Annual report pursuant to Section 13 and 15(d)

Derivative Liability

Derivative Liability
12 Months Ended
Dec. 31, 2017
Derivative Liability [Abstract]  
Derivative Liability

Note 13—Derivative Liability


In June 2015, we granted warrants to purchase 959,924 shares of the Company’s common stock through a private offering of units (“Units”). Each Unit included one share of Common Stock, par value $0.0001 per share, and a three-year Warrant to purchase one share of Common Stock at an initial exercise price per share equal to $0.75, subject to adjustment for certain corporate transactions such as a merger, stock-split or stock dividend and, if the Company does not continue to be a reporting company under the Securities Exchange Act of 1934 during the two-year period after closing, the exercise price will be reduced to $0.01 per share. Each Unit includes limited registration rights for the investors for the shares of Common Stock and the shares of Common Stock that would be issued upon the exercise of a Warrant (“Underlying Shares”) when and if we register our shares of Common Stock in a different offering, subject to certain excluded registered offerings. The Company has also issued to the placement agent warrants to purchase our shares of Common Stock equal to 10% of the total shares sold in the offering, or 95,992 shares.


Because these warrants have full reset adjustments that would preclude the instrument from being considered an index to the Company’s stock, it is subject to derivative liability treatment under ASC 815-40-15, which requires as of the date the warrants are issued, the derivative liability to be measured at fair value and re-evaluated at the end of each reporting period.


Key assumptions used to determine the fair value of the warrants follows:


    At Issuance     December 31,
    December 31,
Market value of stock on measurement date   $ 0.55     $ 0.48     $ 0.42  
Risk-free interest rate     1.12 %     1.53 %     1.20 %
Dividend yield     0 %     0 %     0 %
Volatility factor     55 %     63.5 %     68.8 %
Term     3 years       0.5 year       1.5 years  


As of December 31, 2017 and 2016, the fair value of the total warrants’ derivative liability was $24,233 and $108,809, respectively, and recorded in other accrued expenses in the Consolidated Balance Sheets. We recognized a gain on change of fair value of the derivative liability of $84,576 and a loss on change of fair value of the derivative liability of $81,543 for the years ended December 31, 2017 and 2016, respectively, which is recorded in Other income, net in the Consolidated Statements of Operations and Comprehensive Income.


The following table summarizes the derivative liability included in the consolidated balance sheet:


Balance at December 31, 2016   $ 108,809  
Gain on change of fair value     (84,576 )
Balance at December 31, 2017   $ 24,233  


The following table summarizes information about warrants outstanding as of December 31, 2017:


Total # of warrants issued and outstanding     1,055,916  
Weighted-average exercise price   $ 0.75  
Remaining life (in years)     0.5