Derivative Liabilities

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liabilities

14. Derivative Liabilities

As described in Note 13, as of June 30, 2015 and December 31, 2014, the Company issued a convertible notes which is are convertible into common stock, at holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified the embedded derivatives related to these notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.

The following table represents the Company’s debt derivative liability activity for the six months ended June 30, 2015:

Balance at December 31, 2014	$	1,282,532
Loss on debt modification		371,822
Reclassification of derivative liability associated with convertible debt		(513,143	)
Change in debt derivative liability during the six months ended June 30, 2015		(245,533	)
Balance June 30, 2015	$	895,678

At inception, the fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 2%, (3) weighted average risk-free interest rate of 0.03% to 0.13%, (4) expected life of 0.25 to 1.09 years, and (5) estimated fair value of the Company’s common stock of $0.0139 per share.

At June 30, 2015, the fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 261.65% to 299.66%, (3) weighted average risk-free interest rate of 0.04% to 0.15%, (4) expected life of 0.25 to 0.59 years, and (5) estimated fair value of the Company’s common stock of $0.00064 to $0.00158 per share.

Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.

Warrant derivative liability

As described in Note 13, the Company issued warrants in conjunction with the issuance with certain convertible notes. These warrants contain certain reset provisions. Therefore, in accordance with ASC 815-40, the Company reclassified the fair value of the warrant from equity to a liability at the date of the effectiveness of the reset provisions. Subsequent to the initial effectiveness date, the Company is required to adjust to fair value the warrant as an adjustment to current period operations.

The Company estimated the fair value at date of effectiveness of the warrants issued in connection with the issuance of the convertible promissory notes to be $590,038 using the Binomial Lattice formula assuming no dividends, a risk-free interest rate of 1.65%, expected volatility of 224.54%, and expected warrant life of 4.50 years. Since the warrants have reset provisions, pursuant to ASC 815-40, the Company has reclassified from equity the fair value of the warrants of $590,038 as a warrant liability. Until conversion and expiration of the warrants, changes in fair value were recorded as non-operating, non-cash income or expense at each reporting date.

At December 31, 2014, the Company marked to market the fair value of the warrant liability and determined a fair value of $545,837. The Company recorded a gain from the change in fair value of debt derivatives of $44,201 for the year ended December 31, 2014 The fair value of the warrant liability was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 234.11%, (3) weighted average risk-free interest rate of 1.20%, (4) expected life of 4.24 years, and (5) estimated fair value of the Company’s common stock of $0.0248 per share.

For the six months ended June 30, 2015, the fair value of the warrant liability was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 261.65%, (3) weighted average risk-free interest rate of 1.15%, (4) expected life of 3.52 years, and (5) estimated fair value of the Company’s common stock of $0.00109 per share

The following table represents the Company’s warrant derivative liability activity for the six months June 30, 2015:

Balance at December 31, 2014	$	545,837
Change in derivative liability during the six months ended June 30, 2015		76,124
Balance June 30, 2015	$	621,961