Annual report pursuant to Section 13 and 15(d)

17. Derivative Liability

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17. Derivative Liability
12 Months Ended
Dec. 31, 2015
Derivative Liability  
17. Derivative Liability

The Company has issued warrants to purchase shares of Fusion’s common stock in connection with certain debt and equity financing transactions. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815, ‘Derivatives and Hedging’ (“ASC 815”).  For warrant instruments that do not meet an exclusion from derivative accounting, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrant is exercised or expires, and any change in fair value is recognized in the Company’s statement of operations.  In this regard, the Company has 402,112 outstanding warrants which provide for a downward adjustment of the exercise price if the Company were to issue common stock at an issuance price or issue convertible debt or equity securities with an exercise price that is less than the exercise price for these warrants. In addition, in connection with the sale of the original notes to the Senior Lenders, the Company issued nominal warrants to the Senior Lenders to purchase an aggregate of 728,333 shares of its common stock.  The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock.

 

The following assumptions were used to determine the fair value of the warrants for the year ended December 31, 2015 and 2014:

 

    Year ended December 31,  
    2015     2014  
Stock price ($)     3.26       3.15  
Exercise price ($)     6.25       0 - 6.25  
Risk-free interest rate (%)     1.78 - 2.25       1.97 - 2.52  
Expected volatility (%)     132.99       106.2  
Time to maturity (years)     3.0 - 4.0       7.83 - 9.0  

On August 28, 2015 as part of the debt refinancing, the lenders under the Third Amendment exercised warrants to purchase 728,333 shares of Fusion common stock. As a result of the exercise of these nominal warrants, the Company recognized a reduction in the derivative liability of approximately $364,167 with a reclassification to equity.

 

During the year ended December 31, 2015, warrants to purchase 320,000 shares of Fusion common stock that contained a downward adjustment of the exercise price were modified to remove this provision and thus qualified for equity treatment. As a result. The Company reclassified $0.7 million (the fair value of the derivative liability relative to the modified warrant at the date of the amendment) from the derivative liability into equity.

 

At December 31, 2015 and 2014, the fair value of the derivative was approximately $1.0 million and $3.8 million, respectively.  For the year ended December 31, 2015 and 2014, the Company recognized a gain on the change in the fair value of this derivative of approximately $1.8 million and $5.2 million, respectively.