Liability Attributable to Warrants

9 Months Ended

Sep. 30, 2016

Other Liabilities Disclosure [Abstract]

Liability Attributable to Warrants

5. 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 723,333 shares of our common stock at a purchase price of $4.50 per share (See Note 12) (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 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 $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 Private Placement (Note 12) 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. During the three-month period ended September 30, 2016, the liability warrants for the 2011 transaction expired.

The fair market value of our common stock was $0.08 and $0.10 per share as of September 30, 2016 and 2015, respectively. We used a binomial pricing model to determine the fair value of our warrants liability at September 30, 2016 and December 31, 2015, using the following assumptions:

	Estimated Volatility			Annualized Forfeiture Rate		Expected Term (Years)		Estimated Exercise Factor		Risk-Free Interest Rate			Dividends
ipCapital
September 30, 2016		378	%		—		0.09		1.1		0.20	%		—
December 31, 2015		127	%		—		0.79		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, 2016:

Warrants liability – December 31, 2015 fair value	$	31,600
Change in fair value of warrant liability recorded in other income		(29,400	)
Change in fair value of warrant liability recorded in general and administrative expense		(2,300	)
Warrants liability – September 30, 2016 fair value	$	—

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

	For the Three-Month Period Ended September 30, 2016
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		686,833		—
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		686,833		724,786

	For the Three-Month Period Ended September 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		—		686,833
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		—		1,411,619

	For the Nine-Month Period Ended September 30, 2016
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		686,833		—
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant)		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		686,833		724,786

	For the Nine-Month Period Ended September 30, 2015
	Beginning Outstanding		Issued		Exercised		Cancelled / Forfeited		Ending Outstanding
2011 Transaction		686,833		—		—		—		686,833
2014 Transaction		376,667		—		—		—		376,667
Exercise Agreement		300,000		—		—		—		300,000
ipCapital		26,667		—		—		—		26,667
Consultant Warrant		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		—		1,411,619