Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

v3.6.0.2
Derivative Instruments
12 Months Ended
Dec. 31, 2016
Derivative Instruments [Abstract]  
DERIVATIVE INSTRUMENTS
12. DERIVATIVE INSTRUMENTS

 

The Company evaluates and accounts for derivatives conversion options embedded in its convertible and freestanding instruments in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities ("ASC Topic 815").

 

MidMarket Warrants

 

The Company issued warrants to lenders under the MidMarket Loan Agreement in 2012. These warrants were outstanding at December 31, 2016 and 2015.

 

The terms of the warrants issued in September 2012 originally provided, among other things, that the number of shares of common stock issuable upon exercise of such warrants amounted to 11.5% of the Company’s fully-diluted outstanding common stock and common stock equivalents, whether the common stock equivalents were fully vested and exercisable or not, and that the initial exercise price of such warrants was $5.00 per share of common stock, subject to adjustment. Pursuant to an amendment to the loan agreement, on March 22, 2013, the number of shares for which the warrants are exercisable was fixed at 234,233 shares. On September 17, 2012, when the warrants were issued, the Company recorded a derivative liability in the amount of $194. The amount was recorded as a debt discount and was being amortized over the original life of the related loans. The amount of the derivative liability was computed by using the Black-Scholes option pricing model, which is not materially different from a binomial lattice valuation methodology, to determine the value of the warrants issued. In accordance with ASC Topic 480, the warrants are classified as liabilities because there is a put feature that requires the Company to repurchase any shares of common stock issued upon exercise of the warrants. The derivative liability associated with this debt is revalued each reporting period and the increase or decrease is recorded to the consolidated statement of operations under the caption “change in fair value of derivative instruments.” At each reporting date, the Company performs an analysis of the fair value of the warrants using the Black-Scholes pricing model and adjusts the fair value accordingly.

 

On September 17, 2016, the fourth anniversary date of the warrants, the Company failed to meet the minimum adjusted earnings before interest, taxes, depreciation and amortization provisions set forth within the original warrant agreement. As such, the expiration date of the warrants was extended to September 17, 2018.

 

On December 31, 2016 and 2015, the Company used a binomial pricing model to determine the fair value of the warrants on those dates and determined the fair value was $0 and $21, respectively. The Company recorded the change in the fair value of the derivative liability as a gain on fair value of derivative liability on the consolidated statement of operations for the years ended December 31, 2016 and 2015 of $21 and $191, respectively.

 

The fair value of the warrant derivative liability as of December 31, 2016 and 2015 was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:

 

    Year Ended December 31,  
    2016     2015  
             
Fair value of Company’s common stock   $ 0.03     $ 1.00  
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)     120 %     80 %
Exercise price per share     $4.00 - $5.00       $4.00 - $5.00  
Estimated life     1.7 years       1.7 years  
Risk free interest rate (based on 1-year treasury rate)     0.12 %     0.86 %

 

Forward Investments, LLC Convertible Feature

 

On February 4, 2014 and March 28, 2014, Forward Investments, LLC made convertible loans to the Company for working capital purposes in the amounts of $1,800 and $1,200, respectively. Such loans are evidenced by convertible promissory notes that bear interest at the rate of 2% and 10% per annum, were to mature on June 30, 2015 and originally were convertible into shares of the Company’s common stock at an initial conversion price of $6.36 per share.

 

The fair value of the embedded conversion feature at the date of issuance was $8,860. The Company recorded a debt discount of $6,475 and a loss on debt discount of $2,385. The debt discount is being amortized over the life of the loans. The Company used a Monte Carlo simulation on the date of issuance to determine the fair value of the embedded conversion feature.

 

On October 22, 2014, the two convertible promissory notes were modified to reduce the initial conversion price of $6.36 to $3.93. As a result, the Company used a Monte Carlo simulation to determine the fair value on the date of modification. The Company recorded the change in the fair value of the derivative liability as a loss on fair value of derivative instruments of $310.

 

On March 4, 2015, the Company and Forward Investments, LLC restructured the two promissory notes in order to extend the maturity dates thereof, reduce the seniority and reduce the interest rate accruing thereon (refer to Note 12, Related Parties, for further detail). The Company accounted for this restructuring of the promissory notes as a debt modification under ASC Topic 470-50. As part of the modification, the Company analyzed the embedded conversion feature and recorded a loss on fair value of derivative instruments of $2,600 on the consolidated statement of operations.

 

In conjunction with the issuance of the 6.5% and 3% convertible notes issued to Forward Investments, LLC on March 4, 2015, the Company recorded an additional derivative liability as a debt discount in the amount of $260 and $1,970, respectively, on the date of the issuance of the notes.

 

The debt discounts are being amortized over the life of the loans. The Company used a Monte Carlo simulation on the date of issuance to determine the fair value of the embedded conversion features.

 

On August 3, 2015, the Company and Forward Investments, LLC agreed to reset the conversion price of the convertible notes to $1.58 per share of the Company’s common stock. As a result, the Company used a Monte Carlo simulation to determine the fair value of the conversion features on the date of the agreement. On the date of the transaction, the fair value of the Forward Investments convertible notes conversion feature did not change and as such, no change in fair value of derivative instruments was recorded on the consolidated statement of operations.

  

On October 26, 2015, the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible notes was reset to $1.25 per share of the Company’s common stock. Prior to the triggering of the ratchet-down feature, the Company revalued the derivative and recorded a gain on fair value of derivative liabilities of $120 on the consolidated statement of operations. The Company then reduced the existing derivative liability related to the reset provision and recorded the change of $2,310 in the derivative liability value as a loss on change in fair value of derivative instruments on the consolidated statement of operations.


On December 29, 2015, the ratchet-down feature within the original agreement was triggered and the conversion price of the convertible notes was reset to $0.78 per share of the Company’s common stock. Prior to the triggering of the ratchet-down feature, the Company revalued the derivative and recorded a gain on fair value of derivative liabilities of $3,380 on the consolidated statement of operations. The Company then reduced the existing derivative liability related to the reset provision and recorded the change of $4,140 in the derivative liability value as a loss on change in fair value of derivative instruments on the consolidated statement of operations.

 

On December 31, 2016 and 2015, the fair value of the conversion feature of the Forward Investments, LLC convertible notes was $791 and $13,534, respectively, which is included in derivative financial instruments on the consolidated balance sheets. The Company recorded the change in the fair value of the derivative liability on the consolidated statement of operations for the years ended December 31, 2016 and 2015 as a gain of $12,743 and a loss of $10,504, respectively.

 

The fair value of the Forward Investments, LLC convertible notes derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2016     December 31, 2015  
Principal amount   $ 3,210     $ 390     $ 1,025     $ 4,373     $ 3,650     $ 390     $ 2,825     $ 4,373  
                                                                 
Conversion price per share   $ 0.78     $ 0.78     $ 0.78     $ 0.78     $ 0.78     $ 0.78     $ 0.78     $ 0.78  
Risk free rate     1.93 %     1.93 %     0.51 %     0.85 %     1.93 %     1.93 %     0.49 %     1.06 %
Life of conversion feature (in years)     5.0       5.0       0.3       1.0       6.0       6.0       0.5       2.0  
Volatility     100 %     100 %     135 %     120 %     105 %     105 %     105 %     105 %

  

August 6, 2015 Demand Promissory Note – Senior Convertible Note Embedded Features

 

On August 6, 2015, the Company entered into a senior convertible note agreement with the investor whereby the Company issued a promissory note in the original principal amount of $2,105, with interest accruing at the rate of 12% per annum, which matured on January 6, 2017. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On August 6, 2015, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $524 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.

  

On December 31, 2016 and 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair value to be $176 and $339, respectively. The Company recorded the change in the fair value of the derivative liability on the consolidated statement of operations for the years ended December 31, 2016 and 2015 as a gain of $163 and $185, respectively.

 

The August 6, 2015 senior convertible note matured on January 6, 2017 and was due on demand. Subsequent to December 31, 2016, the note was paid off through conversions of the debt into shares of the Company’s common stock. Refer to Note 21, Subsequent Events, for additional detail. 

 

The fair value of the demand promissory note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2016     December 31, 2015  
Principal amount   $ 1,198     $ 2,105  
                 
Conversion price per share   $ 1.25     $ 1.25  
Conversion trigger price per share      None        None  
Risk free rate     0.44 %     0.69 %
Life of conversion feature (in years)     0.10       1.10  
Volatility     135 %     105 %

 

November 12, 2015 Demand Promissory Note – Senior Convertible Note Embedded Features

 

On November 12, 2015, the Company entered into a securities purchase agreement with an investor whereby the Company issued a senior convertible note, for cash proceeds of $500, in the original principal amount of $525. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On November 12, 2015, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $149 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.

 

As a result of the conversion of the outstanding principal balance (see Note 11, Term Loans, for further detail), the fair value of the corresponding derivative liability was $0 as of December 31, 2016. As of December 31, 2015, the Company used a Monte Carlo simulation to value the


The fair value of the demand promissory note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2015  
Principal amount   $ 525  
         
Conversion price per share   $ 1.75  
Conversion trigger price per share      None  
Risk free rate     0.61 %
Life of conversion feature (in years)     0.87  
Volatility     105 %

 

November 12, 2015 Exchange Agreement Tranches – Senior Convertible Note Embedded Features

 

On November 12, 2015, the Company entered into an exchange agreement with an investor whereby the Company exchanged a portion of the senior secured note originally issued by the Company to GPB Life Science Holdings, LLC on December 3, 2014 and subsequently assigned to the investor, for new senior convertible notes issued in three tranches of $500 for a total principal amount of $1,500. The notes had a term of one year, bore interest at 12% per annum, and were convertible into shares of the Company’s common stock at a conversion price equal to $1.25 per share, subject to adjustment as set forth in the notes.

 

On November 13, 2015, the Company issued to the investor the first tranche of senior secured notes in the principal amount of $500. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On November 13, 2015, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $164 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.

 

On November 27, 2015, the Company issued to the investor the second tranche of senior secured notes in the principal amount of $500. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On November 27, 2015, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $205 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.

 

On December 11, 2015, the Company issued to the investor the third tranche of senior secured notes in the principal amount of $500. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On December 11, 2015, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $109 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.

 

On December 31, 2015, the Company used a Monte Carlo simulation to value the settlement features of the three tranches of senior convertible notes and determined the fair value to be $57 related to tranche one, $78 related to tranche two, and $118 related to tranche three. The Company recorded gains on fair value of derivative instruments of $107 related to tranche one and $127 related to tranche two, and a loss on fair value of derivative instruments of $9 related to tranche three on the consolidated statement of operations for the year ended December 31, 2015. During the year ended December 31, 2016, the three tranches of senior convertible notes were converted into shares of the Company’s common stock (see Note 11, Term Loans, for further detail). The Company recorded the change in fair value of the derivative liability as a gain of $253 in the consolidated statement of operations for the year ended December 31, 2016.

 

The fair value of the senior convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2015  
Principal amount   $ 250     $ 333     $ 500  
                         
Conversion price per share   $ 1.25     $ 1.25     $ 1.25  
Conversion trigger price per share      None        None        None  
Risk free rate     0.14 %     0.14 %     0.15 %
Life of conversion feature (in years)     0.08       0.12       0.16  
Volatility     105 %     105 %     105 %

 

Dominion November 4, 2016 Exchange Agreement – Senior Convertible Debt Features

 

On November 4, 2016, the Company entered into an exchange agreement with the holder of the September 15, 2016 term promissory note. The principal amount was increased by $40, and the note became convertible into shares of the Company’s common stock. The note is convertible at the lower of (i) $0.10, or (ii) 75% of the lowest VWAP day for the 15 days prior to the conversion date (for additional detail refer to Note 11, Term Loans). The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On November 4, 2016, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $242 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On December 31, 2016, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair value to be $78, and recorded a gain of $164 on the consolidated statement of operations for the year ended December 31, 2016.

 

The fair value of the senior convertible note derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2016  
Principal amount   $ 604,800  
         
Conversion price per share   $ 0.10  
Conversion trigger price per share      None  
Risk free rate     0.76 %
Life of conversion feature (in years)     0.80  
Volatility     120 %

 

31 Group Promissory Note Warrants

 

On July 1, 2014, the Company issued 58,870 warrants associated with its issuance to 31 Group LLC of convertible promissory notes. Upon issuance, the Company recorded a derivative liability and a related debt discount in the amount of $184. The debt discount was being amortized over the original life of the convertible promissory notes and was completely amortized as a result of the payoff of the 31 Group debt.

  

On April 7, 2015, the Company entered into an Exchange Agreement with 31 Group LLC, whereby the Company exchanged the July 1, 2014 warrants for a new warrant. Please refer to the 31 Group, LLC April 2015 Warrants section of this footnote for further detail on the new warrant.

 

31 Group, LLC October Warrants

 

Pursuant to the securities purchase agreement entered into with 31 Group LLC dated October 8, 2014, the Company issued a warrant, exercisable for up to 300,000 shares of common stock at an exercise price of $5.00 per share. The warrant expires on the date that is the earlier of (i) the later of (x) the fifteenth (15 th ) Trading Day after the date a registration statement registering all of the shares of the Company’s common stock underlying the warrants is declared effective by the SEC and (y) December 31, 2014, and (ii) such earlier date as set forth in a written agreement of the Company and 31 Group LLC; provided, that any such date shall be extended as set forth in the warrant. On October 8, 2014, when the warrant was issued, the Company recorded a derivative liability in the amount of $90. The amount of the derivative liability was computed by using the Black-Scholes pricing model to determine the value of the warrants issued.


On April 7, 2015, the Company entered into an Exchange Agreement with 31 Group LLC, whereby the Company exchanged the warrant previously issued to 31 Group LLC on October 8, 2014 for 1,146,977 shares of the Company’s common stock issued at $1.66 per share. The Company recorded the issuance of shares as a loss on exchange of shares of $1,904 on the consolidated statement of operations as of the transaction date. Please refer to the 31 Group, LLC April 2015 Warrants section of this footnote for further detail on the exchange agreement.

 

31 Group, LLC April 2015 Warrants

 

In April 2015, the Company exchanged two warrants previously issued to 31 Group LLC on April 15, 2014 and July 1, 2014 for two new warrants, each of which is identical to the previous warrants issued, except that the exercise price of such new warrants is $5.00 per share, subject to the adjustments noted within the 31 Exchange Agreement. Pursuant to the 31 Exchange Agreement, on July 1, 2015, the Company was obligated to pay 31 Group LLC a cash make-whole amount equal to the greater of (a) zero (0) and (b) the difference of (i) $5,175 less (ii) the product of (x) the Exchange Share Amount (as defined in the 31 Exchange Agreement) and (y) the quotient of (A) the sum of each of the 30 lowest daily volume weighted average prices of the Company’s common stock during the period commencing on, and including, April 8, 2015 and ending on, and including, June 30, 2015, divided by (B) 30. As part of the 31 Exchange Agreement, the registration rights agreement previously entered into between the Company and 31 Group LLC in October 2014 was terminated.

 

On April 7, 2015, the Company used the Black-Scholes pricing method, which is not materially different from a binomial lattice valuation methodology, to determine the fair value of the derivative liability of the warrants on those dates, and determined the fair value was $15 and $11, respectively.

 

On May 14, 2015, the Company and 31 Group, LLC entered into an amended agreement whereby the Company issued 100,000 shares of unregistered common stock of the Company to 31 Group, LLC in exchange for the termination of any obligation of the Company to pay the make-whole payment, as described in the 31 Group Exchange Agreement. The Company recorded a loss on exchange of shares of $353 in the consolidated statement of operations during the year ended December 31, 2015.

 

On December 31, 2016 and 2015, the Company used a binomial lattice pricing model to determine the fair value of the warrants and derived an implied fair value of $0 and $2, respectively, which is included in derivative financial instruments at estimated fair value on the consolidated balance sheets. The Company recorded the change in the fair value of the derivative liability for the years ended December 31, 2016 and 2015 as a gain in the consolidated statements of operations of $2 and $48, respectively.

 

The fair value of the 31 Group, LLC April 2015 exchange agreement warrants derivative as of December 31, 2015 was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:

 

    Year Ended December 31,  
    2015  
    April 15,
2014
    July 1,
2014
 
    Warrant     Warrant  
             
Fair value of Company’s common stock   $ 1.00     $ 1.00  
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)     80 %     80 %
Exercise price per share   $ 5.00     $ 5.00  
Estimated life     3.5 months       1.5 years  
Risk free interest rate (based on 1-year treasury rate)     0.33 %     0.86 %

 

Bridge Financing Agreement Warrants

 

On December 3, 2014, the Company entered into a bridge financing agreement with GPB Life Science Holdings LLC, a third-party lender. Pursuant to the agreement, the Company issued a warrant entitling the lender to purchase 250,000 shares of common stock (the “GPB-1 warrant”). The GPB-1 warrant is exercisable at a fixed price of $5.00 and expires 180 days from the original issue date. On December 1, 2014, when the GPB-1 warrant was issued, the Company recorded a derivative liability in the amount of $421. The amount was recorded as a debt discount and is being amortized over the original life of the related loan.

  

On December 24, 2014, the Company entered into a second bridge financing agreement with GPB Life Science Holdings LLC. Pursuant to the second agreement, the Company issued a warrant entitling the lender to purchase 150,000 shares of common stock (the “GPB-2 warrant”). The GPB-2 warrant is exercisable at a fixed price of $5.00 and expires 180 days from the original issue date. On December 24, 2014, when the GPB-2 warrant was issued, the Company recorded a derivative liability in the amount of $215. The amount was recorded as a debt discount and is being amortized over the original life of the related loan. The amount of the derivative liability was computed by using the Black-Scholes pricing model to determine the value of the GPB-2 warrants issued.

  

During the quarter ended March 31, 2015, the Company re-evaluated the GPB Life Science Holdings LLC warrants issued on December 3, 2014 and December 24, 2014 and reclassified the warrants to additional paid-in capital within the consolidated balance sheet.

On May 15, 2015, the Company entered into Amendment No. 1 to the bridge financing agreement with GPB Life Science Holdings LLC. Pursuant to such amendment, the Company issued to the investor a new four-year warrant (the “GPB-3 warrant”), exercisable for up to 200,000 shares of the Company’s common stock, with an exercise price of $3.75 per share, subject to adjustment as set forth in such amendment; and a new four-year warrant (the “GPB-4 warrant”), exercisable for up to 50,000 shares of the Company’s common stock, with an exercise price of $3.93 per share, subject to adjustment as set forth in such amendment, and amended the exercise price of the prior warrants to $3.75 per share (as discussed in the next paragraph), subject to adjustment as set forth in such amendment. The Company evaluated the GPB-3 warrants and GPB-4 warrants issued in connection with such amendment and recorded the amount as a loss on debt extinguishment of $504 on the consolidated statement of operations as of May 15, 2015. The Company evaluated the warrants and determined that the warrants could be classified as a component of stockholders’ deficit and as such, recorded the warrants within the common stock warrants line-item on the consolidated balance sheet as of May 15, 2015.

 

On May 15, 2015, the Company amended the GPB-1 warrants and GPB-2 warrants to reduce the exercise price from $5.00 per share to $3.75 per share of the Company’s common stock and to increase the term from 180 days to four years from the original issuance date of the warrants. Prior to such amendment, the Company utilized a Black-Scholes pricing model, which approximates a binomial lattice valuation methodology, to revalue the warrants to the then-current fair value and recorded a gain on debt extinguishment of $546 within the consolidated statement of operations on May 15, 2015. In connection with such amendment, the Company revalued the two existing warrants to reflect the new $3.75 exercise price and recorded a related loss on debt extinguishment of $771 on the consolidated statement of operations on May 15, 2015.

 

On September 14, 2015, the Company and GPB Life Science Holdings LLC agreed to revise Amendment No. 2 to the bridge financing agreement, which was originally entered into by the Company on August 12, 2015, as described in Note 11 Term Loans, to amend and restate the prior notes and the new note to reduce the conversion price of the prior note and the new note from $3.75 per share of the Company’s common stock to $2.00 per share, amend and restate the GPB-1 warrants, GPB-2 warrants, and GPB-3 warrants to reduce the exercise price of the warrants from $3.75 per warrant share to $2.00 per warrant share, increase the number of amortization payment dates and decrease the amortization payment, and to permit the Company to make amortization payments in shares converted from any of the prior notes or the new note. The conversion price for the conversion shares used to make an amortization payment shall be the lesser of $2.00 per share of the Company’s common stock or 75% of the average volume weighted average price for the five consecutive trading days ending on, and including, the trading day immediately preceding the date of the amortization payment. As part of Amendment No. 2, the GPB-4 warrants were cancelled.

 

In connection with such amendment, the Company revalued the GPB-1 warrants, GPB-2 warrants and GPB-3 warrants using a binomial lattice model and determined the fair value to be $616. The Company recorded a related gain on modification of warrants of $660 on the consolidated statement of operations on September 14, 2015.

 

On December 29, 2015, the Company entered into a conversion agreement with GPB Life Science Holdings, LLC pursuant to which, among other things, the Company agreed to reduce the exercise price of the GPB-1 warrants, GPB-2 warrants and GPB-3 warrants from $2.00 per share to $1.75 per share (refer to the Bridge Financing - GPB Life Science Holdings, LLC section of Note 11, Term Loans for additional information). Prior to the conversion agreement, the Company utilized a binomial lattice valuation methodology to revalue the warrants to the then-current fair value and recorded a loss on debt extinguishment of $358 within the consolidated statement of operations on December 29, 2015.

 

On December 29, 2015, the Company entered into an agreement with the JGB (Cayman) Waltham Ltd. whereby the Company issued to JGB (Cayman) Waltham Ltd. a senior secured convertible debenture (as noted in Note 11 Term Loans) and, among other things, a portion of the JGB (Cayman) Waltham Ltd. proceeds were used to repay the GPB Life Science Holdings, LLC bridge notes. On this date, the Company evaluated the payoff of the GPB Life Science Holdings, LLC bridge notes and determined that the repayment of the bridge notes qualified for debt extinguishment accounting under ASC-470-50, Debt – Modifications and Extinguishments (“ASC-470-50”). In accordance with ASC-470-50, the Company evaluated the GPB-1 warrants, GPB-2 warrants and GPB-3 warrants and revalued the warrants at the $1.75 conversion price and determined that the fair value of the warrants was $258, which is included in common stock warrants within the stockholders’ deficit section on the consolidated balance sheet.

 

Bridge Financing Amendment No. 2 Feature

 

On September 14, 2015, as noted in Note 11, Term Loans, the Company evaluated Amendment No. 2 to the bridge financing agreement and determined that the embedded maturity date feature met the classification of an embedded derivative instrument. The Company used a Monte Carlo simulation on the date of issuance to record the fair value of the maturity date feature and ascribed a value of $75, which was recorded as a debt discount and related derivative liability on the consolidated balance sheet.

 

On December 29, 2015, the Company entered into an agreement with the JGB (Cayman) Waltham Ltd. whereby the Company issued to JGB (Cayman) Waltham Ltd. a senior secured convertible debenture (as noted in Note 11 Term Loans) and, among other things, a portion of the JGB (Cayman) Waltham Ltd. proceeds were used to repay the GPB Life Science Holdings, LLC bridge notes. On this date, the Company evaluated the payoff of the GPB Life Science Holdings, LLC bridge notes and determined that the repayment of the bridge notes qualified for debt extinguishment accounting under ASC-470-50, Debt – Modifications and Extinguishments (“ASC-470-50”). In accordance with ASC-470-50, the Company evaluated the maturity date feature prior to the payoff transaction and determined that the feature had a fair value of $31, which the Company recorded the change in fair value of $44 as a gain on change in fair value of derivative instruments on the consolidated statement of operations. In conjunction with the payoff, the Company re-evaluated the maturity date feature and determined that the derivative was extinguished along with the related bridge financing debt. As such, the Company recorded a gain of $31 within loss on extinguishment of debt on the consolidated statement of operations as of December 31, 2015.

Smithline Senior Convertible Note Embedded Features

 

On August 6, 2015, the Company issued to Smithline a senior convertible note in the principal amount of $526, with interest accruing at the rate of 12% per annum, which matures on January 11, 2017. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On August 6, 2015, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $131 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.

 

On July 20, 2016 and September 1, 2016, principal of $55 and $97, respectively, was added to the Smithline senior convertible note. Refer to Note 11, Term Loans, for additional detail.

 

On December 31, 2016 and 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes and determined the fair value to be $0 and $85, respectively. The Company recorded the change in the fair value of the derivative liability for the years ended December 31, 2016 and 2015 as a gain in the consolidated statements of operations of $85 and $46, respectively.

 

The Smithline senior convertible note matured on January 11, 2017 and is now due on demand.

 

The fair value of the Richard Smithline derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2015  
       
Principal amount   $ 526  
         
Conversion price per share   $ 1.25  
Conversion trigger price per share      None  
Risk free rate     0.69 %
Life of conversion feature (in years)     1.10  
Volatility     105 %

  

JGB (Cayman) Waltham Ltd. Senior Secured Convertible Debenture Features

 

On December 29, 2015, the Company entered into a securities purchase agreement with JGB Waltham whereby the Company issued to JGB Waltham, for gross proceeds of $7,500, a 10% original issue discount senior secured convertible debenture in the aggregate principal amount of $7,500. The Company evaluated the senior convertible note’s settlement provisions and determined that the voluntary conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On December 29, 2015, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $1,479 related to the voluntary conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a debt discount and related derivative liability. The debt discounts are being amortized over the life of the loan.


On May 17, 2016, the Company entered into the Debenture Forbearance Agreement with JGB Waltham pursuant to which JGB Waltham agreed to forbear action with respect to certain existing defaults in accordance with the terms of the Debenture Forbearance Agreement (Refer to Note 11, Term Loans, for further details). The Company evaluated the Debenture Forbearance Agreement and accounted for the transaction as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Debenture Forbearance Agreement. The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $1,154 to its consolidated statement of operations on May 17, 2016.

 

On May 23, 2016, the Company entered into the Amended Agreement with JGB Concord, JGB Waltham, White Oak Global Advisors, LLC, VaultLogix, and the Guarantors. The Company accounted for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for the Amended Agreement as a debt modification and utilized a Monte Carlo simulation to determine the fair value of the settlement features. The Company recorded a loss on the fair value of the settlement features to change in fair value of derivative instruments of $41 on the consolidated statement of operations as of May 23, 2016.

 

On June 23, 2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 7, Term Loans, for further detail). The Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement. The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $486 to its consolidated statement of operations on June 23, 2016.

 

On September 1, 2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 11, Term Loans, for further detail). The Company accounted for the amended agreement in regards to the December Debenture as a debt modification in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement. The Company recorded the change in the settlement features as a gain to change in fair value of derivative instruments of $1,552 to its consolidated statement of operations on September 1, 2016.

 

On December 31, 2016 and 2015, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible notes issued to JGB Waltham and determined the fair value to be $533 and $3,150, respectively. The Company recorded the change in the fair value of the derivative liability for the years ended December 31, 2016 and 2015 as a gain of $3,173 and $69, respectively, which includes all extinguishment and conversion accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded in the consolidated statements of operations.

 

The fair value of the JGB Waltham derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2016     December 31, 2015  
Principal amount   $ 5,034     $ 7,500  
                 
Conversion price per share   $ 0.20     $ 1.33  
Conversion trigger price per share   $ 2.00     $ 4.00  
Risk free rate     1.31 %     0.86 %
Life of conversion feature (in years)     2.41       1.50  
Volatility     100 %     105 %

 

JGB (Cayman) Waltham Ltd. 2.7 Note Convertible Debenture Features

 

On September 1, 2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 11, Term Loans, for further detail). The Company accounted for the amended agreement in regards to the 2.7 Note as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement and determined that the fair value of the features was $1,200 as of September 1, 2016 and recorded these items on the consolidated balance sheets as a derivative liability. The debt discounts are being amortized over the life of the loan.

 

On December 31, 2016, the Company used a Monte Carlo simulation to value the settlement feature of the 2.7 Note and determined the fair value to be $119 and recorded a gain on fair value of derivative instruments of $1,081 for the year ended December 31, 2016 on the consolidated statement of operations.


The fair value of the JGB Waltham derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2016  
Principal amount   $ 593  
         
Conversion price per share   $ 0.20  
Conversion trigger price per share   $ 2.00  
Risk free rate     0.62 %
Life of conversion feature (in years)     0.58  
Volatility     130 %

 

JGB (Cayman) Concord Ltd. Senior Secured Convertible Note

 

On February 17, 2016, the Company entered into a securities exchange agreement by and among the Company, VaultLogix, and JGB Concord, whereby the Company exchanged the White Oak Global Advisors, LLC promissory note and subsequently assigned to the lender party a new 8.25% senior secured convertible note dated February 18, 2016 in the aggregate principal amount of $11,601 (refer to Note 11, Term Loans, for further details).

 

The Company evaluated the senior secured convertible note’s settlement provisions and determined that the conversion feature and fundamental transaction clauses met the criteria to be classified as embedded derivatives as set forth in ASC 815, Derivatives and Hedging and ASC 480, Distinguishing Liabilities from Equity. On February 18, 2016, the Company used a Monte Carlo simulation to value the settlement features and ascribed a value of $1,350 related to the conversion feature and fundamental transaction clauses and recorded these items on the consolidated balance sheets as a derivative liability. The debt discounts are being amortized over the life of the loan.

 

On May 17, 2016, the Company entered into the Note Forbearance Agreement with JGB Concord pursuant to which JGB Concord agreed to forbear action with respect to certain existing defaults in accordance with the terms of the Note Forbearance Agreement (Refer to Note 11, Term Loans, for further details). The Company evaluated the Note Forbearance Agreement and accounted for the transaction as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Note Forbearance Agreement. The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $2,196 to its consolidated statement of operations on May 17, 2016.

 

On May 23, 2016, the Company entered into the Amended Agreement with JGB Concord, JGB Waltham, White Oak Global Advisors, LLC, VaultLogix, and the Guarantors. The Company accounted for this Amended Agreement in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company accounted for the Amended Agreement as a debt modification and utilized a Monte Carlo simulation to determine the fair value of the settlement features. The Company recorded a loss on the fair value of the settlement features to change in fair value of derivative instruments of $79 on the consolidated statement of operations as of May 23, 2016.

 

On June 23, 2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 11, Term Loans, for further detail). The Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement to determine the fair value. The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $924 to its consolidated statement of operations on June 23, 2016.

 

As part of the June 23, 2016 amended agreement with JGB Concord, the Company issued 900,000 shares of the Company’s common stock on June 23, 2016 to JGB Concord (Refer to Note 16, Stockholders’ Deficit, for further detail), which includes a make-whole provision whereby the Company will pay JGB Concord in cash the difference between $0.94 per share of the Company’s common stock and the average volume weighted average price per share of the Company’s common stock sixty days after shares of the Company’s common stock are freely tradable. The Company accounted for the make-whole provision within the June 23, 2016 amendment agreement as a derivative liability and utilized a binomial lattice model to ascribe a value of $280, which was recorded as a derivative liability on the Company’s consolidated balance sheet and as a loss on extinguishment of debt on the Company’s consolidated statement of operations on June 23, 2016.

 

On September 1, 2016, the Company entered into an amended agreement with JGB Concord and JGB Waltham (refer to Note 11, Term Loans, for further detail). The Company accounted for the amended agreement as a debt extinguishment in accordance with ASC Topic 470-50. In accordance with ASC Topic 470-50, the Company used a Monte Carlo simulation to revalue the settlement features associated with the Amended Agreement. The Company recorded the change in the settlement features as a gain to change in fair value of derivative instruments of $1,308 to its consolidated statement of operations on September 1, 2016.


On December 31, 2016, the Company used a Monte Carlo simulation to value the settlement features of the senior secured convertible notes and determined the fair value to be $397 and recorded the change in fair value of derivative instruments for the year ended December 31, 2016 as a gain of $397, which includes all extinguishment and conversion accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded in the consolidated statement of operations.

  

The fair value of the JGB Concord derivative at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    December 31, 2016  
Principal amount   $ 3,749  
         
Conversion price per share   $ 0.20  
Conversion trigger price per share   $ 2.00  
Risk free rate     1.31 %
Life of conversion feature (in years)     2.41  
Volatility     100 %

 

On December 31, 2016, the Company used a binomial lattice model to value the make-whole provision and determined the fair value to be $819. The Company recorded a loss on fair value of derivative instruments of $539 for the year ended December 31, 2016 on the consolidated statement of operations. 

 

The fair value of the JGB Concord make-whole provision at the measurement date was calculated using a binomial lattice model with the following factors, assumptions and methodologies:

 

    December 31, 2016  
Fair value of Company's common stock   $ 0.03  
Volatility     120 %
Exercise price     0.94  
Estimated life     0.15  
Risk free interest rate (based on 1-year treasury rate)     0.48 %

 

Net Settlement of Accounts Payable

 

On March 25, 2015, the Company issued 300,000 shares of common stock and a warrant to purchase 80,000 shares of common stock to a third-party vendor to settle various accounts payable. The shares of common stock were issued with a six-month restrictive legend and as such, the fair value of the accounts payable to be paid with the common stock had not been determined. The Company recorded the common stock at a fair value of $648 and the warrant with a fair value of $106, which reduced the accounts payable to the third party in the amount of $1,475. The Company recorded a derivative liability of $721 at the time the shares were issued. The Company used a Black-Scholes pricing model to determine the fair value of the warrant on the date it was issued.

 

On April 1, 2015, the Company cancelled the warrants to purchase 80,000 shares of common stock issued to the third party and the third party returned the 300,000 shares of common stock previously issued on March 25, 2015 to treasury stock. The Company then issued a new one-year warrant for 425,000 shares of common stock with an exercise price of $0.55 per share. The Company recorded the warrant with a fair value of $674, which reduced the accounts payable to the third party in the amount of $1,417. The Company recorded a derivative liability of $743 at the time the warrants were issued. The derivative liability relates to the difference between the accounts payable due to the third party and the fair value of the warrants on April 1, 2015. The Company used a Black-Scholes pricing model, which is not materially different from a binomial lattice valuation methodology, to determine the fair value of the warrant on the date it was issued.

  

Beginning on October 9, 2015 and continuing through November 12, 2015, the third-party began exercising the warrants to purchase shares of the Company’s common stock. During this time, the third-party exercised all of the 425,000 warrants issued on April 1, 2015 to purchase 287,001 shares of the Company’s common stock. The third-party applied the proceeds from the warrant exercise to reduce outstanding accounts payable of $452. The Company recorded a reduction in accounts payable of $452, a reduction in the derivative balance of $743, and recorded a loss on fair value of derivative of $30. As of November 12, 2015, there were no remaining warrants issued for settlement of accounts payable or any related derivative liabilities.

 

On September 8, 2016, the Company issued a warrant to purchase up to a total of 2,500,000 shares of common stock at any time on or prior to April 1, 2017. The exercise price of the warrant is $0.001. The warrant was issued in consideration for the outstanding accounts payable to the holder of the warrant. Based on the agreement, the proceeds from the eventual sale of the common stock based on the exercise of all or a portion of the warrant will be applied towards unpaid invoices for services previously rendered to the Company. The Company determined that the fair value of the warrants was $460, which is included in common stock warrants within the stockholders’ deficit section on the consolidated balance sheet as of December 31, 2016.


During the three months ended December 31, 2016, the warrant value became less than the accounts payable owed. As a result, a derivative had to be recorded on the consolidated balance sheet as of December 31, 2016 in accordance with ASC 480. On December 31, 2016, the Company used a binomial lattice model to value the warrant derivative and determined the fair value to be $152. The Company recorded a loss on fair value of derivative instruments of $152 for the year ended December 31, 2016 on the consolidated statement of operations. 

 

The fair value of the warrant derivative as of December 31, 2016 was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:

 

    December 31, 2016  
Fair value of Company's common stock   $ 0.03  
Volatility     120 %
Exercise price     0.001  
Estimated life     0.25  
Risk free interest rate (based on 1-year treasury rate)     0.57 %