Unaudited Notes to the Condensed Consolidated Financial Statements
(dollars in 000’s except per share)
1. The Company
TriStar Wellness Solutions, Inc. (“the Company”) was incorporated on August 28, 2000 in the state of Nevada under the name “Quadric Acquisitions”.
From the date of its incorporation through April 27, 2012, the Company had several name changes and different business plans all under prior management that is no longer with the Company. On April 27, 2012, the Company underwent a change of control transaction and changed its business plan. On January 7, 2013, the Company changed its name from Biopack Environmental Solutions, Inc. to TriStar Wellness Solutions, Inc. with the State of Nevada, and such change was effected with FINRA on January 18, 2013. The Company conducts its current operations under the name TriStar Wellness Solutions, Inc. The vast majority of the Company’s operations are conducted through its wholly-owned subsidiary, HemCon Medical Technologies Inc., an Oregon corporation (“HemCon”), and involve the development, marketing and sale of HemCon’s innovative wound care products.
Overall, the Company is focused on bringing new technologies to consumers and patients that address underserved therapeutic healthcare opportunities based on a combination of superior science, product development and market positioning worldwide. Each of the Company’s products is designed to improve health advocacy and medical outcomes through superior and proven technologies. The Company’s innovative products and technologies focus in three categories:
·
|
Wound Care
products focused on superior hemostasis and infection control through the exploitation of proprietary and in licensed technologies targeting a wide range of professional medical (e.g., surgery, dialysis, post-procedure recovery), trauma, military and consumer OTC (over the counter) applications reducing the total cost of care. The Company has developed FDA-approved products targeted to specific procedures within the broad professional care medical market as well as innovative products targeted to the global OTC (consumer self-care) wound care market which have received FDA clearance, CE approval and other international approvals.
|
·
|
Women’s Health
products initially focused on the unique needs during pregnancy and nursing. Longer-term the Company plans to expand the TWSI portfolio to address broader, under-met needs in women’s health. The Company markets to the maternity segment under the Beaute de Maman™ brand sold via traditional retailers and internet portals.
|
·
|
Therapeutic Skin Care
products leveraging a proprietary delivery system enabling superior dosing and consumer therapeutic benefits related to several OTC skin care needs. These technology applications are being developed for potential third party licensing or internal brand expansion.
|
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). All normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the three month periods ended March 31, 2014 and 2013 are not necessarily indicative of results to be expected for a full year.
Use of Estimates
In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting period. Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates. On an ongoing basis, the Company evaluates its estimates and assumptions. These estimates and assumptions include valuing equity securities in share-based payment arrangements, estimating the fair value of equity instruments upon issuance, and estimating the useful lives of depreciable assets and whether impairment charges may apply.
Reclassification
Certain reclassifications have been made to conform to prior year information to the 2014 classifications for comparative
purposes
.
Stock-Based Compensation
Compensation expense for all stock-based awards is measured on the grant date based on the fair value of the award and is recognized as an expense, on a straight-line basis, over the employee's requisite service period (generally the vesting period of the equity award). The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Stock-based compensation expense is recognized only for those awards that are expected to vest using an estimated forfeiture rate. We estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures in compensation expense recognized. For options and warrants issued to non-employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.
Accounting for Derivative Liabilities – Conversion Option
The fair value of the conversion option was valued using the binomial lattice options pricing model, a “Level 3” input, based on the quoted price of common stock, volatility based on the Company’s peer group, the expected life based on the remaining contractual term of the conversion option and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the conversion options’ contractual life.
Income Taxes
The Company accounts for derivative instruments in accordance with ASC 815 “Derivatives and Hedging” (“ASC 815”), which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts. The Company also considers ASC 815, which provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability under ASC 815.
Additionally, the Company evaluated the conversion feature embedded in its convertible promissory notes based on the criteria of ASC 815 to determine whether the conversion feature would be required to be bifurcated from the promissory note and accounted for separately as a derivative. Based on management’s evaluation, the embedded conversion feature meets the requirements of derivative accounting under ASC 815. The Company recorded this conversion feature at its fair value in accordance with ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). The embedded conversion feature was valued using the binomial option pricing model. Increases or decreases in the fair value of the conversion feature are included as a component of other income (expense) in the accompanying condensed consolidated statements of operations for the respective period.
3. Liquidity and Going Concern
The Company's unaudited condensed consolidated interim financial statements are prepared using accounting principles generally accepted in the United States of America (GAAP) applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. In addition, as of March 31, 2014, the Company had an accumulated deficit of $26.0 million, and had incurred a net loss for the three months ended March 31, 2014 of $3.6 million and had negative working capital of $8.7 million. Funding has been provided by related parties as well as new investors committed to make it possible to maintain, expand, and ensure the advancement of the TriStar Wellness products.
The consolidated financial statements for the fiscal year ended December 31, 2013 states that because the Company has suffered recurring operating losses from operations, there is substantial doubt about the Company’s ability to continue as a going concern. A “going concern” opinion indicates that the consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
4. Business Combinations
On May 6, 2013, the Company closed the acquisition of HemCon, an Oregon corporation (“HemCon”), pursuant to the terms of an Agreement for Purchase and Sale of Stock entered into by and between us and HemCon (the “Agreement”). The Agreement was entered into as part of HemCon’s Fifth Amended Plan of Reorganization in its bankruptcy proceeding (United States Bankruptcy Court, District of Oregon, Case No. 12-32652-elp11) and was approved by the Court as part of HemCon’s approved Plan of Reorganization. Under the Agreement, the Company purchased 100 shares of HemCon’s common stock, representing 100% of HemCon’s then-outstanding voting securities, in exchange for approximately $3.1 million (the “Purchase Price”). The Purchase Price was paid to the Court and the Trustee of the bankruptcy proceeding to be distributed to HemCon’s creditors in accordance with the Plan of Reorganization.
The acquisition has been accounted for under the acquisition method of accounting. Accordingly, the assets and liabilities of the acquired entity were recorded at their estimated fair values at the date of the acquisition. The operating results for HemCon have been included in the Company's consolidated financial statements since the acquisition date.
The purchase price allocation is based on estimates of fair value as follows (in thousands):
Accounts receivables
|
|
$
|
653
|
|
Other receivables
|
|
|
1,500
|
|
Inventory
|
|
|
1,410
|
|
Other current assets
|
|
|
23
|
|
Prepaid expenses
|
|
|
156
|
|
Fixed assets
|
|
|
1,193
|
|
Accounts payable and accrued expenses
|
|
|
(341
|
)
|
Current liabilities related to assets held for sale
|
|
|
(1,500
|
)
|
Deferred revenue
|
|
|
(882
|
)
|
Patents
|
|
|
336
|
|
Customer list
|
|
|
198
|
|
Trade name
|
|
|
266
|
|
Non-compete agreement
|
|
|
127
|
|
Total acquisition cost allocated
|
|
$
|
3,139
|
|
Management assigned fair values to the identifiable intangible assets through a combination of the relief from royalty method and the multi-period excess earnings method.
The useful lives of the acquired intangibles are as follows:
|
|
Useful Lives
|
|
Patents
|
|
|
12
|
|
Customer lists
|
|
|
14
|
|
Non-compete arrangements
|
|
|
4
|
|
Trade name
|
|
|
16
|
|
Intangible asset amortization expense for the three months ended March 31, 2014 and March 31, 2013 was $20 and $0, respectively.
The following unaudited pro forma financial information presents results as if the acquisition of HemCon had occurred on January 1, 2014 and January 1, 2013 (in thousands):
|
|
Three Months Ended
March 31,
|
|
(Unaudited)
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,303
|
|
|
$
|
1,290
|
|
Net loss from continuing operations
|
|
$
|
(3,565)
|
|
|
$
|
(4,493
|
)
|
5. Inventories
Inventories, net consist of the following at March 31, 2014 and December 31, 2013 (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Raw materials
|
|
$
|
349
|
|
|
$
|
318
|
|
Work in Progress
|
|
|
212
|
|
|
|
251
|
|
Finished Goods
|
|
|
448
|
|
|
|
575
|
|
|
|
$
|
1,009
|
|
|
$
|
1,144
|
|
Reserve for obsolescence was approximately $279 for three months ended March 31, 2014.
6. Property and Equipment
Property and equipment consist of the following at March 31, 2014 and December 31, 2013 (in thousands):
|
|
Estimates
Useful Life
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2014
|
|
|
2013
|
|
Manufacturing Equipment
|
|
|
7-10
|
|
|
$
|
623
|
|
|
$
|
623
|
|
Leasehold Improvements
|
|
|
7
|
|
|
|
520
|
|
|
|
520
|
|
Office Furniture and Equipment
|
|
|
3-7
|
|
|
|
32
|
|
|
|
32
|
|
Computer Equipment and Software
|
|
|
1-5
|
|
|
|
12
|
|
|
|
12
|
|
Construction in Progress
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
1,193
|
|
|
|
1,193
|
|
Less: Accumulated Depreciation, amortization and impairments
|
|
|
|
|
|
|
(241
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
$
|
952
|
|
|
$
|
997
|
|
Deprecation expense was approximately $67 for the three months ended March 31, 2014 and $0 for the three months ended March 31, 2103.
7. Loans Payable
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Short-term notes (net of debt discount $618 and $497 as March 31, 2014 and December 31, 2013, respectively)
|
|
$
|
1,332
|
|
|
$
|
714
|
|
Short-term notes - related party
|
|
|
3,970
|
|
|
|
3,970
|
|
|
|
$
|
5,302
|
|
|
$
|
4,684
|
|
Convertible notes (net of debt discount $59 and $0 as of March 31, 2014 and December 31, 2013, respectively)
|
|
$
|
389
|
|
|
$
|
356
|
|
Convertible notes – related party (net of debt discount $169 and $0 as of March 31, 2014 and December 31, 2013, respectively)
|
|
|
61
|
|
|
|
-
|
|
|
|
$
|
5,752
|
|
|
$
|
5,040
|
|
Promissory Notes
1
st
Quarter 2014 Activity
On January 15, 2014, the Company issued a convertible promissory note (“Note”) to a third party, in the principal amount of $100. The note has an interest rate of 24% per annum, simple interest and is due on or before July 15, 2014. In connection with this promissory note, the Company issued warrants to purchase 1,000,000 shares of our common stock at an exercise price $1.32 per share, which was the fair market value of our common stock on the date of issuance. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.68%, volatility – 111.11%, expected term – 5 years, expected dividends– N/A. The debt discounts related to the warrants are being amortized over a 0.5 year period (through maturity) on a straight-line basis. The Company recorded a debt discount related to the warrants of $91 by crediting additional paid in capital. Amortization expense on the debt discount was $41. At any time after February 1, 2014, or in the event of default, the holder may choose to convert the balance due from this Note into sufficient number of common shares of the Company, to constitute 1% of the total number of fully diluted and, by doing so, accept the payment of shares as payment in full for the outstanding balance.
The Note contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the Notes was valued at approximately $2,386 using the binomial option pricing model at January 15, 2014.
The fair value of the conversion feature was determined using the binomial option pricing model with the following assumptions: risk free interest rate – 0.06%, volatility – 111.11%, expected term – 0.5 years, expected dividends– N/A.
During the first quarter of 2014 the Company issued a promissory note to a third party, in the principal amount of $740. The note has an interest rate of 21% per annum, simple interest and is due on or before November 30, 2014. In connection with this promissory note, the Company issued warrants to purchase 850,000 shares of our common stock at an exercise price between $0.75 and $1.32 per share, which was the fair market value of our common stock on the date of issuance. The relative fair value of the warrants compared to the debt was recorded as a component of stockholders’ equity with the offset recorded as a discount on the promissory notes and included as a component of promissory notes in the accompanying consolidated balance sheet as of March 31, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.56%, volatility – 100.10%, expected term – 4 years, expected dividends– N/A. The debt discounts related to the warrants are being amortized over a 0.8 year period (through maturity) on a straight-line basis. The Company recorded a debt discount related to the warrants of $298 by crediting additional paid in capital. Amortization expense on the debt discount was $176 for the three months ended March 31, 2014.
During the first quarter of 2014 the Company issued convertible promissory notes (“Notes”) to DayStar Funding, LP, a Texas limited partnership and a party controlled by Frederick A. Voight one of our officers and directors, in the principal amount of $230. The note has an interest rate of 24% per annum, simple interest and is due on or before August 11, 2014. No warrants were issued in connection with the promissory note.
The Notes contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815.
At any time after February 1, 2014, or in the event of default, the holder may choose to convert the balance due from this Note into sufficient number of common shares of the Company, to constitute 1% of the total number of fully diluted and, by doing so, accept the payment of shares as payment in full for the outstanding balance.
The embedded conversion feature of the Notes was valued at approximately $1,483 using the binomial option pricing model at February 11, 2014.
The fair value of the conversion feature was determined using the binomial option pricing model with the following assumptions: risk free interest rate – 0.10%, volatility – 92%, expected term – 0.5 years, expected dividends– N/A. Amortization expense on the debt discount was $61 for the three months ended March 31, 2014.
During the first quarter of 2014, two third parties partially converted their notes payable, in accordance with the original terms of the notes, with an aggregate principal amount of $8,000 into 1,000,000 common shares.
The Company recorded imputed interest on convertible debentures and interest expense of $7 and $9 for the three months ended March 31, 2014 and 2013 respectively, based upon a market interest rate of 8% and accrued interest based on the stated rate of 0.5%.
8. Stockholders’ Equity
Diluted Shares
There were 405,000 shares of Series A, 1,000,000 shares of Series B and no shares of Series C outstanding as of March 31, 2014. Each share of Preferred D is convertible into twenty five shares of common stock. Convertible preferred stock was considered anti-dilutive for the three months ended March 31, 2014 and 2013, due to net losses. As of March 31, 2014, there are 4,216,667 Series D Convertible Preferred Shares which are convertible into 105,416,675 of common shares. All Series D Convertible Preferred Stock voting rights are on an “as converted to common stock” basis. Dividends are not mandatory. If declared by the Board Series D Preferred Stock shall have preference over common stock and equal to other series of preferred stock. As of March 31, 2014, there are 8,182,600 warrants which are convertible into one share of common stock with a weighted average exercise price of $1.62. In addition, convertible debt of $682 as of March 31, 2014 is convertible into 47,789,867 shares of the Company’s common stock.
The Company has determined that common stock equivalents in excess of available authorized common shares are not derivative instruments due to the fact that an increase in
authorized
shares is within the Company’s control.
Note Conversions
All note conversions were within the original conversion terms and therefore no gain or loss was recorded on these conversions.
During the first quarter of 2014, two third parties partially converted their notes payable, in accordance with the original terms of the notes, with an aggregate principal amount of $8,000 into 1,000,000 common shares.
Detachable Warrants
During the first quarter of 2014, the Company issued Promissory Notes containing 1,850,000 detachable Warrants. The relative fair value of the detachable Warrants compared to the debt of approximately $389 was recorded as a component of stockholders’ equity with the offset recorded as a discount on the promissory notes and included as a component of promissory notes in the accompanying condensed consolidated balance sheet as of March 31, 2014. The fair value of the warrants was determined using the Black-Scholes model with the following assumptions: risk free interest rate – 1.46% - 1.68%, volatility – 99.58 – 111.11%, expected term – 4 to 5 years, expected dividends– N/A. The debt discount related to the warrants are being amortized over a six to ten month period (through maturity) on a straight-line basis.
9. Related Party Transactions
Consulting Agreements
On January 6, 2014 the Company entered into a revised consulting agreement with Chord Advisors, LLC ("Chord"). David Horin, the Company's Chief Financial Officer has a significant equity partnership stake in Chord. Currently the agreement is on a month to month basis. The Company has agreed to pay Chord a monthly consulting fee of approximately $13 for Mr. Horin's services and services of his firm and 50,000 warrants upon the consummation of a financing transaction in excess of $2 million with an exercise price equal to the exercise price of such warrants in a financing transaction. The Company incurred $38 and $38 for the three months ended March 31, 2014 and 2013, respectively, and has an accounts payable balance related to this agreement of $120 as of March 31, 2014.
Accounts Payable and Accrued Expenses
As of March 31, 2014 the Company owed Daystar $50, James Barickman $3, John Linderman $16, Highpeak $2, Ingber $6, Northstar $271 and Rivercoach $72. The Company owed accrued compensation of $70,500 to related party officers as of March 31, 2014.
Related Party Notes
During the first quarter of 2014 the Company issued convertible promissory notes (“Notes”) to DayStar Funding, LP, a Texas limited partnership and a party controlled by Frederick A. Voight one of our officers and directors, in the principal amount of $230. The note has an interest rate of 24% per annum, simple interest and is due on or before August 11, 2014. No warrants were issued in connection with the promissory note.
The Notes contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the Notes was valued at approximately $1,483 using the binomial option pricing model at February 11, 2014.
The fair value of the conversion feature was determined using the binomial option pricing model with the following assumptions: risk free interest rate – 0.10%, volatility – 92%, expected term – .05 years, expected dividends– N/A. Amortization expense on the debt discount was $61 for the three months ended March 31, 2014.
As of March 31, 2014, the Company owed to Daystar Funding, LP $3,970 and accrued interest of $621. As of March 31, 2014, the company owed John Linderman and James Barickman $24 and $8 of accrued interest.
10. Intangible Assets, Net
On May 6, 2013, the Company closed the acquisition of HemCon Medical Technologies Inc., an Oregon corporation (“HemCon”), pursuant to the terms of an Agreement for Purchase and Sale of Stock entered into by and between us and HemCon (the “Agreement”). The Agreement was entered into as part of HemCon’s Fifth Amended Plan of Reorganization in its bankruptcy proceeding (United States Bankruptcy Court, District of Oregon, Case No. 12-32652-elp11) and was approved by the Court as part of HemCon’s approved Plan of Reorganization. Under the Agreement, the Company purchased 100 shares of HemCon’s common stock, representing 100% of HemCon’s then-outstanding voting securities, in exchange for $3,139 in cash (the “Purchase Price”). The Purchase Price was paid to the Court and the Trustee of the bankruptcy proceeding to be distributed to HemCon’s creditors in accordance with the Plan of Reorganization.
For the three months ended March 31, 2014, intangible assets consisted primarily of patents, customer lists, non-compete arrangements and a trade name. Patents, customer lists, non-compete arrangements and a trade name acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. The intangible assets are amortized over their estimated useful life which is 4 to 16 years.
The amortization expense for the three months ended March 31, 2014 and March 31, 2013 was $20 and $0, respectively.
|
|
Life in
|
|
|
|
|
|
Amortized as of
|
|
|
Balance as of
|
|
Description
|
|
Years
|
|
|
Price
|
|
|
March 31, 2014
|
|
|
March 31, 2014
|
|
Patents
|
|
|
12
|
|
|
$
|
336
|
|
|
|
25
|
|
|
$
|
311
|
|
Customer list
|
|
|
14
|
|
|
|
198
|
|
|
|
13
|
|
|
$
|
185
|
|
Trade name
|
|
|
16
|
|
|
|
266
|
|
|
|
14
|
|
|
$
|
252
|
|
Non-compete agreement
|
|
|
4
|
|
|
|
127
|
|
|
|
28
|
|
|
$
|
99
|
|
|
|
|
|
|
|
$
|
927
|
|
|
|
80
|
|
|
$
|
847
|
|
11. Litigation
The Company recognizes a liability for a contingency when it is probable that liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, the Company accrues the most likely amount of such loss, and if such amount is not determinable, then the Company accrues the minimum of the range of probable loss. As of March 31, 2014, there was no litigation against the Company and therefore the litigation accrual was zero.
12. Fair Value Measurements
The Company has adopted the provisions of ASC 820 which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 provides guidance on how to measure certain financial assets and financial liabilities at fair value. The requirement to measure an asset as liability at fair value is determined under the U.S. GAAP.
Certain of the Company’s assets and liabilities are considered to be financial instruments and are required to be measured at fair value in the consolidated balance sheets. Certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, short-term debt and deferred revenue are measured at cost, which approximates fair value due to the short-term maturity of these instruments. Derivative liabilities are measured at fair value.
The Company measures fair value basis based on the following key objectives:
|
•
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;
|
|
•
|
A three-level hierarchy (“Valuation Hierarchy”) which prioritizes the use of observable pricing data (Level 1 and Level 2 inputs as defined below) over unobservable pricing data (Level 3 inputs as defined below) is used in measuring value; and
|
|
•
|
The Company’s creditworthiness is considered when measuring the fair value of liabilities.
|
The valuation hierarchy used in measuring fair value is defined as follows:
|
•
|
Level 1 inputs are observed inputs such as quoted prices for identical instruments inactive markets;
|
|
•
|
Level 2 inputs are inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments inactive markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
•
|
Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs are unobservable. Level 3 requires significant management judgment or estimation.
|
All items measures at fair value are required to be classified and disclosed as a Level 1, 2 or 3 asset or liability based on the inputs used to measure for value of an asset or liability in its entirety. An asset or liability classified as Level 1 is measured by quoted prices in active markets for identical instruments. An asset or liability classified as Level 2 is measured using significant observable inputs and an asset or liability classified as Level 3 is measured using significant unobservable inputs.
The following table classifies the Company’s liabilities measured at fair value on a recurring basis (primarily reflecting an increase in stock price per share) into the fair value as of March 31, 2014 and December 31, 2013 (in thousands):
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability- conversion options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,038
|
|
The following table represents our assets and liabilities by level measured at fair value on a recurring basis at December 31, 2013:
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
None
|
|
None
|
|
None
|
There were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2014.
The following table presents changes in Level 3 liabilities measured at fair value from the period ended December 31, 2013 through March 31, 2014. Both observable and unobservable inputs are used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
Balance – December 31, 2013
|
|
$
|
-
|
|
Discount related to embedded conversion feature
1
|
|
|
239
|
|
Change in fair value of derivative liability-conversion option
|
|
|
1,799
|
|
Balance – March 31, 2014
|
|
$
|
2,038
|
|
1. The Notes contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815.
13. Subsequent Events
Stock Options for Services
During the second quarter of 2014, the Company issued 50,000 warrants to Hemcon employees with an exercise price of $0.38 and a four year term. Each option is exercisable into one share of common stock.