Derivative Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2014

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.

Changes in Fair Values of Derivative Liabilities

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

Compound Embedded Derivative [Member]

Changes in Fair Value Inputs and Assumptions

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

Warrant Derivatives [Member]

Significant Assumptions Utilized in Valuation Technique

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%


	September 30,	December 31,
	2013	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%


	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)	—	—

Changes in Fair Value Inputs and Assumptions

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

Senior Convertible Note [Member]

Significant Assumptions Utilized in Valuation Technique

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.

- Definition

Tabular disclosure of the fair value measurement of liabilities using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and gains or losses recognized in other comprehensive income (loss) and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs) by class of liability.

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