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Derivative Liabilities | 6 Months Ended
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Jun. 30, 2014
Derivative Laibilities [Abstract] |
DERIVATIVE LIABILITIES | NOTE 4 – DERIVATIVE LIABILITIES ASC Topic No. 815 – Derivatives and Hedging provides guidance on determining what types of instruments or embedded features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can affect the accounting for warrants and convertible preferred instruments issued by the Company. As the conversion features within the Series A preferred stock, and certain detachable warrants issued in connection with the subordinated promissory notes payable and equity offerings in 2012 and 2013, do not have fixed settlement provisions because their conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future, the Company concluded that the instruments are not indexed to the Company’s stock and are to be treated as derivative liabilities. The Company obtained valuations prepared by Vantage Point Advisors, Inc. for purposes of determining the fair value of the derivatives and stock compensation expense. In determining the fair value of the derivatives, the Company used the Monte Carlo Simulations using Geometric Brownian method for the initial valuation and then the Black-Scholes option pricing model was used for the valuation at June 30, 2014. The following is a summary of the assumptions used in the valuation model as of the initial valuations of the derivative warrant instruments issued during the six months ended June 30, 2014:
|  | Initial |  |  | At |
|  | valuation |  |  | June 30 |
|  | 2014 |  |  | 2014 |
Common stock issuable upon exercise of warrants |  |  | 30,036,648 |  |  |  | 30,036,648 |
Market value of common stock on measurement date (1) |  | $ | 1.17 |  |  | $ | 2.00 |
Exercise price |  | $ | 1.50 and 2.25 |  |  | $ | 1.50 and 2.25 |
Risk free interest rate (2) |  |  | 1.7 | % |  |  | 1.6 | %
Expected life in years |  |  | 0.3 and 5 |  |  |  | 0.3 and 4.9 |
Expected volatility (3) |  |  | 71 and 73 | % |  |  | 71 and 73 | %
Expected dividend yields (4) |  |  | None |  |  |  | None |
(1) | The market value is the calculated fair value of the common stock pursuant to the valuation technique as described above.
(2) | The risk-free interest rate was determined by management using the 1 and 5 - year Treasury Bill as of the measurement date.
(3) | The historical trading volatility was determined by calculating the volatility of the Company’s peer group.
The following is a summary of the assumptions used in the valuation model as of the initial valuations of the derivative warrant instruments and convertible Series A preferred stock issued during the years ended December 31, 2013 and December 31, 2012, respectively, and as of December 31, 2013, and December 31, 2012, respectively:
|  | Initial |  |  | Initial |  |  | At |  |  | At |
|  | valuations |  |  | valuations |  |  | December 31, |  |  | December 31, |
|  | 2013 |  |  | 2012 |  |  | 2013 |  |  | 2012 |
Common stock issuable upon exercise of warrants |  |  | 22,333,593 |  |  |  | 19,385,157 |  |  |  | 41,718,750 |  |  |  | 19,385,157 |
Common stock issuable upon conversion of Series A preferred stock |  |  | 51,006,250 |  |  |  | 85,035,025 |  |  |  | 136,041,275 |  |  |  | 85,035,025 |
Market value of common stock on measurement date (1) |  | $ | 0.80 |  |  | $ | 0.30 |  |  | $ | 1.50 |  |  | $ | 0.80 |
Exercise price |  | $ | 0.80 |  |  | $ | 0.80 |  |  | $ | 0.80 |  |  | $ | 0.80 |
Risk free interest rate (2) |  |  | 0.19 | % |  |  | 0.20 | % |  |  | 0.38 | % |  |  | 0.19 | %
Expected life in years |  |  | 1.4 |  |  |  | 1.6 |  |  |  | 2.0 |  |  |  | 1.4 |
Expected volatility (3) |  |  | 68 | % |  |  | 72 | % |  |  | 68 | % |  |  | 73 | %
Expected dividend yields (4) |  |  | None |  |  |  | None |  |  |  | None |  |  |  | None |
(1) | The market value is the calculated fair value of the common stock pursuant to the valuation technique as described above.
(2) | The risk-free interest rate was determined by management using the 1, 2 or 3 - year Treasury Bill as of the measurement date.
(3) | The historical trading volatility was determined by calculating the volatility of the Company’s peer group.
Change in fair value of derivative liabilities during the six months ended June 30, 2014 was as follows:
|  | Balance at December 31, |  |  | Initial valuation of derivative liabilities upon issuance of new warrants during the |  |  | Increase (decrease) in fair value of derivative |  |  | Fair value of derivatives upon reclass to additional paid-in |  |  | Balance at June 30, |
|  | 2013 |  |  | period |  |  | liabilities |  |  | capital |  |  | 2014 |
Convertible preferred derivative liability issued in connection with Series A preferred stock offering |  | $ | 11,762,115 |  |  | $ | - |  |  | $ | (7,214,804 | ) |  | $ | (4,547,311 | ) |  | $ | - |
Convertible preferred derivative liability issued to Wonpung for services |  |  | 2,030,589 |  |  |  | - |  |  |  | (1,370,262 | ) |  |  | (660,327 | ) |  |  | - |
Convertible preferred derivative liability issued to lenders in connection with exchange of debt for Series A preferred stock |  |  | 2,219,854 |  |  |  | - |  |  |  | (1,262,858 | ) |  |  | (956,996 | ) |  |  | - |
Warrants issued in connection with Series A preferred stock offering |  |  | 2,424,167 |  |  |  | - |  |  |  | (1,945,669 | ) |  |  | (478,498 | ) |  |  | - |
Warrants issued as offering costs to placement agent |  |  | 1,217,083 |  |  |  | - |  |  |  | (1,109,421 | ) |  |  | (107,662 | ) |  |  | - |
Warrants issued to lenders in connection with subordinated promissory notes offering |  |  | 313,258 |  |  |  | - |  |  |  | (259,427 | ) |  |  | (53,831 | ) |  |  | - |
Warrants issued to placement agent in connection with subordinated promissory notes offering |  |  | 136,359 |  |  |  | - |  |  |  | (136,359 | ) |  |  | - |  |  |  | - |
Series A warrants issued in May and June 2014 offering |  |  | - |  |  |  | 842,370 |  |  |  | 9,198,452 |  |  |  | - |  |  |  | 10,040,822 |
Series B warrants issued in connection with May and June 2014 offering |  |  | - |  |  |  | 2,494,655 |  |  |  | 7,400,275 |  |  |  | - |  |  |  | 9,894,930 |
Placement Agent warrants issued in connection with May and June 2014 offering |  |  | - |  |  |  | 996,138 |  |  |  | 4,655,043 |  |  |  | - |  |  |  | 5,651,181 |
Total |  | $ | 20,103,425 |  |  | $ | 4,333,163 |  |  | $ | 7,954,970 |  |  | $ | (6,804,625 | ) |  | $ | 25,586,933 |
Change in fair value of derivative liability during the year ended December 31, 2013 was as follows:
|  |  |  |  | Initial valuation |  |  |  |  |  |  |
|  |  |  |  | of derivative |  |  |  |  |  |  |
|  |  |  |  | liabilities upon |  |  |  |  |  |  |
|  | Balance at |  |  | issuance of new derivatives |  |  | Increase in fair value of |  |  | Balance at |
|  | December 31, |  |  | during |  |  | derivative |  |  | December 31, |
|  | 2012 |  |  | the period |  |  | liabilities |  |  | 2013 |
Convertible preferred derivative liability issued in connection with Series A preferred stock offering |  | $ | 2,492,166 |  |  | $ | 1,647,910 |  |  | $ | 7,622,039 |  |  | $ | 11,762,115 |
Convertible preferred derivative liability issued to Wonpung for services |  |  | 880,214 |  |  |  | - |  |  |  | 1,150,375 |  |  |  | 2,030,589 |
Convertible preferred derivative liability issued to lenders in connection with exchange of debt for Series A preferred stock |  |  | 958,861 |  |  |  | - |  |  |  | 1,260,993 |  |  |  | 2,219,854 |
Warrants issued in connection with Series A preferred stock offering |  |  | 475,000 |  |  |  | 113,153 |  |  |  | 1,836,014 |  |  |  | 2,424,167 |
Warrants issued as offering costs to placement agent |  |  | 242,500 |  |  |  | 248,655 |  |  |  | 725,928 |  |  |  | 1,217,083 |
Warrants issued to lenders in connection with subordinated promissory notes offering |  |  | 29,158 |  |  |  | 83,363 |  |  |  | 200,737 |  |  |  | 313,258 |
Warrants issued to placement agent in connection with subordinated promissory notes offering |  |  | 13,089 |  |  |  | 41,681 |  |  |  | 81,589 |  |  |  | 136,359 |
Total |  | $ | 5,090,988 |  |  | $ | 2,134,762 |  |  | $ | 12,877,675 |  |  | $ | 20,103,425 |
Change in fair value of derivative liability during the year ended December 31, 2012 was as follows:
|  |  |  |  | Initial valuation |  |  |  |  |  |  |
|  |  |  |  | of derivative |  |  |  |  |  |  |
|  |  |  |  | liabilities upon |  |  |  |  |  |  |
|  | Balance at |  |  | liabilities upon issuance of new derivatives |  |  | Increase in fair value of |  |  | Balance at |
|  | December 31, |  |  | during |  |  | derivative |  |  | December 31, |
|  | 2011 |  |  | the period |  |  | liabilities |  |  | 2012 |
Convertible preferred derivative liability issued in connection with Series A preferred stock offering |  | $ | - |  |  | $ | 872,688 |  |  | $ | 1,619,478 |  |  | $ | 2,492,166 |
Convertible preferred derivative liability issued to Wonpung for services |  |  |  |  |  |  | 299,141 |  |  |  | 581,073 |  |  |  | 880,214 |
Convertible preferred derivative liability issued to lenders in connection with exchange of debt for Series A preferred stock |  |  |  |  |  |  | - |  |  |  | 958,861 |  |  |  | 958,861 |
Warrants issued in connection with Series A preferred stock offering |  |  | - |  |  |  | 111,777 |  |  |  | 363,223 |  |  |  | 475,000 |
Warrants issued as offering costs to placement agent |  |  |  |  |  |  | 79,615 |  |  |  | 162,885 |  |  |  | 242,500 |
Warrants issued to lenders in connection with subordinated promissory notes offering |  |  | - |  |  |  | 26,325 |  |  |  | 2,833 |  |  |  | 29,158 |
Warrants issued to placement agent in connection with subordinated promissory notes offering |  |  | - |  |  |  | 13,089 |  |  |  | - |  |  |  | 13,089 |
|  | $ | - |  |  | $ | 1,402,635 |  |  | $ | 3,688,353 |  |  | $ | 5,090,988 |

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