Note 6 – Derivative Liability

During the year ended December 31, 2020, the Company issued certain warrants that contained a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder upon occurrence of certain change in control type events. In accordance with ASC 480, the fair value of these warrants is classified as a liability in the Consolidated Balance Sheets and will be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

The derivative liabilities were valued using a Binomial pricing model with the following average assumptions:

Schedule of Derivative Liabilities Assumptions 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the derivative securities was determined by the remaining contractual life of the derivative instrument. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

During 2021, 2,826 warrants were exercised which resulted in an extinguishment of derivative liability charge of $0.03 million. The Company recognized a net gain of $0.12 million and $0.21 million for the years ended December 31, 2022 and 2021, respectively, to account for the change in fair value of the derivative liability.

Schedule of Derivative Liability Transactions