Liability Attributable to Warrants

12 Months Ended

Dec. 31, 2016

Other Liabilities Disclosure [Abstract]

Liability Attributable to Warrants

9. 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 (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 of $1,356,000 on January 7, 2014 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, 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 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 10) 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. On September 1, 2016, the liability warrants for the 2011 transaction expired.

We used a binomial pricing model to determine the fair value of our warrants liability as of December 31, 2016 and 2015, the balance sheet dates, respectively, using the following assumptions:

For the Year Ended December 31, 2016

Warrants	Estimated Volatility	Annualized Forfeiture Rate	Expected Option Term (Years)	Estimated Exercise Factor	Risk-Free Interest Rate	Dividends
2011 Private Placement	108% - 162%	—	0.6 - 0	-3.5 – 1.1	-0.20% - 0.26-%	—
ipCapital	125% - 378%	—	0.71 - 0-	-4.0 – 1.1	-0.20% - 0.26-%	—

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	0.26% - 0.54%	—

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, 2016:

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

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

	For the Year Ended December 31, 2016
	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		—		—		—		698,119

	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 (1)		11,285		—		—		—		11,285
Offer to Exercise		10,167		—		—		—		10,167
		1,411,619		—		—		—		1,411,619