Derivative Instruments and the Fair Value of Financial Instruments

9 Months Ended

Dec. 31, 2014

Derivative Instruments and the Fair Value of Financial Instruments

Derivative Instruments and the Fair Value of Financial Instruments

Note 11 – Derivative Instruments and the Fair Value of Financial Instruments

(i) Warrants Issued

Description of Warrants and Fair Value on Date of Grant

On August 6, 2012, the Company issued (i) warrants to purchase 1,066,667 shares of the Company’s common stock to the investors (the “investors warrants”) and (ii) warrants to purchase 85,333 shares of the Company's  common  stock to the placement agent (the "agent warrants") with an exercise price of $0.6405 per share, subject to certain adjustments, pursuant to Section 3(b) Subsequent Equity Sales of the SPA, expiring five (5) years from the date of issuance.

On February 26, 2013 and March 15, 2013 the Company issued warrants with an exercise price of $0.25 per share. Pursuant to Section 3(b), the previously issued warrants’ exercise price was reset to $0.25 per share and the number of warrant shares was reset to 2,732,801 and 218,623, respectively, or 2,951,424 in aggregate.

On May 6, 2013, the Company issued warrants with an exercise price of $0.25 per share. Pursuant to Section 3(b), the previously issued warrants' exercise price was reset again to $0.20 per share and the number of warrant shares was increased to 3,416,001 and 273,279, respectively, for a total of 3,689,280. On May 6, 2013, investors exercised warrants to purchase 2,732,799 (out of 3,416,001) shares of the Company’s common stock at $0.20 per share.

On May 6, 2013, the Company issued (i) warrants to purchase 1,877,333 (Series A), 1,066,667 (Series B) and 2,346,666 (Series C) shares of the Company’s common stock to the investors (the “investor warrants”) and (ii) warrants to purchase 150,187 (Series A), 85,333 (Series B) and 187,733 (Series C) shares of the Company's  common  stock to the placement agent (the "agent warrants") with an exercise price of $0.20 (Series A) per share, $0.25 (Series B) per share and $0.25 (Series C) per share subject to certain adjustments, pursuant to Section 3(b), expiring five (5) years from the date of issuance. On February 20, 2014 the previously issued warrants' exercise price was reset again to $0.053365 per share and the number of warrant shares was increased to 23,026,321 and 1,842,106, respectively, for 24,868,426 in aggregate. During February and March, 2014, the investors exercised warrants to purchase 1,877,333 shares at $0.0585 per share and 4,096,534 shares at $0.053365 per share, respectively. On March 11, 2014, the placement agent cashless exercised 3,438,181warrants at the exercise price of $0.053365 per share. All of the Series A and Series B warrants were exercised during the quarter ending June 30, 2014. On July 17, 2014, the remaining unexercised warrants’ exercise price was reset to $0.039 per share. 8,646,803 Series C warrants were exercised during the period ending December 31, 2014 and 3,156,315 Series C warrants left unexercised as of December 31, 2014.

On October 15, 2013, the Company issued a warrant to purchase 1,000,000 common shares with an exercise price at $0.25 per share with full ratchet reset features expiring five (5) years from the date of issuance in connection with the issuance of a convertible note. On February 20, 2014 the warrants' exercise price was reset to $0.053365 per share and the number of warrant shares was reset to 4,684,718.

On February 7, 2014, the Company issued a warrant to purchase 1,000,000 common shares with an exercise price of $0.10 per share with full ratchet reset features expiring five (5) years from the date of issuance in connection with the issuance of a convertible note. On February 20, 2014 the warrants' exercise price was reset to $0.053365 per share and the number of warrant shares was reset to 1,873,887.

Derivative Analysis

Because these warrants have full reset adjustments tied to future issuances of equity securities by the Company, they are subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting Standard Codification (“Section 815-40-15”).

Valuation of Derivative Liability

(a)Valuation Methodology

The Company’s August 6, 2012 and May 6, 2013 warrants do not trade in an active securities market, as such, the Company developed a Lattice model that values the derivative liability of the warrants based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise feature and the full ratchet reset.

Based on these features, there are two primary events that can occur; the Holder exercises the Warrants or the Warrants are held to expiration. The model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on these underlying factors which led to a set of potential scenarios. As the result of the large Warrant overhang we accounted for the dilution affects, volatility and market cap to adjust the projections.

Probabilities were assigned to each of these scenarios based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrant liability.

(b)Valuation Assumptions

The Company’s 2013 derivative warrants were valued at each period ending date with the following assumptions:

·?? The stock price would fluctuate with the Company projected volatility.

·?? The stock price would fluctuate with an annual volatility. The projected volatility curve was based on historical volatilities of the Company for the valuation periods.

·?? The Holder would exercise the warrant as they become exercisable (effective registration is projected 4 months from issuance and the earliest exercise is projected 180 days from issuance) at target prices of 2 times the higher of the projected reset price or stock price.

·?? The Holder would exercise the warrant at maturity if the stock price was above the project reset prices.

·?? A 100% probability of a reset event and a projected financing each quarter for 3 years at prices approximating 93% of market

·?? The Warrants with an exercise price of $0.25 exercise price is projected to reset to $0.047 at maturity; the Warrants with an exercise price of  $0.20 per share  is projected to reset to $0.043 at maturity

·?? No warrants have expired. Warrants with full reset feature issued during this period ending 12/31/2014

·?? The projected volatility curve for the valuation dates was:

	1 Year	2 Year	3 Year	4 Year	5 Year
August 6, 2012	129%	178%	218%	252%	281%
September 30, 2012	127%	173%	211%	244%	272%
March 31, 2013	122%	167%	205%	236%	264%
March 31, 2014	104%	168%	202%	233%	261%
December 31, 2014	112%	168%	202%	233%	261%

(c)  Fair Value of Derivative Warrants

The table below provides a summary of the fair value of the derivative warrant liability and the changes in the fair value of the derivative warrants to purchase 2,951,424 (reset to 6,247,146 on May 1, 2013) shares of the Company’s common stock, including net transfers in and/or out, of derivative warrants measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

		Fair Value Measurement Using Level 3 Inputs
		Derivative warrants Assets (Liability)			Total
Balance, March 31, 2013	$	(486,113	)	$	(486,113	)
Total gains or losses (realized/unrealized) included in:
Net income (loss)		(5,290,703	)		(5,290,703	)
Other comprehensive income (loss)		-			-
Purchases, issuances and settlements		385,192			385,192
Transfers in and/or out of Level 3		-			-
Balance, March 31, 2014		(5,391,624	)		(5,391,624	)
Total gains or losses (realized/unrealized) included in:
Net income (loss)		1,215,623			1,215,623
Other comprehensive income (loss)		-			-
Purchases, issuances and settlements		1,709,657			1,709,657
Transfers in and/or out of Level 3		-			-
Balance, December 31, 2014	$	(2,466,344	)	$	(2,466,344	)

(d) Warrants Outstanding

The table below summarizes the Company’s derivative warrant activity:

	Warrant Activities											APIC		(Gain) Loss
	Derivative Shares			Non-derivative Shares		Total Warrant Shares			Fair Value of Derivative Warrants			Reclassification of Derivative Liability		Change in Fair Value of Derivative Liability
Derivative warrant at March 31, 2013		2,951,424			2,281,753		5,233,177			(486,113	)
Issuance of warrants		42,302,198			1,247,076		42,549,274			(472,374	)		-		-
Exercise of warrants		(12,144,847	)		-		(12,144,847	)		857,566			-		-
Mark to market										(5,290,703	)				5,290,703

Derivative warrant at March 31, 2014	33,108,775		3,528,829	36,637,604		(5,391,624	)
Issuance of warrants	10,336,097		5,184,353	15,520,450		(2,493,287	)	-	-
Exercise of warrants	(23,103,575	)	-	(23,103,575	)	4,202,944		-	-
Mark to market						1,215,623			1,215,623
Derivative warrant at December 31, 2014	20,341,297		8,713,182	36,637,604		(2,466,344	)

(ii) Warrant Activities

The table below summarizes the Company’s warrant activities through December 31, 2014:

Summary of the Company’s Warrant Activities

The table below summarizes the Company’s warrant activities:

	Number of Warrant Shares			Exercise Price  Range Per Share		Weighted Average Exercise Price		Fair Value at Date of Issuance			Aggregate Intrinsic Value
Balance, March 31, 2014		36,637,604		$	0.053365 - 0.30	$	0.05436	$	680,894		$	-
Granted		15,520,450			0.05 - 0.45		0.053365		159,266			-
Canceled		-			-		-		-			-
Exercised		(23,103,575	)		0.041 - 0.053365		0.14291		(143,944	)		-
Expired		-			-		-		-			-
Balance, December 31, 2014		29,054,479		$	0.010 - 0.30	$	0.14291	$	696,216		$	-
Earned and exercisable, December 31, 2014		29,054,479		$	0.010 - 0.30	$	0.14291	$	696,216		$	-
Unvested, December 31, 2014		-		$	-	$	-	$	-		$	-

The following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2014:

	Warrants Outstanding				Warrants Exercisable
Range of Exercise Prices	Number Outstanding	Average Remaining Contractual Life  (in years)	Weighted Average Exercise Price		Number Exercisable	Average Remaining Contractual Life  (in years)	Weighted Average Exercise Price
$0.0426 - 0.45	29,054,479	4.95	$	0.14291	19,654,479	3.97	$	0.15928
$0.0426 - 0.45	29,054,479	4.95	$	0.14291	19,654,479	3.97	$	0.15928