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9. DERIVATIVE LIABILITIES | 6 Months Ended
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Jun. 30, 2013
Notes to Financial Statements |
9. DERIVATIVE LIABILITIES | NOTE 9 – DERIVATIVE LIABILITIES The Company has determined that certain warrants the Company has issued contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option. The warrants issued in connection with the Bridge Warrants (as discussed in Note 9 – Bridge Financing) contain anti-dilution provisions that provide for a reduction in the exercise price of such warrants in the event that the Company issues common stock in an underwritten public offering occurring within six (6) months following March 22, 2013, if the price per share of Company common stock issued in the underwritten public offering is less than the Exercise Price of the Warrant hereunder (as adjusted prior to, or in connection with, such underwritten public offering pursuant to stock splits, stock dividends, reorganizations, mergers, consolidation or sales of assets), then the Exercise Price of this Warrant shall be automatically adjusted to equal the offering price per share issued by the Company in the underwritten public offering, provided, however, that this is a one-time adjustment to occur only in connection with the Company’s first underwritten public offering consummated within six (6) months following March 22, 2013. Such warrants were recognized as derivative warrant instruments at issuance and are measured at fair value at each reporting period. The Company determined the fair values of these warrants using a Monte Carlo simulation valuation model in the period ended March 31, 2013. The Company has now determined that a public offering will not be closed prior to the six months expiration of any possible exercise price adjustment on September 22, 2013. Therefore the exercise price of the warrants will not be reset and the derivative feature of the warrants has no value as of the period ending June 30, 2013. Activity for derivative warrant instruments during the six months ended June 30, 2013, was as follows:
Description |  | Balance at December 31, 2012 |  |  | Initial valuation of derivative liabilities upon issuance of warrants |  |  | Decrease in fair value of derivative liability |  |  | Exercise of warrants |  |  | Balance at June 30, 2013 |
Bridge Warrants |  | $ | - |  |  | $ | 14,005 |  |  | $ | (14,005 | ) |  | $ | - |  |  | $ | - |
Total |  | $ | - |  |  | $ | 14,005 |  |  | $ | (14,005 | ) |  | $ | - |  |  | $ | - |
The following is a summary of the assumptions used in the Monte Carlo simulation valuation model as of the initial valuation of the derivative warrant instruments issued on March 22, 2013:
Description |  |  |
Common stock issuable upon exercise of warrants |  |  | 85,722 |
Market value of common stock on date of measurement (1) |  | $ | 5.25 |
Adjusted exercise price |  | $ | 5.25 |
Risk free interest rate (2) |  |  | 0.6 | %
Warrant lives in years |  |  | 4 |
Expected volatility (3) |  |  | 85.0 | %
Expected dividend yield (4) |  |  | 0.0 | %
(1) | The market value of common stock is the stock price at the close of trading on the date of issuance or at period-end, as applicable.
(2) | The risk-free interest rate was determined by management using the 3 or 5 - year Treasury Bill as of the respective Offering or measurement date.
(3) | Because the Company does not have adequate trading history to determine its historical trading volatility, the volatility factor was estimated by management using the historical volatilities of comparable companies in the same industry and region.
(4) | Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.

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