Derivative Liabilities

12 Months Ended

Dec. 31, 2015

Derivative Liability [Abstract]

Derivative Liabilities

The Company has determined that the convertible notes issued on December 31, 2014, September 21, 2015 and December 31, 2015 contain provisions that protect holders from future issuances of the Company’s common stock at prices below such convertible notes’ respective conversion price and these provisions result in modification of the conversion price to issue additional common shares based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40 and the conversion feature represents an embedded derivative that requires bifurcation.

The fair values of the Convertible Notes Offering were recognized as derivative instruments at issuance and are measured at fair value at each reporting period. The embedded derivative on the 2014 Agreement was valued at $594,963 using a binomial valuation model at December 31, 2014. In addition during 2015 the Company recognized derivative liabilities aggregating $1,439,432 in connection with the Sept 2015 and Dec 2015 fund raising. At December 31, 2015, the embedded conversion derivative for all three debt financings was revalued to $2,224,362 and the Company recorded an increase in the derivative liability related to its convertible debt of $189,967. The assumptions considered in the valuation model for the December 31, 2014 notes at December 31, 2015 and 2014 were:

	December 31,
	2015	2014
Trading price of common stock on measurement date	$0.55	$10.40
Conversion price	$0.30	$   6.00
Risk free interest rate (1)	0.15%	0.25%
Conversion notes lives in years	<1 year	1 year
Expected volatility (2)	208%	177%
Expected dividend yield (3)	-	-

The assumptions considered in the valuation model for the Sept 2015 and Dec 2015 notes were:

	December 31,
	2015
Trading price of common stock on measurement date	$0.55
Conversion price	$0.30
Risk free interest rate (1)	0.57%- 0.65%
Conversion notes lives in years	<1 year to 1 year
Expected volatility (2)	208% - 224%
Expected dividend yield (3)	-

(1)   The risk-free interest rate was determined by management using the 9 and 12 months Treasury Bill as of the respective measurement date.

(2)   The volatility factor was estimated by using the historical volatilities of the Company’s trading history.

(3)   Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.

A summary of the derivative liability at December 31, 2015 is summarized as follows:

Balance, December 31, 2014                                                              $828,830

Allocation from September 2015 and December 2014

Convertible debt offerings                                                                 1,439,432

Change in fair value                                                                          ( 35,676)

Balance, December 31, 2015                                                            $2,232,586

The derivative liability at December 31, 2015 consists of debt conversions of $2,224,362 ($594,963 - 2014) and warrants of $8,224 ($233,867 - 2014).

 Accounting for Convertible Debt

Under the initial accounting for the December 2014 Offering the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the $445,000 face amount of the convertible debt at the issuance date. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. As of December 31, 2014, the Company recorded aggregate debt discounts of $445,000 related to the conversion rights and recorded $149,963 of expense related to the excess value of the derivative over the face amount of the convertible debt.

Under the September 21, 2015 offering the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the $275,000 face amount of the additional convertible debt at the issuance date.

Under the December 31, 2015 offering the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the $550,000 face amount of the additional convertible debt at the issuance date.  

As a result, upon issuance of the two 2015 debt offerings, the Company recorded a debt discount of $825,000 and recorded a loss of $614,432 related to the excess value of the $1,439,432 the derivative over the $825,000 face amount of the convertible debt.

The debt discount is accreted to interest expense over the life of the convertible debentures using an effective interest method. For the year ended December 31, 2015, the Company amortized $609,288 of the debt discount. In addition, amortization of deferred debt issuance costs amounted to $722,375 for the year ended December 31,2015.