Liabilities

9 Months Ended

Sep. 30, 2015

Liabilities [Abstract]

Liabilities

3. Liabilities

Note Payable

In November 2014, the Company issued for cash of $100,000 an unsecured note payable and a five year warrant with an exercise price of $0.09 per share for the purchase of up to 50,000 shares of common stock. The terms of the note were a repayment of $115,000 if paid by February 18, 2015 and, if paid thereafter, the principal balance of the note was to be increased to $115,000 and interest will accrue at 20% from February 18, 2015 until paid. The note remained outstanding at September 30, 2015 and is accruing interest at 20%. The warrant was valued at $1,659 using the Black-Scholes Pricing Model and was recorded as additional paid-in capital and expensed to non-cash interest in 2014.

Convertible Debentures

As of September 30, 2015, the Company has issued and outstanding Convertible Debentures (“Debentures”) with original terms of nine months to one year, an interest rate ranging from 10-20% per year and an original issue discount ranging from 5% to 10% which, at the option of the holder, may convert into common stock at an initial conversion price ranging from $0.03 to $0.099 per share. The Debentures were issued with detachable five year cashless Holders Warrants that allow the holders to purchase one share of stock for each two shares available under the converted Debentures at an exercise price ranging from $0.06 to $0.1287 per share. In addition, the Company issued five year cashless Agent Warrants equal to 10% of the total number of shares issuable under the Debentures and Holders Warrants at an exercise price ranging from $0.0745 to $0.1287 per share. For debentures issued through March 31, 2013, at the option of the Debenture holder, the terms of the Debentures and Holders Warrants are subject to an exchange feature in the event that the Company issues securities with terms more favorable than those of the then outstanding Debentures and Holders Warrants. Debentures issued subsequent to March 31, 2013 do not contain such an exchange clause. The gross amount of Debentures outstanding is $5,499,159 as of September 30, 2015.

During the nine months ended September 30, 2015, the Company has issued and outstanding Convertible Debentures (“Variable Debentures”) with original terms of 9 months to one year, an interest rate ranging from 0-10% per year and original issue discount rate ranging from 0-10% which contain variable conversion rates ranging from discounts of 40-50% of the Company’s common stock based on the lowest trading prices ranging from 10-25 days previous to conversion. The Variable Debentures contain prepayment options which enable the Company to prepay the notes for periods of 0-180 days subsequent to issuance at premiums ranging from 0-50%. The gross amount of Variable Debentures outstanding is $496,361 as of September 30, 2015.

As of September 30, 2015 and December 31, 2014, the balances of the Debentures are as follows:

	September 30,			December 31,
	2015			2014
Balance at beginning of period	$	4,496,602		$	2,951,629
Issuance of debentures for cash		1,520,250			2,506,376
Original issue discount		109,444			128,071
Debentures converted to common stock		(130,777	)		(1,089,474	)
Convertible debt		5,995,519			4,496,602
Less unamortized costs of financing		554,173			576,502
Convertible debt, net of unamortized costs	$	5,441,346		$	3,920,100
Convertible debt in default	$	3,660,275		$	1,862,160

Derivative Liability

Since the Company issued Convertible Debentures which included Holders Warrants, Agent Warrants and a conversion option that includes a possible exchange feature in the event of a future financing on terms more favorable than those of the existing warrants and debentures, this results in the warrants and conversion feature of the debentures being recorded as a liability and measured at fair value. In addition, Variable Debentures issued during the nine months ended September 30, 2015, contained variable conversion rates based on unknown future prices of the Company’s common stock resulting in a conversion feature. The Company measures these warrants and conversion features using a combination of Black-Scholes option valuation models and Binomial Lattice option valuation models using similar assumptions to those described under “Stock-Based Compensation.” The time period over which the Company will be required to evaluate the fair value of the warrants is approximately five years and the time period over which the Company will be required to evaluate the fair value of the conversion features are six to twelve months or conversion.

The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, managements’ assessment of the probability of a more favorably priced future financing or significant fluctuations in the volatility of the trading market for the Company’s common stock, the Company’s fair value estimates could be materially different in the future.

The Company computes the fair value of the derivative liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the derivative liability is the Company’s stock price, which is subject to significant fluctuation and is not under its control. The resulting effect on net loss is therefore subject to significant fluctuation and will continue to be so until the Company’s Debentures, which the convertible feature is associated with, are converted into common stock or paid in full with cash. Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its stock price increases and non-cash income when its stock price decreases.

As of September 30, 2015 and December 31, 2014, the balances of the Derivative Liability are as follows:

				Conversion
	Warrants			Feature			Total
Balance at December 31, 2013	$	803,484		$	300,939		$	1,104,423
Elimination on extinguishment of debt		-			(197,482	)		(197,482	)
Change in fair value at year end		(38,526	)		193,424			154,898
Balance at December 31, 2014		764,958			296,881			1,061,839
Elimination on extinguishment of debt		-			(57,732	)		(57,732	)
Initial value on issuance of debt		-			456,324			456,324
Change in fair value at period end		(402,484	)		49,169			(353,315	)
Balance at September 30, 2015	$	362,474		$	744,642		$	1,107,116

Debentures with warrants attached issued subsequent to March 31, 2013 did not contain an exchange provision and were accounted for using the equity method of valuing the note and warrant. For the nine months ended September 30, 2015, $225,700 was recorded as additional paid-in capital.