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Derivative Liabilities
 6 Months Ended
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