DERIVATIVE WARRANT LIABILITY

12 Months Ended

Dec. 31, 2014

Notes to Financial Statements

DERIVATIVE WARRANT LIABILITY

In August 2012, the Company and Platinum-Montaur Life Sciences, LLC (PM) entered into a Loan Agreement whereby PM agreed to provide a credit facility (CF) to the Company of up to $20,000,000 dependent on the achievement of certain clinical and regulatory milestones set forth in the Loan Agreement, with an initial available principal amount of $5,000,000 (the “Maximum Draw Amount”).  The Company issued to PM a Promissory Note dated August 31, 2012 (the “Note”), with a maturity date of five years from the date of closing (the “Maturity Date”).  The Company used the proceeds from the CF to fund its operations.  As a result of the Company's 2013 financing transactions, this Credit Facility was only available at PM’s discretion. The draws under the agreement bore interest at 10% per annum. Obligations under the CF were guaranteed by the Company’s subsidiary, Sontra Medical, Inc. The CF was terminated on October 30, 2014.

The Loan Agreement called for each $1,000,000 of funds borrowed pursuant to the Credit Facility, the Company will would issue PM a warrant to purchase 100,000 shares of Common Stock, with a term of five years and an exercise price equal to 150% of the market price of the Common Stock at the time of the draw, but in no event less than $20.00 or more than $40.00 per share (together with the Commitment Warrant, the “Warrants”). All of the Warrants are immediately exercisable and will have a term of five years from the issue date. The exercise price of the Warrants is subject to adjustment for stock splits, combinations or similar events.  An exercise under the Warrants may not result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a holder may waive the 4.99% ownership limitation upon sixty-one (61) days’ advance written notice to the Company. Over a three month period beginning in September 2012, three separate draws totaling $3,000,000 were taken under the CF and five year warrants to purchase 300,000 shares of Common Stock were issued at prices ranging from $21.10 to $22.70. The warrants were valued at $3,455,000, with $455,000 charged to interest expense in 2012, and $3,000,000 recorded as a debt discount against the note and accreted to interest expense over the life of the draws. The warrants contained certain beneficial ownership blockers requested by PM. On March 1, 2013, the Company elected to prepay the $3,000,000 of principal and $113,166 of accrued and unpaid interest outstanding under the CF. After such date, no principal amount was outstanding under the CF. Concurrent with this prepayment, the Company recorded non-cash interest expense of $2,879,166 in 2013 relating to the unamortized debt discount on the outstanding draws paid off.

In connection with the CF, the Company issued PM a warrant to purchase 400,000 shares of its Common Stock, with a term of five years and an exercise price of $20.00 per share (the “Commitment Warrant” or “CW”). The CW was valued at $4,840,000 and recorded as a deferred financing asset and a derivative warrant liability. The deferred financing cost was then amortized over the life of the CF. $3,549,325 and $968,004 were charged to interest expense in 2014 and 2013, respectively.

The requisite accounting related to the derivative warrant liability requires the Company to remeasure the value of the underlying warrants and report the effect of the changes on our operations until the warrants expire. The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock for each reporting period.

Changes in fair value of the derivative financial instruments are recognized currently in the Statements of Operations as a Gain (Loss) on Revaluation of Derivative Warrant Liability. The changes in the fair value of the derivative warrant liability for the years ended 2014 and 2013 resulted in gains of $911,000 and $4,465,986, respectively.

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in fair value hierarchy (see Note 3):

	2014			2013
Derivative warrant liability as of January 1	$	1,119,155		$	5,585,141
Total unrealized losses included in net loss		333,000			1,671,682
Total unrealized gains included in net loss		(1,244,000	)		(5,985,000	)
Total realized gains included in net loss		—			(152,668	)
Gain on Revaluation		911,000			4,465,986
Derivative warrant liability as of December 31	$	208,155		$	1,119,155

None of the derivative warrants were exercised in 2014 or 2013 pursuant to cashless exercise provisions.