Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

15. Fair Value Measurements

The Company’s financial instruments consist of Level 1, Level 2 and Level 3 assets as of December 31, 2019. As of December 31, 2019, the Company’s cash and cash equivalents of $8,852,281, were Level 1 assets and included savings deposits, overnight investments, and other liquid funds with financial institutions.

The carrying value of the Company’s 12% Amended Senior Secured Notes (as defined below) approximates fair value based on current market interest rates for debt instruments of similar credit standing and, consequently, their fair values are based on Level 2 inputs.

The quantitative information utilized in the fair value calculation of the Level 3 liabilities are as follows:

Unearned Revenues – The fair value of unearned revenues as of December 31, 2019 of $41,101,381 was determined with the following inputs: (1) projection of when deferred revenue will be earned; (2) expense necessary to fulfill the subscriptions; (3) gross up of the fulfillment costs to include a market participant level of profitability; (4) slight premium to the fulfillment-costs plus a reasonable profit metric; and (5) reduce projected future cash flows to present value using an appropriate discount rate. The current portion of the unearned revenues is classified within current liabilities based on the expected portion that will be earned (delivery of the subscription) within twelve months, with the remaining portion classified within long-term liabilities on the consolidated balance sheets.

The changes in unearned revenues with inputs classified as Level 3 of the fair value hierarchy are reflected within revenues on the consolidated statements of operations.

The Company accounted for the embedded conversion features of the 8% Promissory Notes and 10% Convertible Debentures (both as described in Note 16) as derivative liabilities, which required that the Company carry such amounts on its consolidated balance sheets as a liability at fair value, as adjusted at each reporting period-end.

The Company accounts for certain warrants and the embedded conversion features of the 12% Convertible Debentures (as described in Note 17) as derivative liabilities, which required the Company carry such amounts on its consolidated balance sheets as a liability at fair value, as adjusted at each reporting period-end.

The Company determined, due to their greater complexity, prior to the reset provision (as described in Note 16), the fair value of the L2 Warrants (as described in Note 20) and the embedded conversion feature with respect to the 8% Promissory Notes, as of the date of repayment, and 10% Convertible Debentures, as of the date of conversion, using appropriate valuation models derived through consultations with the Company’s independent valuation firm. The Company determined the fair value of the Strome Warrants (as described in Note 20) utilizing the Black-Scholes valuation model as further described below. After the reset provision, the Company determined the fair value of the L2 Warrants utilizing the Black-Scholes valuation model as further described below since such valuation model meets the fair value measurement objective based on the substantive characteristics of the instrument. These warrants and the embedded conversion features are classified as Level 3 within the fair-value hierarchy. Inputs to the valuation model include the Company’s publicly-quoted stock price, the stock volatility, the risk-free interest rate, the remaining life of the warrants, notes and debentures, the exercise price or conversion price, and the dividend rate. The Company uses the closing stock price of its common stock over an appropriate period of time to compute stock volatility. These assumptions are summarized as follows:

L2 Warrants – 2019 assumptions: Black-Scholes option-pricing; expected life: 3.75 years; risk-free interest rate: 1.56%; volatility factor: 130.46%; dividend rate: 0.0%; transaction date closing market price: $0.89; exercise price: $0.50; and 2018 assumptions: Black-Scholes option-pricing; expected life: 4.44 years; risk-free interest rate: 2.49%; volatility factor: 124.40%; dividend rate: 0.0%; transaction date closing market price: $0.48; exercise price: $0.50.

Strome Warrants – 2019 assumptions: Black-Scholes option-pricing; expected life: 3.45; risk-free interest rate: 1.62%; volatility factor: 144.56%; dividend rate: 0.0%; transaction date closing market price: $0.80; exercise price: $4.50; and 2018 assumptions: Black-Scholes option-pricing; expected life: 4.45 years; risk-free interest rate: 2.49%; volatility factor: 124.22%; dividend rate: 0.0%; transaction date closing market price: $0.48; exercise price: $0.50.

B. Riley Warrants – 2019 assumptions: Black-Scholes option-pricing; expected life: 5.80 years; risk-free interest rate: 1.76%; volatility factor: 127.63%; dividend rate: 0.0%; transaction date closing market price:$0.80; exercise price: $1.00; and 2018 assumptions: Black-Scholes option-pricing; expected life: 6.80 years; risk-free interest rate: 2.59%; volatility factor: 121.65%; dividend rate: 0.0%; transaction date closing market price: $0.48; exercise price: $1.00.

The following table represents the carrying amount, valuation and roll-forward of activity for the Company’s warrants accounted for as a derivative liability and classified within Level 3 of the fair-value hierarchy for the years ended December 31, 2019 and 2018:

	L2 Warrants			Strome Warrants			B. Riley Warrants			Total Warrant Derivative Liabilities
Carrying value at January 1, 2018	$	-		$	-		$	-		$	-
Issuance of warrants on June 11, 2018		312,837			-			-			312,837
Issuance of warrants on June 15, 2018		288,149			1,344,648			-			1,632,797
Issuance of warrants on October 18, 2018		-			-			382,725			382,725
Change in valuation of warrant derivative liabilities		(182,772	)		(756,677	)		(24,675	)		(964,124	)
Carrying value at December 31, 2018		418,214			587,971			358,050			1,364,235
Change in valuation of warrant derivative liabilities		316,972			448,716			249,463			1,015,151
Exercise of warrants		(735,186	)		-			-			(735,186	)
Carrying value at December 31, 2019	$	-		$	1,036,687		$	607,513		$	1,644,200

For the years ended December 31, 2019 and 2018, the change in valuation of warrant derivative liabilities recognized within other (expense) income on the consolidated statement of operations, as described in the above table of $(1,015,151) and $964,124, respectively. The L2 Warrants were fully exercised on a cashless basis during the year ended December 31, 2019, resulting in an offset within additional paid-in capital of $735,186 on the consolidated statements of stockholders’ deficiency.

The following table represents the carrying amount, valuation and a roll-forward of activity for the conversion option features, buy-in features, and default remedy features, as deemed appropriate for each instrument (collectively the embedded derivative liabilities), with respect to the 8% Promissory Notes, 10% Convertible Debentures, 10% OID Convertible Debentures, 12% Convertible Debentures (refer to Note 17 for each instrument), and Series G Preferred Stock (as described in Note 19) accounted for as embedded derivative liabilities and classified within Level 3 of the fair-value hierarchy for the years ended December 31, 2019 and 2018:

	8% Promissory Notes			10% Convertible Debentures			10% OID Convertible Debentures			12% Convertible Debentures		Series G Preferred Stock			Total Embedded Derivative Liabilities
Carrying value at January 1, 2018	$	-		$	-		$	-		$	-	$	72,563		$	72,563
Recognition of embedded derivative liabilities (conversion feature) on June 11, 2018		78,432			-			-			-		-			78,432
Recognition of embedded derivative liabilities (conversion feature) on June 15, 2018		81,169			471,002			-			-		-			552,171
Recognition of embedded derivative liabilities (buy-in feature and default remedy feature) on October 18, 2018		-			-			49,000			-		-			49,000
Recognition of embedded derivative liabilities (conversion feature, buy-in feature, and default remedy feature) on December 12, 2018		-			-			-			4,760,000		-			4,760,000
Gain on extinguishment of embedded derivatives liabilities upon extinguishment of host instrument		(29,860	)		(1,042,000	)		(25,000	)		-		-			(1,096,860	)
Change in valuation of embedded derivative liabilities		(129,741	)		570,998			(24,000	)		2,627,000		(72,563	)		2,971,694
Carrying value at December 31, 2018		-			-			-			7,387,000		-			7,387,000
Recognition of embedded derivative liabilities (conversion feature, buy-in feature and default remedy feature) on March 18, 2018		-			-			-			822,000		-			822,000
Recognition of embedded derivative liabilities (conversion feature, buy-in feature and default remedy feature) on March 27, 2018		-			-			-			188,000		-			188,000
Recognition of embedded derivative liabilities (conversion feature, buy-in feature and default remedy feature) on April 8, 2018		-			-			-			64,000		-			64,000
Change in valuation of embedded derivative liabilities		-			-			-			5,040,000		-			5,040,000
Carrying value at December 31, 2019	$	-		$	-		$	-		$	13,501,000	$	-		$	13,501,000

For the year ended December 31, 2019, the change in valuation of embedded derivative liabilities as described in the above table of $5,040,000 was recognized as other expense on the consolidated statements of operations. For the year ended December 31, 2018, the change in valuation of embedded derivative liabilities as described in the above table of $2,971,694 was recognized as other income on the consolidated statements of operations.

In addition, the fair value requirement at each period-end for the Series G Preferred Stock embedded conversion feature was no longer required for the year ended December 31, 2018 since it is not considered a derivative liability, therefore, the carrying amount of $72,563 as of January 1, 2018 was recognized as other income of $72,563 during the year ended December 31, 2018 on the consolidated statements of operations.