Liability Attributable to Warrants

9 Months Ended

Sep. 30, 2015

Other Liabilities Disclosure [Abstract]

Liability Attributable to Warrants

4. Liability Attributable to Warrants

On January 7, 2014, we entered into a securities purchase agreement (the “SPA”) with a limited number of institutional investors, pursuant to which we issued and sold for cash an aggregate 11,299,999 shares of our common stock at a purchase price of $0.30 per share (See Note 11) (the “2014 Transaction”). We also issued warrants to the investors for no additional consideration to purchase an aggregate 5,650,001 shares of our common stock at an exercise price of $0.40 per share from January 7, 2014 through January 7, 2019.

Under certain conditions of the SPA that were to expire no later than January 7, 2015, we could have been required to issue a variable number of additional warrants to the investors at a below-market value exercise price. Accordingly, we have concluded that the warrants issued to the investors were not indexed to our common stock; therefore, the fair value of these warrants was recorded as a liability of $1,356,000 on January 7, 2014 on our Balance Sheet. Since these conditions did not occur as of January 7, 2015, we have reclassified the warrant from liability to equity.

Using a binomial pricing model, we calculated the fair value of the warrants issued to the investors on January 7, 2015 to be $407,300. We used the following assumptions in the binomial pricing model to derive the fair value: estimated volatility 113%; annualized forfeiture rate 0%; expected term 4.1 years; estimated exercise factor 3.5; risk free interest rate 1.20; and dividends 0.

Changes in fair value of the warrants liability are recognized in other income (expense), except for changes in the fair value of the warrants issued to ipCapital Group, Inc. (“ipCapital”), which are recognized as a component of general and administrative expense in the condensed consolidated statement of operations.

We used the exercise price of the warrants, as well as the fair market value of our common stock, to determine the fair value of our warrants. The exercise price for warrants issued in conjunction with a 2011 transaction, including those issued to the placement agent, was either $0.20 or $0.26 per share, and was $0.26 per share for the warrants issued to ipCapital. The warrants issued to the placement agent included anti-dilution provisions for repricing of the warrants in the event that future issuances of stock by hopTo met certain conditions. The 2015 Transaction (Note 11) met those conditions and resulted in the placement agent warrants being repriced from $0.20 and $0.26 to $0.17 and $0.22, respectively.

The fair market value of our common stock was $0.10 and $0.12 per share as of September 30, 2015 and 2014, respectively. We used a binomial pricing model to determine the fair value of our warrants liability at September 30, 2015 and December 31, 2014, using the following assumptions:

	Estimated Volatility			Annualized Forfeiture Rate		Expected Term (Years)		Estimated Exercise Factor		Risk-Free Interest Rate			Dividends
2011 Transaction
September 30, 2015		112	%		—		0.94		3.5		0.30	%		—
December 31, 2014		104	%		—		1.69		3.5		0.56	%		—
2014 Transaction
September 30, 2015		—			—		—		—		—			—
December 31, 2014		114	%		—		4.08		3.5		1.35	%		—
ipCapital
September 30, 2015		113	%		—		1.05		4.0		0.35	%		—
December 31, 2014		105	%		—		1.81		4.0		0.61	%		—

The following table is a reconciliation of the warrants liability measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2015:

Warrants liability – December 31, 2014 fair value	$	647,300
Change in fair value of warrant liability recorded in other income		(126,900	)
Change in fair value of warrant liability recorded in general and administrative expense		(12,300	)
Reclassification of 2014 PIPE Warrant to Equity		(407,300	)
Warrants liability – September 30, 2015 fair value	$	100,800

The following tables reconcile the number of warrants outstanding for the periods indicated:

	For the Three-Month Period Ended September 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		10,302,500		—		—		—		10,302,500
2014 Transaction		5,650,001		—		—		—		5,650,001
ipCapital		400,000		—		—		—		400,000
Exercise Agreement		4,500,000		—		—		—		4,500,000
Consultant Warrant (1)		169,273		—		—		—		169,273
Offer to Exercise		152,500		—		—		—		152,500
		21,174,274		—		—		—		21,174,274

	For the Three-Month Period Ended September 30, 2014
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		10,302,500		—		—		—		10,302,500
2014 Transaction		5,650,001		—		—		—		5,650,001
ipCapital		400,000		—		—		—		400,000
Exercise Agreement		4,500,000		—		—		—		4,500,000
Consultant Warrant (1)		169,273		—		—		—		169,273
Offer to Exercise		152,500		—		—		—		152,500
		21,174,274		—		—		—		21,174,274

	For the Nine-Month Period Ended September 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		10,302,500		—				—		10,302,500
2014 Transaction		5,650,001		—		—		—		5,650,001
ipCapital		400,000		—		—		—		400,000
Exercise Agreement		4,500,000		—		—		—		4,500,000
Consultant Warrant (1)		169,273		—		—				169,273
Offer to Exercise		152,500		—		—		—		152,500
		21,174,274		—		—		—		21,174,274

	For the Nine-Month Period Ended September 30, 2014
	Beginning Outstanding		Issued		Exercised			Cancelled / Forfeited			Ending Outstanding
2011 Transaction		11,302,500		—		(1,000,000	)		—			10,302,500
2014 Transaction		—		5,650,001		—			—			5,650,001
ipCapital		400,000		—		—			—			400,000
Exercise Agreement		4,500,000		—		—			—			4,500,000
Consultant Warrant (1)		312,500		—		—			(143,227	)		169,273
Offer to Exercise		152,500		—		—			—			152,500
		16,667,500		5,650,001		(1,000,000	)		(143,227	)		21,174,274

(1) Effective April 11, 2014, we cancelled our consulting agreement with a former investor relations firm. Under the terms of the agreement, 169,273 of the warrants that had been issued to such firm had vested as of the effective cancellation date.