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Summary of Significant Accounting Policies | 6 Months Ended
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Jun. 30, 2014
Summary of Significant Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the Company’s accounts and those of the Company’s wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management 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 and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. The significant estimates are the valuation of derivative liabilities, stock-based compensation expenses and income taxes and its associated valuation allowance. Cash and Cash Equivalents The Company considers cash deposits and all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company's cash deposits are held at two high-credit-quality financial institutions. The Company's cash deposits at these institutions exceed federally insured limits. Patents Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain. Fixed Assets Fixed assets are stated at cost less accumulated depreciation. Fixed assets are comprised of computers and software. Depreciation is calculated using the straight-line method over the estimated useful life of the related assets, which is three years. Derivatives All derivatives are recorded at fair value on the balance sheet. The Company has determined fair values using market based pricing models incorporating readily observable market data and requiring judgment and estimates. Fair Value of Financial Instruments The Company’s financial instruments primarily include cash, derivative liabilities, accounts payable and subordinated promissory notes. Due to the short-term nature of cash, derivative liability, accounts payable and promissory notes the carrying amounts of these assets and liabilities approximate their fair value. Derivatives are recorded at fair value at each period end. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Valuations for assets and liabilities that can be obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company's principal markets for these securities are the secondary institutional markets, and valuations are based on observable market data in those markets. Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange or dealer- or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. Fair Value on a Recurring Basis As required by Accounting Standard Codification (“ASC”) Topic No. 820 – 10 Fair Value Measurement, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of the derivative instruments which include Series A preferred stock with down-round protection provisions and warrants with down-round protection provisions was calculated with the assistance of a third party valuation firm, see Note 4. The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of June 30, 2014:
|  | Quoted Prices |  |  |  |  |  |  |  |  |  |
|  | In Active |  |  | Significant |  |  |  |  |  | Total |
|  | Markets for |  |  | Other |  |  | Significant |  |  | Carrying |
|  | Identical |  |  | Observable |  |  | Unobservable |  |  | Value as of |
|  | Assets |  |  | Inputs |  |  | Inputs |  |  | June 30, |
Description |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | 2014 |
Derivative liabilities – warrant instruments |  | $ | - |  |  | $ | - |  |  | $ | 25,586,933 |  |  | $ | 25,586,933 |
The following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of December 31, 2013:
|  | Quoted Prices |  |  |  |  |  |  |  |  |  |
|  | In Active |  |  | Significant |  |  |  |  |  | Total |
|  | Markets for |  |  | Other |  |  | Significant |  |  | Carrying |
|  | Identical |  |  | Observable |  |  | Unobservable |  |  | Value as of |
|  | Assets |  |  | Inputs |  |  | Inputs |  |  | December 31, |
Description |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | 2013 |
Derivative liabilities – warrant instruments |  | $ | - |  |  | $ | - |  |  | $ | 4,089,284 |  |  | $ | 4,089,284 |
Derivative liabilities – Series A preferred stock |  |  | - |  |  |  | - |  |  |  | 16,014,141 |  |  |  | 16,014,141 |
Total derivative liabilities |  | $ | - |  |  | $ | - |  |  | $ | 20,103,425 |  |  | $ | 20,103,425 |
The following table sets forth a reconciliation of changes in the fair value of financial liabilities classified as level 3 in the fair value hierarchy:
|  | Significant Unobservable Inputs (Level 3) |
|  | Six Month Ended June 30, |  |  | Year Ended December 31, |  |  | Year Ended December 31, |
|  | 2014 |  |  | 2013 |  |  | 2012 |
Beginning balance |  | $ | (20,103,425 | ) |  | $ | (5,090,988 | ) |  | $ | - |
Change in fair value of derivative liabilities included in net loss for the six months ended June 30, 2014 and for the years ended December 31, 2013 and 2012, respectively |  |  | (7,954,970 | ) |  |  | (12,877,675 | ) |  |  | (3,688,353 | )
Additions – warrant instruments |  |  | (4,333,163 | ) |  |  | (37 3,699 | ) |  |  | (119,029 | )
Transfer of warrant instruments to additional paid in capital |  |  | 6,804,625 |  |  |  | - |  |  |  | - |
Additions – conversion feature of Series A preferred stock |  |  | - |  |  |  | (1,761,063 | ) |  |  | (1,283,606 | )
Ending balance |  | $ | (25,586,933 | ) |  | $ | (20,103,425 | ) |  | $ | (5,090,988 | )
Income Taxes The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. At June 30, 2014 and December 31, 2013, the Company had recognized a valuation allowance to the full extent of the Company’s net deferred tax assets since the likelihood of realization of the benefit does not meet the more likely than not threshold. The Company files a U.S. Federal income tax return and various state returns. Uncertain tax positions taken on our tax returns will be accounted for as liabilities for unrecognized tax benefits. The Company will recognize interest and penalties, if any, related to unrecognized tax benefits in general and administrative expenses in the statements of operations. There were no liabilities recorded for uncertain tax positions at June 30, 2014 and December 31, 2013. The open tax years, subject to potential examination by the applicable taxing authority, for the Company were from 2010 through 2014. Research and Development Research and development costs primarily consist of research contracts for the advancement of product development, stock-based compensation, and consultants. The Company expenses all research and development costs in the period incurred. Stock-Based Compensation The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period. The grant-date fair value of employee share options is estimated using the Black-Scholes option pricing model adjusted for the unique characteristics of those instruments. Compensation expense for options and warrants granted to non-employees is determined by the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured, and is recognized over the service period. The expense is subsequently adjusted to fair value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted, is expensed over the related vesting period. Adjustments to fair value at each reporting date may result in income or expense, depending upon the estimate of fair value and the amount of expense recorded prior to the adjustment. The Company reviews its agreements and the future performance obligation with respect to the unvested options or warrants for its vendors or consultants. When appropriate, the Company will expense the unvested options or warrants at the time when management deems the service obligation for future services has ceased. Net Loss per Common Share Basic net loss per common share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per common share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Dilutive common stock equivalents are comprised of Class A convertible preferred stock, Series A Preferred Stock, warrants for the purchase of common stock and options. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position. Potentially dilutive securities are not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares):
|  | Six Month Ended June 30, 2014 |  |  | Year Ended December 31, 2013 |  |  | Year Ended December 31, 2012 |
Class A convertible preferred stock |  |  | 3,337,309 |  |  |  | - |  |  |  | - |
Series A preferred stock |  |  | - |  |  |  | 136,041,275 |  |  |  | 8,503,503 |
Common stock warrants |  |  | 43,144,557 |  |  |  | 89,265,160 |  |  |  | 4,.865,235 |
Common stock options |  |  | 3,365,171 |  |  |  | 18,654,097 |  |  |  | 677,962 |
Total |  |  | 49,847,037 |  |  |  | 243,960,532 |  |  |  | 14,046,700 |
Recent Accounting Pronouncements In June 2014, the FASB issued ASU 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation”. The guidance eliminates the definition of a development stage entity thereby removing the incremental financial reporting requirements from U.S. GAAP for development stage entities, primarily presentation of inception to date financial information. The provisions of the amendments are effective for annual reporting periods beginning after December 15, 2014, and the interim periods therein. However, early adoption is permitted. Accordingly, the Company has adopted this standard during the six months ending June 30, 2014. The Company does not expect the adoption of any other recent accounting pronouncements to have a material impact on its financial statements. Subsequent Events The Company’s management reviewed all material events through the date the financial statements were issued for subsequent event disclosure consideration.

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