Derivative Liability and Fair Value Measurements

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liability and Fair Value Measurements

Note 10 – Derivative Liability and Fair Value Measurements

The Company recognized a derivative liability for the warrants to purchase shares of its common stock issued in connection with the equity offering and related debt conversions on August 5, 2013. These warrants have a cashless exercise provision and an exercise price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions) along with full-ratchet anti-dilution provisions. In accordance with ASC 815-10-25, we measured the derivative liability using a Monte Carlo Options Lattice pricing model at their issuance date and subsequently remeasured the liability on each reporting date.

Accordingly, at the end of each quarterly reporting date the derivative fair market value is remeasured and adjusted to current market value. As at December 31, 2014 and 2013 a total of 4,730,992 and 6,008,516 warrants were outstanding that contained a full-ratchet anti-dilution provision.

The Company recognized a derivative liability during the year ended December 31, 2014 for the $3,000,000 of senior convertible notes with a conversion price that is subject to adjustment in the event of subsequent equity sales at a lower purchase price (subject to certain exceptions). In accordance with ASC 815-10-25, we measured the derivative liability of this embedded conversion option using a Monte Carlo Options Lattice pricing model at the June 3, 2014 issuance date as $1,938,988. The value of the derivative liability at issuance was recorded as a discount against the notes in the Long-Term Debt section of the balance sheet. Accordingly, at the end of each quarterly reporting date the derivative fair market value is remeasured and adjusted to current market value.

The Company has adopted ASC Topic 820 for financial instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

-      Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

-      Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

-      Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2014:

	Total		(Level 1)		(Level 2)		Level (3)
Assets	$	—	$	—	$	—	$	—
Total assets measured at fair value		—		—		—		—
Liabilities
Note Conversion Feature Liability in 2014		2,806,942		—		—		2,806,942
Warrant Liability		10,734,196		—		—		10,734,196
Total liabilities measured at fair value (Long-Term)	$	13,541,138	$	—	$	—	$	13,541,138

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2013

	Total		(Level 1)		(Level 2)		Level (3)
Assets	$	—	$	—	$	—	$	—
Total assets measured at fair value		—		—		—		—
Liabilities
Warrant Liability		12,035,816		—		—		12,035,816
Total liabilities measured at fair value (Long-Term)	$	12,035,816	$	—	$	—	$	12,035,816

Fair value – December 31,2012	$	—
Warrants issue during period		9,067,283
Reclassification (reset expiration) of warrant liabilities to Additional Paid-in Capital		(526,245)
Reclassification of warrant exercises to Additional Paid-in Capital		(80,500)
Change in fair value for the period of warrant derivative liability		(3,575,278)
Fair value – December 31, 2013		12,035,816
Reclassification of warrant exercises to Additional Paid-in Capital		(2,127,405)
Change in fair value for the period of warrant derivative liability		825,786
Convertible debt issued with an embedded conversion price adjustment provision		1,938,988
Extinguishment of liability upon conversion of debt		(500,261)
Change in fair value of debt conversion price adjustment for the period		1,368,215
Fair value – December 31, 2014	$	13,541,138

For period ending December 31, 2014, the Monte Carlo Options Lattice pricing model was used to estimate the fair value of the embedded conversion option on the convertible notes issued during this period. The following summary table shows the assumptions used to compute the fair value of the embedded conversion option when granted at issuance and as of December 31, 2014:

	December 31, 2014			At Issuance – June 3, 2014
Assumptions for Pricing Model:
Expected term in years		2.67			3.00
Volatility range for years 1 to 5		81	%		57	%
Expected annual dividends		None			None
Value of convertible debt price adjustment:
Fair value of debt embedded conversion price adjustment option	$	2,806,942		$	1,938,988

The Monte Carlo Options Lattice pricing model was used to estimate the fair value of warrants outstanding:

	December 31, 2014		December 31, 2013		At Issuance Aug 5, 2013
Assumptions for Pricing Model:
Expected term in years		3.47 to 4.04		4.2 to 4.6		4.62 to 5.0
Volatility range for years		72 to 81%		56 to 62%		61 to 110%
Risk-free interest rate		0.93 to 1.83%		1.75%		0.77 to 1.41%
Expected annual dividends		None		None		None
Value of warrants outstanding:
Fair value of warrants	$	10,734,196	$	12,035,816	$	9,067,283