DERIVATIVE LIABILITIES

12 Months Ended

Dec. 31, 2014

DERIVATIVE LIABILITIES [Abstract]

DERIVATIVE LIABILITIES

NOTE 13 – DERIVATIVE LIABILITIES

Certain of the Company’s warrants (as well as its formerly outstanding preferred stock and Convertible 8% Senior Secured Notes issued in 2008 and 2010) have reset provisions to the exercise price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants. This ratchet provision results in a derivative liability in our financial statements.

Our derivative liabilities decreased to $20,166 at December 31, 2014 from $95,049 at December 31, 2013.  The gain recognized during the twelve months ended December 31, 2013 was $74,883 as compared to $966,736 for the twelve months ended December 31, 2013.

During the twelve months ended December 31, 2013, additional paid in capital increased by $6,963,596 as a result of the March 2013 conversion of the Series II Convertible Preferred Stock by Brightline Ventures I and the exercise of warrants in 2013.  The change attributable to the conversion of the preferred stock was $2,761,688 and the change associated with the exercise of warrants was $4,201,908.

The assumptions used to value the derivative liabilities in the lattice model for the year ended December 31, 2014 included the closing stock price of $0.38 per share, the total market capitalization of $14,900,570, and the projected volatility based on a historical value used of 119% and assuming the probability for an event of default occurring 5% of the time and increasing by 0.10% per month.  For the year ended December 31, 2013, the assumptions included the closing stock price of $0.56 per share, the total market capitalization of $28,625,236, and the projected volatility based on a historical value used of 93% and assuming the probability for an event of default occurring 5% of the time and increasing by 0.10% per month.

The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at December 31, 2014 and 2013:

Components of derivative financial instruments
	12/31/2014			12/31/2013
Common stock warrants	$	20,166		$	95,049
Embedded conversion features for convertible debt or preferred shares		-			-
Total	$	20,166		$	95,049
Beginning balance	$	95,049		$	8,025,381
Bifurcated amount		-			-
Change in derivative liability valuation		(74,883	)		(966,736	)
Change in derivative liability - settlements		-			(6,963,596	)
Total	$	20,166		$	95,049

For the twelve months ended December 31, 2013, the Company issued 5,893,887 shares of common stock as a result of the exercise of warrants both on a cash and cashless basis. The impact of these issuances to the related embedded derivative liabilities was a decrease to the derivative liability and increase to additional paid in capital for $2,489,552 on the exercise dates.  Finally, the Company issued 3,859,697 shares of common stock as a result of the conversion of Series II Convertible Preferred Stock and accrued dividends.  The impact of these conversions to the related embedded derivative liabilities was a decrease to the derivative liability and increase to additional paid in capital for $2,761,688 on the conversion dates.

As a result of the August 20, 2013 transaction with Brightline Ventures I, pursuant to the anti-dilution provisions in the $1.50 Warrants that were not exercised as part of the Cashless Exercise Program, the Company reduced the exercise price of those warrants to $1.25 per share and adjusted the number of shares issuable upon the exercise of those warrants such that for every five warrants owned, each remaining holder of $1.50 Warrants received one additional warrant with an exercise price of $1.25.  There were a total of 11,880,047 warrants that were not exercised as part of the Cashless Exercise Program.  In addition, the warrant holders agreed to permanently waive the full reset feature contained in the original warrant.  As a result, the Company issued an aggregate of 2,376,009 additional warrants at an exercise price of $1.25 per share (including 2,316,597 additional warrants that were issued to Brightline Ventures I) to the holders of $1.50 Warrants that were not exercised as part of the Cashless Exercise Program and recognized a settlement to additional paid in capital for the related derivative liability of $1,712,356.

On November 18, 2013, the Company completed a public offering of 1,866,667 shares of common stock at a price of $0.75 per share along with warrants to purchase 1,400,000 shares of common stock at an exercise price of $1.00 per share.  The warrants were issued with a full reset feature which was valued at $57,729 at issuance and netted with the $966,736 gain recognized on the derivative liability for the year ended December 31, 2013.