11. Derivative Liabilities

6 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

11. Derivative Liabilities

The Company has issued various financial instruments to investors that contain full ratchet anti-dilution provisions. GAAP provides guidance on determining what types of financial instruments or embedded features in a financial instrument would cause the financial instrument to be classified as a liability instead of equity. Under the evaluation criteria, the Company concluded that the financial instruments that contained full ratchet anti-dilution provisions are to be treated as derivative liabilities. GAAP requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value over the period reported in the statement of operations. These instruments were valued using pricing models which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life.

The following table sets forth the Company’s estimate of the fair value of the financial instruments that are classified as liabilities as of June 30, 2013 and December 31, 2012:

June 30, 2013

December 31, 2012

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(Level 1)

(Level 2)

(Level 3)

Total

(Level 1)

(Level 2)

(Level 3)

Total

Derivative Liabilities

-

-

82,457

82,457

-

-

987,020

987,020

The following table sets forth a summary of changes in fair value of our derivative liabilities for the six months ended June 30, 2013 and year ended December 31, 2012:

	June 30, 2013			December 31, 2012
Beginning balance		987,020			14,791,291
Fair value of financial instruments at issue date		-			19,036,312
Fair value of embedded conversion feature at issue date		-			-
Change in fair value of financial instrument included in the statement of operations		(335,176	)		(28,946,762	)
Change in fair value of embedded conversion feature included in the statement of operations		(569,387	)		(3,893,821	)
		82,457			987,020

The following tables set forth a description of the financial instruments classified as derivative liabilities as of June 30, 2013 and December 31, 2012 and the assumption used to value the instruments.

Convertible Debentures

The derivative liabilities related to the embedded conversion feature and the outstanding warrants were valued using the Black-Scholes option valuation model and the following assumptions on the following dates:

	June 30, 2013						December 31, 2012
	Embedded Detachable Warrants			Embedded Conversion Feature			Embedded Detachable Warrants			Embedded Conversion Feature
Risk free interest rate		3.00	%		3.00	%		3.00	%		3.00	%
Expected volatility (peer group)		105.09	%		105.09	%		105.09	%		105.09	%
Expected life (in years)		2.75			0.50			3.25			0.50
Expected dividend yield		-			-			-			-
Number outstanding		3,071,542			9,066,667			3,071,542			9,066,667
Fair value at issue date	$	263,146		$	25,418		$	263,146		$	25,418
Change in derivative liability for period ending June 30, 2013 and December 31, 2012, respectively	$	(10,246,676	)	$	(4,463,208	)	$	(9,921,400	)	$	(3,893,821	)
Fair value at	$	63,274		$	18,133		$	388,250		$	587,520

Private Placement Offering

The derivative liabilities related to the warrants issued as part of the private placement offering were valued using the Black-Scholes option valuation model and the following assumptions on the following dates:

	June 30, 2013			December 31, 2012
Risk free interest rate		3.00	%		3.00	%
Expected volatility (peer group)		105.09	%		105.09	%
Expected life (in years)		3.75			4.25
Expected dividend yield		-			-
Number outstanding		200,000			200,000
Fair value at issue date	$	19,036,312		$	19,036,312
Change in derivative liability for period ending June 30, 2013 and December 31, 2012, respectively	$	(19,035,262	)	$	(19,025,362	)
Fair value -derivative liability	$	1,050		$	10,950