New Brainlab Note, and with the 2014 Convertible Note Holders, the provisions of which created: (a) a conversion feature allowing for the principal balance described above to be converted at a public offering price that may be less than market value per share of the Company’s common stock; and (b) down round strike price protection with respect to the warrants. In addition, warrants issued in 2013 contain net-cash settlement and down round provisions.

 

Under GAAP, the provisions described above require that the conversion feature and the warrants be accounted for as derivatives, thus requiring that they each be adjusted to estimated fair value at each balance sheet date and shown as liabilities in the accompanying condensed consolidated balance sheets. The fair values of the conversion feature and the warrants were calculated using the Monte Carlo simulation valuation method. Assumptions used in calculating the fair value of the conversion feature at September 30, 2017 are as follows:

 

Risk free interest rates     1.35%  
Volatility     60%  

 

Assumptions used in calculating the fair value of the warrants at September 30, 2017 are as follows:

 

Dividend yield     0%  
Expected volatility     55%  
Risk free interest rates     1.06 – 1.70%  
Expected remaining term (in years)     0.32 – 3.51  

 

In addition to the assumptions above, the Company also estimates the likelihood of whether it will participate in a future qualified public offering, as defined in either the amended note or warrant agreements, as applicable, that would trigger the conversion feature or the repricing of warrants, and, if so, the estimated timing and pricing of its offering of common stock.

 

The fair values and the changes in fair values of derivative liabilities during the nine months ended September 30, 2017 and 2016 are as follows:

 

   

Nine Months Ended 

September 30, 

 
    2017     2016  
Balance, beginning of period   $ 131,173     $ 658,286  
Conversion of equity warrants to liabilities     -       192,173  
Additions from debt restructuring     -       1,592,134  
Reduction from debt conversions     -       (1,207,813 )
Reduction from warrant exercise     (10,659 )     (37,672 )
Gain on change in fair value for the period     (48,064 )     (748,080 )
Balance, end of period   $ 72,450     $ 449,028