Quarterly report pursuant to Section 13 or 15(d)

12. Derivative Liability

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12. Derivative Liability
9 Months Ended
Sep. 30, 2016
Derivative Liability  
12. Derivative Liability

Fusion has issued warrants to purchase shares of its 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 such instruments 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, Fusion has 584,834 outstanding warrants which provide for a downward adjustment of the exercise price if Fusion 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 of these warrants. In addition, in connection with the sale of certain notes under the original Praesidian Facility, Fusion issued nominal warrants to the original lenders to purchase an aggregate of 728,333 shares of Fusion’s common stock. The nominal warrants were exercised in August 2015. 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 nine months ended September 30, 2016 and 2015:

 

    Nine months ended September 30,  
    2016     2015  
Stock price ($)     1.65       1.88  
Exercise price ($)     6.25       0 - 6.25  
Risk-free interest rate (%)     1.56       1.75 - 2.06  
Expected volatility (%)     92.4       125.4  
Time to maturity (years)     2.25       7.08 - 8.25  

 

 

At September 30, 2016 and December 31, 2015, the fair value of the derivative was $233,934 and $953,005, respectively. For the three months ended September 30, 2016 and 2015, the Company recognized a gain on the change in the fair value of this derivative of approximately $152,000 and $1.2 million, respectively, and a gain of approximately $380,000 and $2.5 million for the nine months ended September 30, 2016 and 2015, respectively.

 

During the nine months ended September 30, 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 17). The Company has evaluated these adjustments in accordance with ASC 250-10-S99, SEC Materials (formerly SEC Staff Accounting Bulletin 99, Materiality) and concluded that both quantitatively and qualitatively the adjustments were not material. These adjustments were also evaluated by management in their assessment of internal controls over financial reporting.