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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | NOTE L — DERIVATIVE FINANCIAL INSTRUMENTS The following tables summarize the components of our derivative liabilities and linked common shares as of September 30, 2014 and December 31, 2013 and the amounts that were reflected in our income related to our derivatives for the periods then ended:
|  | September 30, 2014 |  |  | December 31, 2013 |
Derivative liabilities: |  |  |  |  |  |  |  |
Embedded derivatives derived from: |  |  |  |  |  |  |  |
Senior Convertible Notes |  | $ | — |  |  | $ | 47,243 |
|  |  | — |  |  |  | 47,243 |
Warrant and Share Purchase Option derivatives |  |  |  |  |  |  |  |
Senior Convertible Notes |  |  | 140,828 |  |  |  | 840,000 |
2014 Share Purchase Option |  |  | 984,921 |  |  |  | — |
Series G Convertible Preferred Stock |  |  | — |  |  |  | 83,580 |
Warrant derivatives |  |  | 1,125,749 |  |  |  | 923,580 |
Total derivative liabilities |  | $ | 1,125,749 |  |  | $ | 970,823 |
|  | September 30, 2014 |  |  | December 31, 2013 |
Common shares linked to derivative liabilities: |  |  |  |  |  |  |  |
Embedded derivatives: |  |  |  |  |  |  |  |
Senior Convertible Notes |  |  | — |  |  |  | 1,729,647 |
|  |  | — |  |  |  | 1,729,647 |
Warrant and Share Purchase Option derivatives |  |  |  |  |  |  |  |
Senior Convertible Notes |  |  | 1,562,500 |  |  |  | 1,562,500 |
2014 Share Purchase Option * |  |  | * * |  |  |  | — |
Series G Convertible Preferred Stock |  |  | — |  |  |  | 525,000 |
|  |  | 1,562,500 |  |  |  | 2,087,500 |
Total common shares linked to derivative liabilities |  |  | * * |  |  |  | 3,817,147 |
* | The 2014 Share Purchase Option common shares are indexed and convertible to Oceanica shares.
** | See related August 14, 2014 loan information in NOTE I regarding redacted information.
|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2014 |  |  | 2013 |  |  | 2014 |  |  | 2013 |
Derivative income (expense): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gains (losses) from fair value changes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Senior Convertible Notes |  | $ | — |  |  | $ | 202,034 |  |  | $ | 47,243 |  |  | $ | 244,303 |
2014 Share Purchase Option derivative |  |  | (153,175 | ) |  |  | — |  |  |  | (153,175 | ) |  |  | — |
Warrant derivatives |  |  | 459,016 |  |  |  | 438,119 |  |  |  | 782,752 |  |  |  | 1,098,688 |
|  |  | 305,841 |  |  |  | 640,153 |  |  |  | 676,820 |  |  |  | 1,342,991 |
Redemptions of Senior Convertible Notes |  |  | — |  |  |  | 230,300 |  |  |  | — |  |  |  | 863,651 |
Total derivative income (expense) |  | $ | 305,841 |  |  | $ | 870,453 |  |  | $ | 676,820 |  |  | $ | 2,206,642 |
Our Series G Convertible Preferred Stock and Warrant Financing Transaction on October 11, 2010, Series G Convertible Preferred Stock and Warrant Settlement Transaction during April 2011, and Senior Convertible Note and Warrant Financing Transaction on November 8, 2011 gave rise to derivative financial instruments. We entered into a Series G Convertible Preferred Stock and Warrant Financing Transaction and the Series G Convertible Preferred Stock and Warrant Settlement Transaction on October 11, 2010 and April 14, 2011, respectively. These transactions have since expired. The Series G Convertible Preferred Stock embodied certain terms and features that both possessed all of the conditions of derivative financial instruments and were not clearly and closely related to the host preferred contract in terms of economic risks and characteristics. These terms and features consist of the embedded conversion option and the related down-round anti-dilution protection provision, the Company’s redemption privilege and the holder’s redemption privilege. Each of the redemption features also embodies the redemption premium payments. Warrants issued with this transaction and the subsequent Settlement Transaction embodied down-round anti-dilution protection and, accordingly, were not afforded equity classification. As more fully discussed in NOTE I, we entered into the Senior Convertible Note and Warrant Financing Transactions on November 8, 2011 and May 10, 2012. The Senior Convertible Notes embodied certain terms and conditions that were not clearly and closely related to the host debt agreement in terms of economic risks and characteristics. These terms and features consist of the embedded conversion options, certain redemption features and a conversion price reset feature. Warrants issued with this transaction embodied reset price protection and, accordingly, were not afforded equity classification. Current accounting principles that are provided in ASC 815 - Derivatives and Hedging require derivative financial instruments to be classified in liabilities and carried at fair value with changes recorded in income. In addition, the standards do not permit an issuer to account separately for individual derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be bundled together and fair valued as a single, compound embedded derivative. We have selected the Monte Carlo Simulations valuation technique to fair value the compound embedded derivative because we believe that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market participants would likely consider in transactions involving compound embedded derivatives. Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional inputs for option models such as market trading volatility and risk free rates. We have selected Binomial Lattice to fair value our warrant derivatives because we believe this technique is reflective of all significant assumption types market participants would likely consider in transactions involving freestanding warrants derivatives. The Monte Carlo Simulations technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators. During the nine-months ended September 30, 2014, the compound embedded derivatives related to the Senior Convertible Notes were converted. As of September 30, 2014, no compound embedded derivatives were present. Significant inputs and results arising from the Monte Carlo Simulations process are as follows for the compound embedded derivative that has been bifurcated from our Senior Convertible Note and classified in liabilities as of December 31, 2013:
|  | December 31, 2013
Quoted market price on valuation date |  | $2.02
Contractual conversion rate |  | $3.17
Range of effective contractual conversion rates |  | —
Contractual term to maturity |  | 0.33 Years
Implied expected term to maturity |  | 0.33 Years
Market volatility: |  |
Range of volatilities |  | 47.4% - 91.2%
Range of equivalent volatilities |  | 59.9% - 69.9%
Contractual interest rate |  | 8.0 - 9.0%
Range of equivalent market risk adjusted interest rates |  | 8.08% - 9.08%
Range of equivalent credit risk adjusted yields |  | 0.67%
Risk-free rates |  | 0.01% - 0.07%
Significant inputs and results arising from the Monte Carlo Simulations process are as follows for the options issued and bifurcated from our Monaco Promissory Loan and classified in liabilities as of September 30, 2014 and the inception date August 14, 2014:
|  | September 30, 2014 |  | August 14, 2014
Underlying price on valuation date * |  | $2.50 |  | $2.50
Contractual conversion rate |  | $* * |  | $* *
Contractual term to maturity |  | 1.87 Years |  | 2.00 Years
Implied expected term to maturity |  | 1.68 Years |  | 1.85 Years
Market volatility: |  |  |  |
Range of volatilities |  | 55.5% - 70.5% |  | 37.0% - 62.2%
Equivalent volatilities |  | 62.3% |  | 51.2%
Contractual interest rate |  | 8.0% - 11.0% |  | 8.0% - 11.0%
Equivalent market risk adjusted interest rates |  | 9.50% |  | 9.50%
Range of credit risk adjusted yields |  | 3.97% - 4.61% |  | 3.94% - 4.45%
Equivalent credit risk adjusted yield |  | 4.24% |  | 4.15%
* | The instrument is convertible into shares of the Company’s subsidiary, Oceanica, which is not a publicly-traded entity. Therefore its shares do not trade on a public exchange. As a result, the underlying value must be based on private sales of the subsidiary’s shares because that is the best indicator of the value of the shares. There has been one sale of Oceanica’s shares in which a private investor purchased 21% of the shares for $2.50 per share. Accordingly the underlying price used in the MCS calculations for the inception date and quarter ended September 30, 2014 was $2.50.
** | See related August 14, 2014 loan information (Loan one) in NOTE I regarding redacted information.
The following table reflects the issuances of compound embedded derivatives, redemptions and changes in fair value inputs and assumptions related to the compound embedded derivatives during the nine months ended September 30, 2014 and 2013.
|  | For the nine months ended September 30, |
|  | 2014 |  |  | 2013 |
Balances at January 1 |  | $ | 47,243 |  |  | $ | 1,529,583 |
Issuances |  |  | — |  |  |  | — |
Expirations from redemptions of host contracts reflected in income |  |  | — |  |  |  | (863,652 | )
Changes in fair value inputs and assumptions reflected in income |  |  | (47,243 | ) |  |  | (244,302 | )
Balances at September 30 |  | $ | — |  |  | $ | 421,629 |
The fair value of the compound embedded derivative is significantly influenced by our trading market price, the price volatility in trading and the interest components of the Monte Carlo Simulation technique. On October 11, 2010, we also issued warrants to acquire 1,800,000 of our common shares in connection with the Series G Convertible Preferred Stock Financing. During April 4-8, 2011, we issued warrants to acquire 525,000 of our common shares in connection with the Series G Convertible Preferred Stock and Warrant Settlement Transaction. Finally, on November 8, 2011, we issued warrants to acquire 1,302,083 of our common shares in connection with the Senior Convertible Note Financing Transaction. These warrants required liability classification as derivative financial instruments because certain down-round anti-dilution protection or price protection features included in the warrant agreements are not consistent with the concept of equity. We applied the Binomial Lattice valuation technique in estimating the fair value of the warrants because we believe that this technique is most appropriate and reflects all of the assumptions that market participants would likely consider in transactions involving the warrants, including the potential incremental value associated with the down-round anti-dilution protections. The Binomial Lattice technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators. All remaining warrants linked to 1,725,000 shares of common stock were exercised on October 11, 2013. Therefore, the warrants linked to 1,725,000 shares of common stock were not outstanding as of September 30, 2014 and December 31, 2013. Significant assumptions and utilized in the Binomial Lattice process are as follows for the warrants linked to 1,725,000 shares of common stock as of September 30, 2013:
|  | September 30, 2013
Linked common shares |  | 1,725,000
Quoted market price on valuation date |  | $3.00
Contractual exercise rate |  | $2.4648
Term (years) |  | 0.03
Range of market volatilities |  | 24.0% - 31.5%
Risk free rates using zero coupon US Treasury Security rates |  | 0.03%
All remaining warrants linked to 525,000 shares of common stock expired unexercised on April 13, 2014. Therefore, the warrants linked to 525,000 shares of common stock were not outstanding as of September 30, 2014. Significant assumptions and utilized in the Binomial Lattice process are as follows for the warrants linked to 525,000 shares of common stock as of September 30, 2013 and December 31, 2013:
|  | September 30, 2013 |  | December 31, 2013
Linked common shares |  | 525,000 |  | 525,000
Quoted market price on valuation date |  | $3.00 |  | $2.02
Contractual exercise rate |  | $2.4648 |  | $2.3793
Term (years) |  | 0.54 |  | 0.28
Range of market volatilities |  | 26.3% - 46.1% |  | 50.1% - 88.3%
Risk free rates using zero coupon US Treasury Security rates |  | 0.02% - 0.04% |  | 0.01% - 0.07%
Significant assumptions and utilized in the Binomial Lattice process are as follows for the warrants linked to 1,562,500 shares of common stock as of September 30, 2014, September 30, 2013 and December 31, 2013:
|  | September, 30 |  | December 31,
|  | 2014 |  | 2013 |  | 2013
Linked common shares |  | 1,562,500 |  | 1,562,500 |  | 1,562,500
Quoted market price on valuation date |  | $0.91 |  | $3.00 |  | $2.02
Contractual exercise rate |  | $3.60 |  | $3.60 |  | $3.60
Term (years) |  | 2.61 |  | 3.61 |  | 3.35
Range of market volatilities |  | 57.0% - 79.7% |  | 38.2% - 60.5% |  | 51.1% - 78.2%
Risk free rates using zero coupon US Treasury Security rates |  | 0.02% - 0.58% |  | 0.02% - 0.63% |  | 0.07% - 0.78%
Custom lattice variable: Probability of exercisability (434,027 linked common shares) |  | — |  | — |  |
Of the 1,302,083 common shares accessible from the warrant issued on November 8, 2011, 434,027 of those common shares were accessible only based upon the Company’s election to require the lender to provide the additional financing. When the lender provided additional financing of $8,000,000 on May 10, 2012, the additional 434,027 of common shares became accessible. Warrants indexed to an additional 260,417 were issued in conjunction with the additional financing. The following table reflects the issuances of the Share Purchase Option derivative and warrant derivatives and changes in fair value inputs and assumptions for these derivatives during the nine months ended September 30, 2014 and 2013.
|  | For the nine months ended September 30, |
|  | 2014 |  |  | 2013 |
Balances at January 1 |  | $ | 923,580 |  |  | $ | 3,826,619 |
Issuances on August 14, 2014 |  |  | 831,746 |  |  |  | — |
Changes in fair value inputs and assumptions reflected in income |  |  | (629,577 | ) |  |  | (1,098,688 | )
Balances at September 30 |  | $ | 1,125,749 |  |  | $ | 2,727,931 |
The fair value of all warrant derivatives is significantly influenced by our trading market price, the price volatility in trading and the risk free interest components of the Binomial Lattice technique.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5618551-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624181-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624163-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708773-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624177-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579245-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41641-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624171-113959 + Details
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