Liability Attributable to Warrants

12 Months Ended

Dec. 31, 2015

Other Liabilities Disclosure [Abstract]

Liability Attributable to Warrants

8. 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 753,333 shares of our common stock at a purchase price of $4.50 per share (See Note 9) (the “2014 Transaction”). We also issued warrants to the investors for no additional consideration to purchase an aggregate 376,667 shares of our common stock at an exercise price of $6.00 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 are not indexed to our common stock; therefore, the fair value of these warrants has been recorded as a liability. 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, except for changes in the fair value of the warrants issued to ipCapital which are recognized as a component of general and administrative expense in the 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 $3.00 or $3.90 per share, and was $3.90 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 9) met those conditions and resulted in the placement agent warrants being repriced from $3.00 and $3.90 to $2.55 and $3.30, respectively.

We used a binomial pricing model to determine the fair value of our warrants liability as of December 31, 2015 and 2014, the balance sheet dates, respectively, using the following assumptions:

For the Year Ended December 31, 2015

Warrants	Estimated Volatility	Annualized Forfeiture Rate	Expected Option Term (Years)	Estimated Exercise Factor	Risk-Free Interest Rate	Dividends
2011 Private Placement	104% - 132%	—	1.61 – 0.68	3.5	0.26% - 0.47%	—
ipCapital	105% - 127%	—	1.79 – 0.79	4.0	0.26% - 0.54%	—

For the Year Ended December 31, 2014

Warrants	Estimated Volatility	Annualized Forfeiture Rate	Expected Option Term (Years)	Estimated Exercise Factor	Risk-Free Interest Rate	Dividends
2011 Private Placement	91% - 104%	—	2.67 – 1.69	3.5	0.41% - 0.56%	—
2014 Private Placement	114% - 157%	—	5.00 - 4.08	3.5	1.35% - 1.69%	—
ipCapital	92% - 127%	—	3.79 – 1.81	4	0.43% - 0.61%	—

The following table is a reconciliation of the warrants liability measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31, 2015:

Warrants liability – December 31, 2014 fair value	$	647,300
Change in fair value of warrant liability recorded in other income		(190,300	)
Change in fair value of warrant liability recorded in general and administrative expense		(18,100	)
Reclassification of 2014 PIPE Warrant to Equity		(407,300	)
Warrants liability – December 31, 2015 fair value	$	31,600

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

	For the Year Ended December 31, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—				—		686,833
2014 Transaction		376,667		—		—		—		376,667
ipCapital		26,667		—		—		—		26,667
Exercise Agreement		300,000		—		—		—		300,000
Consultant Warrant		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		—		1,411,619

During the year ended December 31, 2015, our warrants liability was reduced by $407,300 as a result of the above mentioned reclassification of 2014 PIPE from liability warrant to equity. The aggregate reduction in the liability was $615,700. See Note 14.

	For the Year Ended December 31, 2014
	Beginning Outstanding		Issued		Exercised			Cancelled / Forfeited			Ending Outstanding
2011 Transaction		753,500		—		(66,667	)		—			686,833
2014 Transaction		—		376,667		—			—			376,667
ipCapital		26,667		—		—			—			26,667
Exercise Agreement		300,000		—		—			—			300,000
Consultant Warrant (1)		20,833		—		—			(9,548	)		11,285
Offer to Exercise		10,167		—		—			—			10,167
		1,111,167		376,667		(66,667	)		(9,548	)		1,411,619

(1)

Effective September 18, 2013, we entered into a consulting agreement with Genesis Select to provide us with a variety of investor relations services. As part of their compensation, we issued to them a warrant to purchase 312,500 shares of our common stock at an exercise price of $0.50 per share. The warrant will vest, monthly, over the initial twelve-month service period of the contract, assuming that the agreement remains in-force, with the first vesting having occurred on October 18, 2013. The warrant is substantially similar in nature to those issued in the warrant amendment, discussed above, thus; the warrant is accounted in equity and is not included as a component of our warrants liability as of December 31, 2013. We used the following assumptions in a binomial pricing model to calculate the fair value of the warrant issued to Genesis: estimated volatility 181%; expected term 4.96 years; estimated exercise factor 4, risk free interest rate 1.41%; and dividends 0. Expense associated with this warrant is recognized as a component of general and administrative expense over the one-year vesting term of the warrant.

Effective April 11, 2014, we cancelled our consulting agreement with Genesis Select. Under the terms of the agreement, 169,273 of the warrants that had been issued the firm had vested as of the effective cancellation date.