Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.10.0.1
Derivative Instruments
9 Months Ended
Sep. 30, 2018
Derivative Instruments [Abstract]  
DERIVATIVE INSTRUMENTS

9. DERIVATIVE INSTRUMENTS

 

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

 

MidMarket Warrants

 

The Company issued warrants to the lenders under the MidMarket Loan Agreement in 2012. These warrants were outstanding as of September 30, 2018 and December 31, 2017.

 

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 $1,600.00 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 586 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 binomial lattice 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 September 17, 2018, the sixth 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, 2019.

 

On September 30, 2018 and December 31, 2017, the Company used a binomial lattice pricing model to determine the fair value of the derivative liability of the warrants on that date, and determined the fair value was $0.

 

The fair value of the warrant derivative liability as of September 30, 2018 and December 31, 2017 was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:

 

    September 30, 
2018
    December 31, 
2017
 
             
Fair value of Company’s common stock   $ 0.003     $ 0.27  
Volatility (closing prices of 3-4 comparable public companies, including the Company’s historical volatility)     176 %     215 %
Exercise price per share     $1,600.00 - $2,000.00       $1,600.00 - $2,000.00  
Estimated life     1 year       0.7 years  
Risk free interest rate (based on 1-year treasury rate)     2.59 %     1.65 %

 

Forward Investments, LLC Convertible Feature

 

During the years ended December 31, 2012, 2013 and 2014, Forward Investments LLC made convertible loans to the Company for working capital purposes in the various amounts totaling $6,475. 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 13, 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 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 were 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 $632.00 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 $500.00 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 $312.00 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 September 30, 2018 and December 31, 2017, the fair value of the conversion feature of the Forward Investments, LLC loans was $278 and $348, respectively, which was included in derivative financial instrument at estimated fair value on the unaudited condensed consolidated balance sheets. The change in fair value of the Forward Investments, LLC derivative liabilities was recorded as a gain the unaudited condensed consolidated statement of operations of $16 and $70 for the three and nine months ended September 30, 2018, respectively. The change in the fair value of the Forward Investments, LLC derivative liabilities was recorded as a gain in the unaudited condensed consolidated statements of operations of $125 and $406 for the three and nine months ended September 30, 2017, respectively.

 

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

 

    September 30, 
2018
    December 31, 
2017
 
Principal and interest amount   $ 1,210     $ 634     $ 1,272     $ 2,088     $ 1,810     $ 582     $ 1,270     $ 2,438  
                                                                 
Conversion price per share      *         *         *         *         *         *         *         *   
Risk free rate     2.88 %     2.88 %     2.19 %     2.19 %     2.00 %     2.00 %     1.39 %     1.39 %
Life of conversion feature (in years)     3.3       3.3       0.3       0.3       4.0       4.0       0.3       0.0  
Volatility     174 %     174 %     199 %     199 %     142 %     142 %     195 %     195 %

 

 

* The conversion price per share is equal to the lesser of $7.80 or 95% of VWAP on the conversion date.

 

Dominion Capital LLC 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 Topic 815, Derivatives and Hedging and ASC Topic 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 were being amortized over the life of the loan.

 

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 $176. As a result of the conversion of the outstanding principal balance (refer to Note 8, Term Loans, for further detail), the fair value of the corresponding derivative liability was $0 as of December 31, 2017. The Company recorded a gain on fair value of derivative instruments of $176 on the consolidated statement of operations for the year ended December 31, 2017.

 

Dominion Capital LLC 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 was convertible at the lower of (i) $40.00, or (ii) 75% of the lowest VWAP day for the 15 days prior to the conversion date (for additional detail refer to Note 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 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.

 

As a result of conversions discussed in Note 8, Term Loans, the balance outstanding on the promissory note was $0 as of September 30, 2018. The Company recorded a gain of $59 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2018. On December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair value to be $59. The Company recorded a gain of $473 on the unaudited condensed consolidated statement of operations for the three months ended September 30, 2017, and a loss of $1 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017.

 

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,
2017
 
Principal amount and guaranteed interest   $ 75  
         
Conversion price per share      *   
Conversion trigger price per share      None   
Risk free rate     1.39 %
Life of conversion feature (in years)     0.25  
Volatility     195 %

 

 

* The conversion price per share was equal to the lesser of $10.00 or 75% of average daily VWAP for the fifteen trading days prior to the conversion date.

 

Dominion Capital LLC January 31, 2017 – Senior Convertible Debt Features

 

On January 31, 2017, the Company entered into a senior convertible promissory note with Dominion Capital, LLC in the original principal amount of $70, with interest accruing at the rate of 6% per annum, which matures on January 31, 2018. The note is convertible at the lower of (i) $40.00 or (ii) 80% of the lowest VWAP in the 15 trading days prior to the conversion date (for additional detail refer to Note 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On January 31, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $38 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

As a result of conversions, the balance outstanding on the promissory note was $0 as of September 30, 2018. The Company recorded a gain of $81 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2018. On December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair value to be $81. The Company recorded a gain of $3 on the unaudited condensed consolidated statement of operations for the three months ended September 30, 2017, and a loss of $26 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017.

 

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,
2017
 
Principal amount and guaranteed interest   $ 74  
         
Conversion price per share      *   
Conversion trigger price per share      None   
Risk free rate     1.28 %
Life of conversion feature (in years)     0.08  
Volatility     310 %

 

 

* The conversion price per share was equal to 70% of average daily VWAP for the fifteen trading days prior to the conversion date.

 

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 Topic 815, Derivatives and Hedging and ASC Topic 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 8, Term Loans, for additional detail).

 

As a result of conversions, the balance outstanding on the promissory note was $0 as of September 30, 0218 and December 31, 2017. The Company recorded the change in the fair value of the derivative liability for the three months ended September 30, 2017 as a gain of $43. The Company recorded the change in fair value of the derivative liability for the nine months ended September 30, 2017 as a loss of $7.

 

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 Topic 815, Derivatives and Hedging and ASC Topic 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 were 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 8, 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, 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 8, 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 8, 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 February 28, 2017, the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail). The Company accounted for the amended agreement in regards to the JGB Waltham debenture 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 agreement. The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $1,752 to its unaudited condensed consolidated statement of operations for the six months ended June 30, 2017.

 

On March 9, 2017, JGB (Cayman) Waltham entered into an Assignment and Assumption agreement with MEF I, LP (refer to Note 8, Term Loans, for further detail). The Company accounted for the assumption agreement in regards to the JGB Waltham debenture 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 agreement. The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $349 to its unaudited condensed consolidated statement of operations for the six months ended June 30, 2017. 

 

On September 30, 2018 and December 31, 2017, 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 $380 and $1,820, respectively. The Company recorded the change in the fair value of the derivative liability for the three months ended September 30, 2018 and 2017 as a gain of $487 and $474, respectively. The Company recorded the change in fair value of the derivative liability for the nine months ended September 30, 2018 and 2017 as a gain and loss of $1,440 and $1,934, respectively, which includes all extinguishment accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded in the unaudited condensed consolidated statements of operations. 

 

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

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 616     $ 3,091  
                 
Conversion price per share      *        *  
Conversion trigger price per share      None        None  
Risk free rate     2.36 %     1.76 %
Life of conversion feature (in years)     0.67       1.41  
Volatility     219 %     201 %

 

 
* The conversion price per share is equal to the lesser of $4.00 or 80% of VWAP on the conversion date.

 

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 8, 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 were amortized over the life of the loan.

 

On February 28, 2017, the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail). The Company accounted for the amended agreement in regards to the JGB Waltham 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 agreement. The Company recorded the change in the settlement features as a loss to change in fair value of derivative instruments of $141 to its unaudited condensed consolidated statement of operations for the six months ended June 30, 2017.

 

On September 30, 2018 and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement feature of the 2.7 Note and determined the fair value to be $42 and $120, respectively. The Company recorded a gain on fair value of derivative instruments of $18 and $42 for the three months ended September 30, 2018 and 2017, respectively. The Company recorded a gain and loss on fair value of derivative instruments of $78 and $82 for the nine months ended September 30, 2018 and 2017, respectively, which includes all extinguishment accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded on the unaudited condensed 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:

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 107     $ 294  
                 
Conversion price per share      *        *  
Conversion trigger price per share      None        None  
Risk free rate     2.19 %     1.39 %
Life of conversion feature (in years)     0.25       0.00  
Volatility     199 %     195 %

 

 

* The conversion price per share is equal to the lesser of $4.00 or 80% of VWAP on the conversion date.

 

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 8, 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 Topic 815, Derivatives and Hedging and ASC Topic 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 8, 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, 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 8, 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 2,250 shares of the Company’s common stock on June 23, 2016 to JGB Concord, which included a make-whole provision whereby the Company would pay JGB Concord in cash the difference between $376.00 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 8, 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 February 28, 2017, the Company entered into a consent agreement with JGB Concord and JGB Waltham (refer to Note 8, Term Loans, for further detail). The Company accounted for the amended agreement in regards to the JGB Concord Debenture 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 agreement. The Company recorded the change in the settlement features as a gain to change in fair value of derivative instruments of $2 to its unaudited condensed consolidated statement of operations for the six months ended June 30, 2017.

 

On September 30, 2018 and December 31, 2017, 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 $7 and $7, respectively. The Company recorded the change in fair value of derivative instruments for the three months ended September 30, 2018 and 2017 as a loss and gain of $1 and $152, respectively. The Company did not record a gain or loss on the change in fair value of derivative instruments for the nine months ended September 30, 2018. The Company recorded the change in fair value of derivative instruments for the nine months ended September 30, 2017 as a gain of $390, which includes all extinguishment accounting for the periods in accordance with ASC Topic 470-50. These changes were recorded in the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 11     $ 11  
                 
Conversion price per share      *        *  
Conversion trigger price per share      None        None  
Risk free rate     2.36 %     1.76 %
Life of conversion feature (in years)     0.67       1.41  
Volatility     219 %     201 %

 

 

* The conversion price per share is equal to the lesser of $4.00 or 80% of VWAP on the conversion date.

 

JGB Concord Make-Whole Provision 

 

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. Proceeds from the January 31, 2017 sale of the Company’s Highwire subsidiary were used to pay the remaining balance of the make-whole provision. On February 28, 2017, the Company used a binomial lattice model to value the make-whole provision and determined the fair value to be $814.

 

During the year ended December 31, 2017, the Company paid the balance owed for the make-whole provision.

The Company recorded a gain on fair value of derivative instruments of $5 for the nine months ended September 30, 2017 on the unaudited condensed consolidated statement of operations.

 

February 28, 2017 JGB Waltham Warrant 

 

On February 28, 2017, the Company entered into a securities exchange agreement with JGB Waltham whereby the Company issued a warrant giving JGB Waltham the right to purchase from the Company shares of common stock for an aggregate purchase price of up to $1,000. The warrant had an original expiration date of November 28, 2018 and contained a cashless exercise feature. The warrants had an exercise price of $16.00 until May 29, 2017 and the lower of (a) $16.00 and (b) 80% of the lowest VWAP of the Company’s common stock for the prior 30 days thereafter. On February 28, 2017, the Company used a binomial lattice calculation to value the warrants. The Company ascribed a value of $65 related to the warrants and recorded this item on the consolidated balance sheets as a derivative liability.

 

The Company recorded a gain of $401 on the unaudited condensed consolidated statement of operations for the three months ended September 30, 2017. The Company recorded a loss of $933 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017.

 

During the year ended December 31, 2017, JGB Waltham exercised the warrant in full for an aggregate purchase price of $1,000.

 

MEF I, L.P. Assignment and Assumption Agreement 

 

On March 9, 2017, the Company entered into a convertible promissory note with MEF I, L.P. pursuant to an assignment and assumption agreement (refer to Note 11, Term Loans, for additional detail on the assignment). The note is convertible at the lower of (i) $16.00 or (ii) 80% of the lowest VWAP in the 30 trading days prior to the conversion date. The Company evaluated the 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 March 9, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $250 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

The Company recorded a gain of $369 on the unaudited condensed consolidated statement of operations for the three months ended September 30, 2017. The Company recorded a gain of $250 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017. 

 

As a result of the conversion of the outstanding principal balance during the year ended December 31, 2017 (refer to Note 8, Term Loans, for further detail), the fair value of the corresponding derivative liability was $0 as of December 31, 2017. 

 

SRFF Warrant and Derivative

 

On September 8, 2016, the Company issued a warrant to purchase up to a total of 6,250 shares of common stock at any time on or prior to April 1, 2017. The exercise price of the warrant is $0.40. 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 was 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.

 

As of March 31, 2017, the Company did not have sufficient authorized shares for the remaining equity warrants to qualify as equity. Per ASC 815-40-35-9, the Company reclassified these warrants to a derivative liability at their fair value as of March 31, 2017. Based on a warrant to purchase up to a total of 2,500,000 shares of common stock and an underlying price of $0.03 per share, the Company recorded these warrants at fair value of $75 on the unaudited condensed consolidated balance sheet as of March 31, 2017.

 

On September 30, 2018 and December 31, 2017, the Company used a binomial lattice model to value the warrant derivative and determined the fair value to be $132 and $234, respectively. The Company did not record a gain or loss on change in fair value of derivative instruments for the three months ended September 30, 2018. The Company recorded a loss on change in fair value of derivative instruments of $54 for the three months ended September 30, 2017 on the unaudited condensed consolidated statement of operations. The Company recorded a gain on change in fair value of derivative instruments of $102 and $7, respectively, for the nine months ended September 30, 2018 and 2017 on the unaudited condensed consolidated statement of operations.

 

On September 30, 2018, the expiration date was extended until December 31, 2018.

 

The fair value of the warrant derivative as of September 30, 2018 and December 31, 2017 was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies:

 

    September 30,
2018
    December 31,
2017
 
Fair value of Company’s common stock   $ 0.003     $ 0.27  
Volatility     347 %     201 %
Exercise price     0.40       0.400  
Estimated life (in years)     0.25       0.25  
Risk free rate     2.19 %     1.39 %

 

RDW April 3, 2017 2.5% Convertible Promissory Note

 

On April 3, 2017, Scott Davis assigned 100% of his promissory note in the original principal amount of $250, reduced to $225 based on a $25 conversion into common stock, to RDW. This note was convertible at a price of $888.00 per share and was due on demand. As consideration for the assignment RDW paid Scott Davis $40. RDW then exchanged this original note for a new 2.5% convertible promissory note in the principal amount of $100 due April 3, 2018. The conversion price of the new note was equal to 75% of the average of the five lowest VWAPS over the seven trading days prior to the date of conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On April 25, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $39 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

As a result of the conversion of the outstanding principal balance during the year ended December 31, 2017 (refer to Note 8, Term Loans, for further detail), the fair value of the corresponding derivative liability was $0 as of September 30, 2018 and December 31, 2017. The Company recorded a gain of $39 on the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2017.

 

RDW July 14, 2017 9.9% Convertible Promissory Note

 

On July 14, 2017, the Company issued a convertible promissory note to RDW in the principal amount of $155, which bore interest at the rate of 9.9% per annum, and had an original maturity date of July 14, 2018. The note was convertible at the lower of (i) $4.00 or (ii) 75% of the average of the lowest five VWAPS over the seven trading days prior to the date of conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On July 14, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $126 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

As a result of the conversion of the outstanding principal balance during the nine months ended September 30, 2018 (refer to Note 8, Term Loans, for further detail), the fair value of the corresponding derivative liability was $0 as of September 30, 2018. The Company recorded a gain on fair value of derivative instruments of $64 for the nine months ended September 30, 2018, on the unaudited condensed consolidated statement of operations. The Company recorded a gain on fair value of derivative instruments of $53 for the three and nine months ended September 30, 2017 on the unaudited condensed consolidated statement of operations.

 

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

 

    December 31,
2017
 
Principal amount and guaranteed interest   $ 162  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     1.53 %
Life of conversion feature (in years)     0.53  
Volatility     198 %

 

 
* The conversion price per share was equal to the lesser of $4.00 or 75% of the average of the lowest 5 prices during the 7 days preceding the conversion date.

 

Assignment of Tim Hannibal Note - RDW July 18, 2017 2.5% Convertible Promissory Note

 

On July 18, 2017, Tim Hannibal assigned 100% of his 8% convertible promissory note in the original principal amount of $1,215, due October 9, 2017, to RDW. This note was convertible into the Company’s common stock at a price of $2,548.00 per share. RDW then exchanged this original note for a new 2.5% convertible promissory note in the principal amount of $1,215 due July 18, 2018. The conversion price of the new note was equal to the lower of (i) $4.00 or (ii) 75% of the average of the lowest five VWAPS over the seven trading days prior to the date of conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On July 18, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $911 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

During the year ended December 31, 2017, the holder of the July 18, 2017 convertible promissory note converted the outstanding principal balance into shares of the Company’s common stock (refer to Note 8, Term Loans, for further detail). As a result of the conversions, the fair value of the derivative liability was $0 at December 31, 2017. The Company recorded a gain on fair value of derivative instruments of $679 for the three and nine months ended September 30, 2017 on the unaudited condensed consolidated statement of operations. 

 

RDW September 27, 2017 9.9% Convertible Promissory Note 

 

On September 27, 2017, the Company entered into a convertible promissory note with RDW in the principal amount of $155, which bore interest at the rate of 9.9% per annum, and had an original maturity date of September 27, 2018. The note was convertible at the lower of (i) $4.00 or (ii) 75% of the average of the lowest five VWAPS over the twenty trading days prior to the date of conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On September 27, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $122 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability. 

 

As a result of conversions discussed in Note 8, Term Loans, the balance outstanding on the promissory note was $0 as of September 30, 2018. The Company recorded a gain of $108 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2018. On December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the senior convertible note and determined the fair value to be $108.

 

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

 

    December 31,
2017
 
Principal amount and guaranteed interest   $ 163  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     1.95 %
Life of conversion feature (in years)     0.49  
Volatility     255 %

 

 

* The conversion price per share was equal to the lesser of $4.00 or 75% of the average of the lowest 5 prices during the 20 days preceding the conversion date.

 

RDW October 12, 2017 9.9% Convertible Promissory Note

 

On October 12, 2017, Frank Jadevaia, former owner of IPC, assigned $400 of his outstanding promissory notes to RDW. The new note is in the principal amount of $400, bears interest at the rate of 9.9% per annum, and matures on September 27, 2018. The note is convertible at the lower of (i) $4.00 or (ii) 75% of the lowest VWAP over the twenty trading days prior to the date of conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On October 12, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $374 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018 and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $11 and $121, respectively. The Company recorded a gain on fair value of derivative instruments of $53 for the three months ended September 30, 2018 on the unaudited condensed consolidated statement of operations. The Company recorded a gain on fair value of derivative instruments of $110 for the nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 14     $ 140  
                 
Conversion price per share      *        *  
Conversion trigger price per share      None        None  
Risk free rate     2.19 %     1.73 %
Life of conversion feature (in years)     0.03       0.78  
Volatility     199 %     191 %

 

 

* The conversion price per share is equal to the lesser of $4.00 or 75% of the lowest VWAP over the twenty trading days prior to the date of conversion

 

RDW December 8, 2017 9.9% Convertible Promissory Note 

 

On December 8, 2017, London Bay – VL Holding Company LLC assigned $600 of an outstanding promissory note to RDW. The new note is in the principal amount of $600, bears interest at the rate of 9.9% per annum, and matures on December 8, 2018. The note is convertible at the lower of (i) $4.00 or (ii) 65% of the lowest VWAP over the twenty trading days prior to the date of conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On December 8, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $600 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018 and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $257 and $617, respectively. The Company recorded a gain on fair value of derivative instruments of $128 for the three months ended September 30, 2018 on the unaudited condensed consolidated statement of operations. The Company recorded a gain on fair value of derivative instruments of $360 for the nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 214     $ 484  
                 
Conversion price per share      *        *  
Conversion trigger price per share      None        None  
Risk free rate     2.19 %     1.76 %
Life of conversion feature (in years)     0.19       0.94  
Volatility     205 %     225 %

 

 

* The conversion price per share is equal to the lesser of $4.00 or 65% of the lowest VWAP over the twenty trading days prior to the date of conversion

  

RDW July 6, 2018 8% Convertible Promissory Note

 

On July 6, 2018, Tim Hannibal assigned 100% of his 8% promissory note in the original principal amount of $300, which matured on January 9, 2018, to RDW. RDW then exchanged this original note for a new 8% convertible promissory note with a principal amount of $300 due November 27, 2018. The note is convertible at the lower of (i) $0.04 or (ii) 65% of the lowest VWAP in the 20 trading days prior to the conversion date. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On July 6, 2018, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $228 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $184. The Company recorded a gain on fair value of derivative instruments of $44 for the three and nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
 
Principal amount and guaranteed interest   $ 154  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     2.12 %
Life of conversion feature (in years)     0.16  
Volatility     187 %

 

 

* The conversion price per share is equal to the lesser of $0.04 or 55% of the lowest VWAP over the twenty trading days prior to the date of conversion

 

London Bay – VL Holding Company LLC November 17, 2017 Amendment

 

On November 17, 2017, the Company amended a convertible promissory note originally issued to London Bay – VL Holding Company LLC on October 9, 2014. The amendment extended the maturity date to October 9, 2018. The amended note is in the principal amount of $2,003 and does not accrue interest. The note is convertible at 95% of the average of the three lowest prices during the 5 days preceding conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On November 17, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $282 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018 and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $200 and $190, respectively. The Company recorded a gain on fair value of derivative instruments of $86 for the three months ended September 30, 2018 on the unaudited condensed consolidated statement of operations. The Company recorded a loss on fair value of derivative instruments of $10 for the nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 1,513     $ 1,426  
                 
Conversion price per share     *       *  
Conversion trigger price per share     None       None  
Risk free rate     2.19 %     1.76 %
Life of conversion feature (in years)     0.02       0.77  
Volatility     199 %     204 %

 

 
* The conversion price per share is equal to 95% of the average of the three lowest prices during the 5 days preceding conversion

  

WV VL Holding Corp November 17, 2017 Amendment

 

On November 17, 2017, the Company amended a convertible promissory note originally issued to WV VL Holding Corp on October 9, 2014. The amendment extended the maturity date to October 9, 2018. The amended note is in the principal amount of $2,005 and does not accrue interest. The note is convertible at 95% of the average of the three lowest prices during the 5 days preceding conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On November 17, 2017, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $282 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018 and December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $284 and $271, respectively. The Company recorded a gain on fair value of derivative instruments of $123 for the three months ended September 30, 2018 on the unaudited condensed consolidated statement of operations. The Company recorded a loss on fair value of derivative instruments of $13 for the nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 2,153     $ 2,028  
                 
Conversion price per share      *        *  
Conversion trigger price per share      None        None  
Risk free rate     2.19 %     1.76 %
Life of conversion feature (in years)     0.02       0.77  
Volatility     199 %     204 %

 

 
* The conversion price per share is equal to 95% of the average of the three lowest prices during the 5 days preceding conversion

 

SCS LLC February 27, 2018 Convertible Promissory Note

 

On February 27, 2018, the Company issued a convertible promissory note to SCS, LLC. The note has a principal amount of $150, accrues interest at the rate of 12% per annum, and is due on February 27, 2019. The note is convertible into shares of the Company’s common stock at a conversion price per share equal to 80% of the average of the three (3) lowest VWAPs over the five (5) trading days prior to the conversion date. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On February 27, 2018, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $70 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On July 6, 2018, SCS, LLC assigned 100% of its 12% promissory note in the original amount of $150 to Bellridge Capital, L.P. The Company recorded a loss on fair value of derivative of $14 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2018.

   

Bellridge Capital, L.P Assignment Agreement

 

On August 20, 2018, SCS LLC assigned 100% of its 12% promissory note in the original principal amount of $150, due February 27, 2019, to Bellridge Capital. The note is convertible into shares of the Company’s common stock at a conversion price per share equal to 80% of the average of the three (3) lowest VWAPs over the five (5) trading days prior to the conversion date. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On August 20, 2018, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $84 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $70. The Company recorded a gain on fair value of derivative instruments of $14 for the three and nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
 
Principal amount and guaranteed interest   $ 132  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     2.36 %
Life of conversion feature (in years)     0.41  
Volatility     302 %

 

 

* The conversion price per share is equal to 80% of the average of the three lowest VWAPs during the 5 days preceding conversion

 

BOU Trust 8% Convertible Promissory Note

 

On August 17, 2018, the Company issued a convertible promissory note to BOU Trust. The note has a principal amount of $31, bears interest at the rate of 8% per annum, and is due on August 17, 2019. The note is convertible at the lower of (i) $0.04 or (ii) 55% of the lowest VWAP over the twenty trading days prior to the date of conversion. The Company evaluated the 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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On August 17, 2018, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $48 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $51. The Company recorded a loss on fair value of derivative instruments of $3 for the three and nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
 
Principal amount and guaranteed interest   $ 31  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     2.59 %
Life of conversion feature (in years)     0.88  
Volatility     210 %

 

 

* The conversion price per share is equal to the lesser of $0.04 or 55% of the lowest VWAP over the twenty trading days prior to the date of conversion

 

Pryor Cashman LLP Warrant

  

On February 23, 2018, the Company issued a warrant to purchase up to 5,000,000 shares of its common stock to Pryor Cashman LLP. The warrant expires on May 23, 2019 and is exercisable at a per share price equal to the lower of (i) $0.075 and (ii) 25% of the closing price of the Company’s common stock on the trading day immediately preceding the date of exercise. The Company evaluated the warrant’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 Topic 815, Derivatives and Hedging and ASC Topic 480, Distinguishing Liabilities from Equity. On February 23, 2018, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $1,798 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability.

 

On September 30, 2018, the Company used a binomial lattice model to value the settlement features of the warrant and determined the fair value to be $12. The Company recorded a gain on fair value of derivative instruments of $214 for the three months ended September 30, 2018 on the unaudited condensed consolidated statement of operations. The Company recorded a gain on fair value of derivative instruments of $1,786 for the nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

  

The fair value of the warrant derivative at the measurement date was calculated using a binomial lattice pricing model with the following factors, assumptions and methodologies: 

 

    September 30,
2018
 
Fair value of Company’s common stock   $ 0.003  
Volatility     176 %
Exercise price     0.00075  
Estimated life (in years)     0.64  
Risk free rate     2.59 %

 

RAI Capital, LLC Settlement Agreement

 

On July 17, 2018, RAI Capital, LLC (“RAI Capital”) purchased the right to collect the balance of an unpaid judgment against the Company by White Winston Select Asset Funds, LLC pursuant to a receivable purchase agreement. The amount initially owed to RAI Capital was $849, plus interest, fees, costs and expenses. The Company entered into a Stipulation for Settlement of Claims (the “Settlement”) with RAI Capital to settle the judgment claim in exchange for the issuance to RAI Capital of shares of common stock of the Company. The settlement was court approved under 25017(f)(3) of the California Corporations Code and Section 3(a)(10) of the Securities Act of 1933, as amended (“Securities Act”). The conversion price per share is equal to 75% of the VWAP on the date of conversion.

 

During the nine months ended September 30, 2018, RAI Capital converted $139 of accrued expenses into shares of the Company’s common stock (refer to Note 11, Stockholders’ Deficit, for further information). As a result of these conversions, the Company recorded a loss on extinguishment of debt of $16 to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018.

 

The Company evaluated the settlement agreement’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 Topic 815, Derivatives and Hedgingand ASC Topic 480, Distinguishing Liabilities from Equity. On July 17, 2018, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed a value of $283 related to the conversion feature and recorded this item on the consolidated balance sheets as a derivative liability. 

 

On September 30, 2018, the Company used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $237. The Company recorded a gain on fair value of derivative instruments of $46 for the three and nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations.

 

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

 

    September 30,
2018
 
Principal amount and guaranteed interest   $ 710  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     2.59 %
Life of conversion feature (in years)     0.91  
Volatility     209 %

 

 
* The conversion price per share is equal to 75% of the VWAP on the date of conversion

 

Series K, L, and M Preferred Stock Embedded Conversion Features

 

On October 12, 2017, the Company issued 227 shares of the Company’s Series L preferred stock pursuant to an exchange of promissory notes (refer to Note 14, Preferred Stock, for further detail). The Series L preferred stock was originally convertible into common stock of the Company at 105% of the weighted average trading price for the five days prior to conversion

 

On November 10, 2017, the Company issued 1,512 shares of the Company’s Series K preferred stock pursuant to an exchange of promissory notes (refer to Note 14, Preferred Stock, for further detail). The Series K preferred stock is convertible into common stock of the Company at the lower of $3.00 or 95% of the weighted average trading price for the five days prior to conversion.

 

On December 1, 2017, the Company issued 386 shares of the Company’s Series M preferred stock pursuant to an exchange of warrants (refer to Note 14, Preferred Stock, for further detail). The Series M preferred stock was originally convertible into common stock of the Company at 105% of the weighted average trading price for the five days prior to conversion. In accordance with ASC 480, Distinguishing Liabilities from Equity, the Company classified the Series M preferred stock as a liability.

 

The Company evaluated the embedded conversion features of the Series K and L preferred stock and concluded that they needed to be bifurcated. The Series M preferred stock was also recorded at its fair value. At the issuance dates, the Company used a Monte Carlo simulation to value the settlement features. The Company ascribed values of $15,748 and $1,664 related to the conversion features of the Series K and L preferred stock, respectively, and recorded these items on the consolidated balance sheets as a derivative liability. The Series M preferred stock was ascribed a value of $3,015 and recorded as a liability.

  

On July 3, 2018, the Company amended its Certificate of Designation for its Series M preferred stock (refer to Note 14, Preferred Stock, for further detail). Per the amended Certificate of Designation, the conversion price was changed to the greater of $0.01 or 105% of the average closing VWAP price for the 5 days immediately preceding the conversion date. In accordance with ASC Topic 470-50, the Company treated the amendment as a debt extinguishment. The Company used a Monte Carlo simulation to value the settlement features as of July 3, 2018. The Series M preferred stock was ascribed a value of $2,625. The Company recorded a loss on extinguishment of debt of $130 to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018. Post amendment, the instrument is no longer predominantly an obligation to issue a variable number of shares for a fixed monetary amount and thus the instrument as a whole is no longer classified as a liability. However, due to the variable conversion feature, the Company cannot assert it would have sufficient authorized, but unissued shares to settle all future conversion requests and as such the embedded conversion option has been bifurcated and classified as a derivative liability and the host instrument is deemed to be conditionally redeemable, and, accordingly is classified as temporary equity in the unaudited condensed consolidated balance sheet as of September 30, 2018.

 

On July 17, 2018, the Company amended its Certificate of Designation for its Series L preferred stock (refer to Note 14, Preferred Stock, for further detail). Per the amended Certificate of Designation, the conversion price was changed to the greater of $0.01 or a 35% discount to the lowest VWAP for the 5 trading days immediately preceding the conversion date. The Company treated the amendment as a debt extinguishment. The Company used a Monte Carlo simulation to value the settlement features as of July 17, 2018. The Series L preferred stock settlement features were ascribed a value of $1,424. The Company recorded a gain on extinguishment of debt of $301 to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018.

  

On September 30, 2018, the Company used a Monte Carlo simulation to value the settlement features of the Series K, L, and M preferred stock and determined the fair values to be $13,352, $1401, and $2,378, respectively. On December 31, 2017, the Company used a Monte Carlo simulation to value the settlement features of the Series K, L, and M preferred stock and determined the fair values to be $14,247, $1,743, and $3,021, respectively. The Company recorded a gain on fair value of derivative instruments of $241 and $895, respectively, for the three and nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations for the settlement features of the Series K preferred stock. The Company recorded a gain on fair value of derivative instruments of $23 and $41, respectively, for the three and nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations for the settlement features of the Series L preferred stock. The Company recorded a gain on change in fair value of derivative instruments of $9 for the three and nine months ended September 30, 2018 on the unaudited condensed consolidated statement of operations. The Company recorded a gain on change in fair value of the Series M preferred stock liability of $171 for the nine months ended September 30, 2018.

 

The fair value of the embedded conversion features of the Series K and L preferred stock as of September 30, 2018 and December 31, 2017, as well as the fair value of the embedded conversions features of the Series M preferred stock as of September 30, 2018 and the fair value of the Series M preferred stock as of December 31, 2017, at the measurement date was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    Series K Preferred Stock     Series L Preferred Stock     Series M Preferred Stock     Series K Preferred Stock     Series L Preferred Stock     Series M Preferred Stock  
    September 30,
2018
    September 30,
2018
    September 30,
2018
    December 31,
2017
    December 31,
2017
    December 31,
2017
 
Fair value of Company’s common stock   $ 0.003     $ 0.003     $ 0.003     $ 0.27     $ 0.27     $ 0.27  
Volatility     161 %     163 %     161 %     160 %     160 %     159 %
Exercise price     3.00       3.00       3.00       3.00       3.00       3.00  
Estimated life     4.12       4.04       4.17       4.86       4.78       4.92  
Risk free interest rate (based on 1-year treasury rate)     2.94 %     2.94 %     2.92 %     2.20 %     2.20 %     2.26 %