Annual report pursuant to Section 13 and 15(d)

16. Common Stock Options and Warrants

v3.6.0.2
16. Common Stock Options and Warrants
12 Months Ended
Sep. 30, 2016
Notes  
16. Common Stock Options and Warrants

16.                Common Stock Options and Warrants

The fair value of each stock option or warrant is estimated on the date of grant using a binomial option-pricing model or the Monte Carlo valuation model.  The expected life of stock options or warrants represents the period of time that the stock options or warrants are expected to be outstanding, based on the simplified method.  Expected volatilities are based on historical volatility of the Company's common stock, among other factors.  The Company uses the simplified method within the binomial option-pricing valuation model due to the Company's short trading history.  The risk-free rate related to the expected term of the stock options or warrants is based on the US Treasury yield curve in effect at the time of grant.  The dividend yield is zero.

 

During fiscal 2016, the Company granted warrants to purchase 12,015,350 common shares with an exercise price of $0.065 per share in connection with the acquisition of a note payable and line of credit; warrants for the purchase of 7,392,800 shares vested immediately, 1,847,550 vested upon the disbursement of the second tranche of the related note payable, and 2,775,000 vest evenly in the event of three available increases on the related line of credit (see Note 9).  The warrants expire in February 2023, may be settled in a cashless exercise, and are puttable upon expiration or liquidation for the greater of $500,000 or up to 6.5% of the equity value of the Company, depending on the number of warrants vested.  The fair value of the warrants upon grant of $3,731,969 was recorded as a derivative and the Company received cash of $2,967 upon issuance of the warrants.  The Company recognized $1,419,541 as debt discount for the portion allocated to the note payable and the debt discount is being amortized over the life of the note payable to interest expense.  During September 2016, the Company entered into a conditionally effective warrant cancellation agreement with the warrant holders (see Note 19).

During February 2016, the Company exchanged warrants held by the holders of its Series F preferred stock for the purchase of 5,534,097 shares of common stock in connection with the redemption of Series F preferred stock for new warrants for the purchase of the same number of shares on different terms.  The new warrants were initially exercisable for $0.30 per share, adjustable to any lower rates granted through equity sales or other conversion rates provided by issuances of other debt, warrants, options or other instruments, with the exception of certain other raises.  During September 2016, the Company issued warrants for the purchase of common stock that adjusted the warrants to have an exercise price per share equal to the lesser of (i) 80% of the per share price of the common stock of the offering, (ii) $0.05 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the offering.  The new warrants expire in February 2021, and may be settled in a cashless exercise.  Additional warrants for the purchase of 8,000,000 shares of common stock may be issued in the event of default on the related notes payable, exercisable at $0.001 per share, with 25% issuable upon the first event of default, 37.5% upon the second event, and 37.5% upon the third event.  The warrants issuable upon default expire in February 2026 (if issued), may be settled in a cashless exercise, and are puttable upon expiration or liquidation with the primary warrants.  The new warrants may only be exercised to the extent the respective holder would own a maximum of 4.99% of the Company’s common stock after exercise, but the holders may elect to increase the maximum to 9.99%.  The Company recognized a deemed dividend of $6,484,236 as a result of the exchange and related redemption of Series F preferred stock.

 

During September 2016, the Company granted warrants to purchase 10,000,000 shares in connection with the acquisition of a note payable at an exercise price per share equal to the lesser of (i) 80% of the per share price of the common stock of the offering, (ii) $0.05 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the offering.  Upon the closing of the offering, the number of shares issuable under the warrant will reset to an amount of shares equal to the aggregate exercise amount of the warrants (as defined therein) divided by the exercise price then in effect. The warrants expire in September 2021, and may be settled in a cashless exercise. The warrants may only be exercised to the extent the holder would own a maximum of 9.99% of the Company’s common stock after exercise. The Company recognized $220,000 of the $493,590 fair value of the warrants as a debt discount, which is being amortized over the life of the borrowing, and recognized the remaining $273,590 as a loss on derivatives liability.  In the event the Company borrows additional amounts above the initial $500,000 under the note payable, the Company will be required to issue additional warrants with an aggregate exercise amount equal to 100% of the additional amount borrowed with similar terms to warrants issued as part of the initial borrowing.  Subsequent to September 30, 2016, the Company borrowed an additional $700,000 on the note and issued warrants for the purchase of 14,000,000 shares of common stock with the same terms as the initial warrants.

 

During fiscal 2016, the Company granted warrants to purchase 1,333,333 shares with an exercise price of $0.30 per share in connection with the acquisition of a note payable (see Note 9).  The warrants expire in November 2020.  The fair value of the warrants upon grant of $130,254 was recorded as a debt discount and was amortized over the life of the note payable to interest expense.

 

During fiscal 2016 and 2015, the Company measured the fair value of warrants classified as equity instruments using a binomial valuation model with the following assumptions:

 

 

 

2016

 

 

2015

 

Exercise price

 

$0.30

 

 

 

$0.30 - $1.00

 

Expected term (years)

 

5

 

 

 

1 - 2

Volatility

 

219%

 

 

 

228% - 302%

 

Risk-free rate

 

1.57%

 

 

 

0.22%- 0.63%

 

Dividend rate

 

0%

 

 

 

0%

 

 

During fiscal 2016, the Company measured the fair value of warrants classified as liabilities on the date of issuance and on each re-measurement date using the Monte Carlo valuation model. For this liability, the Company and specialist developed their own assumptions that do not have observable inputs or available market data to support the fair value. This method of valuation involves using inputs such as the fair value of the Company’s common stock, stock price volatility, the contractual term of the warrants, risk–free interest rates and dividend yields. Due to the nature of these inputs, the valuation of the warrants uses Level 3 measurements. The following assumptions were used:

 

 

 

 

 

 

 

 

Exercise price

 

 

 

 

 

$0.02 - $[A1] 0.30[A2] 

 

Expected term (years)

 

 

 

 

 

4.09 – [A3] 6.40

 

Volatility

 

 

 

 

 

134% - 189%

 

Risk-free rate

 

 

 

 

 

0.91% - 1.44%

 

Dividend rate

 

 

 

 

 

0%

 

Common stock price

 

 

 

 

 

$0.02 - $0.40

 

 

The following table summarizes information about stock options and warrants outstanding as of September 30, 2016:

Options and Warrants

 

Number of Options and Warrants

 

 

 

Weighted-

Average

Exercise

Price

 

Outstanding as of October 1, 2015

 

9,497,551

 

 

$

0.91

 

Granted

 

28,882,780

 

 

 

0.07

 

Cancelled

 

(326,200

)

 

 

0.81

 

Forfeited

 

(5,534,097

)

 

 

1.10

 

Outstanding as of September 30, 2016

 

32,520,037

 

 

 

0.13

 

Exercisable as of September 30, 2016

 

28,015,034

 

 

 

0.11

 

 

During fiscal 2015, the Company did not grant any common stock options or warrants, and 1,494,025 options and warrants were forfeited.  During February 2015, the Company modified the exercise price of options and warrants previously issued to a former Executive Chairman of the Board of Directors from $1.00 to $0.30 per share, according to an agreement entered into prior to appointment as the Executive Chairman, and recognized additional expense of $20,472.  During April 2015, the Company modified the exercise price of options and warrants previously issued to a note holder from $1.00 to $0.40 per share as part of a settlement agreement and conversion of an existing note payable and other payables into a new note payable.  The additional expense of $22,397 was recorded as a loss on extinguishment of debt.

As of September 30, 2016, the outstanding warrants had an aggregate intrinsic value of $0 and the weighted average remaining term of the warrants was 5 years. The total compensation cost related to unvested awards not yet recognized (options, warrants, and shares) was $69,728.