Quarterly report pursuant to Section 13 or 15(d)

Derivative Liability

v3.21.1
Derivative Liability
3 Months Ended
Mar. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Liability

NOTE 4 - Derivative Liability

 

On March 26, 2021, the Company issued warrants to purchase an aggregate of 2,190,000 shares of common stock to holders in a private placement concurrently with a registered direct offering of 2,190,000 shares of its common stock. The warrants entitle the holders to purchase one share of our common stock at an exercise price equal to $4.32 per share commencing on the date the Company receives stockholder approval to increase its authorized common shares from 12,000,000 to 24,000,000 (the “Initial Exercise Date”) and will expire two years from the Initial Exercise Date. The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the registered direct offering. Management also determined that the Company currently does not have sufficient authorized and unissued shares to settle the warrants, and as such required classification as a liability pursuant to ASC 815 “Derivative Instruments and Hedging”. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations.

 

The Company has called a Special Stockholders’ Meeting (the “Special Meeting”) for May 24, 2021, where it will seek stockholder approval to increase its authorized shares. Upon such approval, the Company will reclassify the warrant liability to equity pursuant to ASC 815-40-35-8. However, in the event that the Company does not receive stockholder approval to increase its authorized shares, the Company will continue to account for the outstanding warrants as a derivative liability and will be required to call a meeting of stockholders every 75 days after the Special Meeting to seek approval of the increase in authorized shares to not be in breach of the Securities Purchase Agreement.

 

The fair value of the derivative liability presented below was measured using the Black Scholes valuation model. Significant inputs into the model for the three months ended March 31, 2021 are as follows:

 

    March 31, 2021  
Dividend yield     0.00 %
Risk-free interest rate     0.7 %
Expected volatility     121.2 % - 121.7 %
Expected life (in years)     2  

 

The warrants outstanding and fair values at each of the respective valuation dates are summarized below:

 

    Warrants     Fair Value        
Warrant Liability   Outstanding     per Share     Fair Value  
Fair Value at initial measurement date of March 26, 2021     2,190,000     $ 2.61     $ 5,708,212  
(Gain) on change in Fair Value of warrant liability                     (802,285 )
Fair Value as of March 31, 2021     2,190,000     $ 2.24     $ 4,905,927  

 

The Company has presented the fair value measurement as a Level 3 measurement, relying on unobservable inputs reflecting management’s assumptions. Level 3 measurements, which are not based on quoted prices in active markets, introduce a higher degree of subjectivity and may be more sensitive to fluctuations in stock prices, volatility rates and U.S. Treasury Bond rates and could have a material impact on future fair value measurements.

 

The Company uses the Black Scholes model, based on the adjusted historical volatility rates for fair value measurements through the date of Shareholder Approval. Management has determined the Black Scholes model to be the most reliable and least volatile determinate of the current fair value of the warrants. It is the Company’s expectation to maximize on all observable market inputs for the warrants and calibrate the model to incorporate relevant observable market data into the fair value measurement at each future measurement date, if applicable.

 

During the three months ended March 31, 2021, the company recognized a gain of $802,285 on the change in fair value of warrants.