Annual report pursuant to Section 13 and 15(d)

17. Derivative Liability

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17. Derivative Liability
12 Months Ended
Dec. 31, 2016
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.  The Company has 584,834 outstanding warrants at December 31, 2016 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 original Praesidian Lenders, the Company issued nominal warrants to the original PraesidianLenders 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, 2016 and 2015:

 

  Year ended December 31,
  2016   2015
Stock price ($) 1.50   1.88
Exercise price ($) 6.25   6.25
Risk-free interest rate (%) 1.21-2.23   1.78 - 2.25
Expected volatility (%) 71.40   132.99
Time to maturity (years) 2.0   3.0 - 4.0

 

During the year ended December 31, 2016, the Company adjusted the valuation of its derivative liability for warrants issued in December 2013 and January 2014 and its valuation of certain warrants exercised during 2015. The amount of the adjustment was a net $772,022 impact on the condensed consolidated statements of operations resulting from the loss on the change in the fair value of the derivative and an additional $338,972 impact to capital in excess of par and $433,050 increase in derivative liability in the condensed consolidated balance sheets (see Note 18).The Company has evaluated these adjustments in accordance with ASC 250-10-S99, SECMaterials (formerly SEC Staff Accounting Bulletin 99, Materiality) and concluded that both quantitatively and qualitatively the adjustmentswere not material. These adjustments were also evaluated by management in their assessment of internal controls over financial reporting.

 

In connection with the sale of certain notes to original Praesidian Lenders, Fusion issued nominal warrants to the Praesidian Lenders to purchase an aggregate of 728,333 shares of Fusion’s common stock. On August 28, 2015 these nominal warrants were exercised, and the Company recognized a reduction in the derivative liability of $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, 2016 and 2015, the fair value of the derivative was $0.3million and$1.0 million, respectively. For the years ended December 31, 2016 and 2015, the Company recognized a gain on the change in the fair value of this derivative of $0.5 million and $1.8 million, respectively.