Quarterly report pursuant to Section 13 or 15(d)

Warrants

v2.4.0.6
Warrants
3 Months Ended
Mar. 31, 2013
Warrants [Abstract]  
Warrants

13. Warrants

As of March 31, 2013, warrants to purchase 21,656,142 shares were outstanding, having exercise prices ranging from $0.41 to $1.90 and expiration dates ranging from August 8, 2013 to December 4, 2017.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

2012

 

Number of warrants

Weighted average exercise price

Number of warrants

Weighted average exercise price

Balance, January 1

21,656,142

$

0.89 
8,676,142 

$

1.53 

Issued during the period

 -

 

 -

 -

$

 -

Exercised during the period

         -

 

        -

 -

$

 -

Expired during the period

         -

 

        -

 -

$

 -

 

 

 

 

 

 

 

Balance, March 31

21,656,142 

$

0.89 
8,676,142 

$

1.53 

At March 31, 2013 and December 31, 2012, the average remaining contractual life of the outstanding warrants was 3.6 and 3.8 years, respectively.

 

The warrants, which were issued to investors in the December 2007, March 2008, May 2009, October 2009, June 2010, March 2011 and December 2012 offerings, contain a provision for net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer, or share exchange).   If a fundamental transaction occurs in which the consideration issued consists principally of cash or stock in a non-public company, then the warrant holder has the option to receive cash, equal to the fair value of the remaining unexercised portion of the warrant.  Due to this contingent redemption provision, the warrants require liability classification in accordance with ASC 480 and are recorded at fair value.  In addition, the warrants issued in the May 2009, October 2009, June 2010, March, 2011 and December 2012 offerings contain a cashless exercise provision that is exercisable only in the event that a registration statement is not effective, which provision may not be operative if an effective registration statement is not available because of an exemption under the U.S. Securities laws may not be available to issue unregistered shares.  As a result, net cash settlement may be required.

 

ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition.  Fair values for warrants are determined using the Binomial Lattice (“Lattice”) valuation technique. The Lattice model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, the Company provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Lattice model to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario.

 

Significant assumptions are determined as follows:

Trading market values—published trading market values;

Exercise price—Stated exercise price;

Term—remaining contractual term of the warrant;

Volatility—Historical trading volatility for periods consistent with the remaining terms;

Risk-free rate—Yields on zero coupon government securities with remaining terms consistent with the remaining terms of the warrants.

 

Due to the fundamental transaction provision, which could provide for early redemption of the warrants, the model also considered the probability the Company would enter into a fundamental transaction during the remaining term of the warrant. Since the Company is still in its development stage and is not yet achieving positive cash flow, management believes the probability of a fundamental transaction occurring over the term of the warrant is unlikely and therefore estimates the probability of entering into a fundamental transaction to be 5%.  For valuation purposes, the Company also assumed that if such a transaction did occur, it was more likely to occur towards the end of the term of the warrants.

 

The warrants issued in December 2007 and March 2008 were not only subject to traditional anti-dilution protection, such as stock splits and dividends, but they were also subject to down-round anti-dilution protection. Accordingly, if the Company sold common stock or common stock indexed financial instruments below the stated exercise price, the exercise price related to these warrants will adjust to that lower amount.  The Lattice model used to value the warrants with down-round anti-dilution protection provides for multiple, probability-weighted scenarios at the stated exercise price and at five additional decrements/scenarios on each valuation date in order to encompass the value of the anti-dilution provisions in the estimate of fair value of the warrants. Calculations were performed at the stated exercise price and at five additional decrements/scenarios on each valuation date. The calculations provided for multiple, probability-weighted scenarios reflecting decrements that result from declines in the market prices. Decrements are predicated on the trading market prices in decreasing ranges below the contractual exercise price. For each valuation date, multiple Binomial Lattice calculations were performed which were probability weighted by considering both the Company’s (i) historical market pricing trends, and (ii) an outlook for whether or not the Company may need to issue equity or equity-indexed instruments in the future with a price less than the current exercise price.

 

The significant unobservable inputs used in the fair value measurement of the warrants include management’s estimate of the probability that a fundamental transaction may occur in the future.  Significant increases (decreases) in the probability of occurrence would result in a significantly higher (lower) fair value measurement.

 

The following table summarizes the fair value of the warrants as of the respective balance sheet or transaction dates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of:

Warrant Issuance:

 

March 31, 2013

December 31, 2012

Transaction Date

December 18, 2007 financing

 

$

-     

$

 -     

$

1,392,476 

March 20, 2008 financing

 

 

-

 

-

 

190,917 

June 5, 2009 financing:

 

 

 

 

 

 

 

    Series I warrants

 

 

-

 

-

 

707,111 

    Series II warrants

 

 

-

 

-

 

1,315,626 

    Series III warrants

 

 

5,289 

 

35,311 

 

1,306,200 

    Warrants to placement agent

 

 

634 

 

3,489 

 

122,257 

October 23, 2009 financing:

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

32,059 

 

73,454 

 

1,012,934 

    Warrants to placement agent

 

 

 -

 

41 

 

101,693 

June 30, 2010 financing

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

3,400 

 

12,200 

 

1,800,800 

    Warrants to placement agent

 

 

 -

 

20 

 

180,080 

March 31, 2011 financing:

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

209,667 

 

306,333 

 

2,826,666 

    Warrants to placement agent

 

 

 -

 

83 

 

97,667 

December 4, 2012 financing:

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

2,096,930 

 

2,263,910 

 

2,474,120 

    Warrants to placement agent

 

 

125,184 

 

147,224 

 

163,096 

Total:

 

$

2,473,163 

$

2,842,065 

$

13,691,643 

 

The following table summarizes the number of shares indexed to the warrants as of the respective balance sheet or transaction dates:

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares indexed as of:

Warrant Issuance

 

March 31, 2013

December 31, 2012

Transaction Date

December 18, 2007 financing

 

          -     

          -     

1,078,579 

March 20, 2008 financing

 

          -     

          -     

128,572 

June 5, 2009 financing:

 

 

 

 

    Series I warrants

 

-

-

2,222,222 

    Series II warrants

 

-

-

1,866,666 

    Series III warrants

 

1,555,555 
1,555,555 
1,555,555 

    Warrants to placement agent

 

132,143 
132,143 
142,857 

October 23, 2009 financing:

 

 

 

 

    Warrants to institutional investors

 

1,228,333 
1,228,333 
2,125,334 

    Warrants to placement agent

 

18,445 
18,445 
245,932 

June 30, 2010 financing

 

 

 

 

    Warrants to institutional investors

 

2,000,000 
2,000,000 
2,000,000 

    Warrants to placement agent

 

200,000 
200,000 
200,000 

March 31, 2011 financing:

 

 

 

 

    Warrants to institutional investors

 

3,333,333 
3,333,333 
3,333,333 

    Warrants to placement agent

 

208,333 
208,333 
208,333 

December 4, 2012 financing:

 

 

 

 

    Warrants to institutional investors

 

12,100,000 
12,100,000 
12,100,000 

    Warrants to placement agent

 

880,000 
880,000 
880,000 

Total:

 

21,656,142 
21,656,142 
28,087,383 

The assumptions used in calculating the fair values of the warrants are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 18, 2007 financing:

 

March 31, 2013

December 31, 2012

Transaction Date

 

Trading market prices

 

$

 -

 

$

 -

 

$

1.75 

 

Estimated future volatility

 

 

-

 

 

-

 

 

143 

%

Dividend

 

 

-

 

 

-

 

 

-

 

Estimated future risk-free rate

 

 

-

 

 

-

 

 

3.27 

%

Equivalent volatility

 

 

-

 

 

-

 

 

106 

%

Equivalent risk-free rate

 

 

-

 

 

-

 

 

3.26 

%

Estimated additional shares to be issued upon dilutive event

 

 

-

 

 

-

 

 

98,838 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 20, 2008 financing:

 

March 31, 2013

December 31, 2012

Transaction Date

 

Trading market prices

 

$

 -

 

$

 -

 

$

2.14 

 

Estimated future volatility

 

 

-

 

 

-

 

 

142 

%

Dividend

 

 

-

 

 

-

 

 

-

 

Estimated future risk-free rate

 

 

-

 

 

-

 

 

1.95 

%

Equivalent volatility

 

 

-

 

 

-

 

 

97 

%

Equivalent risk-free rate

 

 

-

 

 

-

 

 

1.31 

%

Estimated additional shares to be                      issued upon dilutive event

 

 

-

 

 

-

 

 

7,479 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 5, 2009 financing:

 

March 31, 2013

December 31, 2012

Transaction Date

 

Trading market prices

 

$

0.31 

 

$

0.31 

 

$

1.14 

 

Estimated future volatility

 

 

100 

%

 

100 

%

 

100 

%

Dividend

 

 

-

 

 

-

 

 

-

 

Estimated future risk-free rate

 

 

0.14 

%

 

0.16 

%

 

0.63-4.31

%

Equivalent volatility

 

 

70 

%

 

92 

%

 

103-117

%

Equivalent risk-free rate

 

 

0.10 

%

 

0.11 

%

 

0.20-1.44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 23, 2009 financing:

 

March 31, 2013

December 31, 2012

Transaction Date

 

Trading market prices

 

$

0.31 

 

$

0.31 

 

$

0.69 

 

Estimated future volatility

 

 

100 

%

 

100 

%

 

100 

%

Dividend

 

 

-

 

 

-

 

 

-

 

Estimated future risk-free rate

 

 

0.14-0.36

%

 

0.16-0.34

%

 

2.63-3.80

%

Equivalent volatility

 

 

44-76

%

 

74-93

%

 

98-99

%

Equivalent risk-free rate

 

 

0.06-0.11

%

 

0.06-0.13

%

 

0.93-1.16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2010 financing:

 

March 31, 2013

December 31, 2012

Transaction Date

 

Trading market prices

 

$

0.31 

 

$

0.31 

 

$

1.43 

 

Estimated future volatility

 

 

100 

%

 

100 

%

 

100 

%

Dividend

 

 

-

 

 

-

 

 

-

 

Estimated future risk-free rate

 

 

0.14 

%

 

0.16-0.34

%

 

1.78 

%

Equivalent volatility

 

 

44-69

%

 

74-75

%

 

98 

%

Equivalent risk-free rate

 

 

0.06-0.10

%

 

0.06 

%

 

0.59 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2011 financing:

 

March 31, 2013

December 31, 2012

Transaction Date

 

Trading market prices

 

$

0.31 

 

$

0.31 

 

$

1.18 

 

Estimated future volatility

 

 

87-100

%

 

93-100

%

 

100 

%

Dividend

 

 

-

 

 

-

 

 

-

 

Estimated future risk-free rate

 

 

0.14-0.58

%

 

0.16-0.58

%

 

1.32-3.64

%

Equivalent volatility

 

 

44-79

%

 

74-89

%

 

79-96

%

Equivalent risk-free rate

 

 

0.06-0.21

%

 

0.06-0.23

%

 

0.39-1.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 4, 2012 financing:

 

March 31, 2013

December 31, 2012

Transaction Date

 

Trading market prices

 

$

0.31 

 

$

0.31 

 

$

0.30-0.33

 

Estimated future volatility

 

 

88-100

%

 

85-100

%

 

100 

%

Dividend

 

 

-

 

 

-

 

 

-

 

Estimated future risk-free rate

 

 

0.58-1.39

%

 

0.58-1.26

%

 

0.52-1.065

%

Equivalent volatility

 

 

79-84

%

 

88 

%

 

88-90

%

Equivalent risk-free rate

 

 

0.20-0.29

%

 

0.21-0.32

%

 

0.22-0.31

%

 

 

Changes in the fair value of the warrant liabilities, carried at fair value, as reported as “unrealized gain (loss) on fair value of warrants” in the statement of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended      March 31, 2013

Three Months Ended        March 31, 2012

Cumulative from March 19, 2001 (Inception) to   March 31, 2013

December 18, 2007 financing

 

$

 -

$

 -

$

50,722 

March 20, 2008 financing

 

 

-

 

 -

 

160,063 

June 5, 2009 financing:

 

 

 

 

 

 

 

    Series I warrants

 

 

-

 

-

 

707,111 

    Series II warrants

 

 

-

 

-

 

(2,191,175)

    Series III warrants

 

 

30,022 

 

(14,622)

 

1,300,911 

    Warrants to placement agent

 

 

2,855 

 

(1,665)

 

107,243 

    Derivative loss at inception

 

 

-

 

-

 

(328,937)

October 23, 2009 financing:

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

41,395 

 

(42,131)

 

(68,365)

    Warrants to placement agent

 

 

41 

 

(728)

 

(135,938)

June 30, 2010 financing

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

8,800 

 

(17,800)

 

1,797,400 

    Warrants to placement agent

 

 

20 

 

(20)

 

180,080 

March 31, 2011 financing:

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

96,666 

 

(184,333)

 

2,616,999 

    Warrants to placement agent

 

 

83 

 

(562)

 

97,667 

December 4, 2012 financing:

 

 

 

 

 

 

 

    Warrants to institutional investors

 

 

166,980 

 

 -

 

377,190 

    Warrants to placement agent

 

 

22,040 

 

 -

 

37,912 

Total:

 

$

368,902 

$

(261,861)

$

4,708,883