• Filing Date: 2014-04-14
  • Form Type: 10-K
  • Description: Annual report
v2.4.0.8
10. DERIVATIVE LIABILITIES
12 Months Ended
Dec. 31, 2013
DerivativeInstrumentsAndHedgingActivitiesAbstract  
DERIVATIVE LIABILITIES

Beginning in 2008, the Company issued stock purchase warrants to various lenders and investors as part of note payable agreements and stock subscription agreements.  These warrants were immediately exercisable and some contained provisions for cashless exercise under certain circumstances. The warrants ranged in term from three to five years and had expiration dates ranging from December 31, 2012 to December 31, 2017. The warrants also contained anti-dilution provisions including provisions for the adjustment of the exercise price if the Company issues common stock or common stock equivalents at a price less than the exercise price.  As of December 31, 2012, the Company had outstanding warrants entitling the holders to purchase 12,099,968 shares of the Company’s common stock upon exercise. As of December 31, 2013, the Company had outstanding warrants entitling the holders to purchase 15,670,143 shares of the Company’s common stock upon exercise.

 

In addition, beginning in 2010, the Company issued convertible debentures and notes payable to various lenders.  These debentures and notes were convertible at discounts ranging from 30% to 50% of the fair market value of the Company’s common stock. As of December 31, 2013, the Company had outstanding convertible debt in the principal amount of $23,492.  The Company did not have any outstanding convertible debentures at December 31, 2013.

 

As of December 31, 2013 and 2012, the Company did not have a sufficient number of common shares authorized to fulfill the possible exercise of all outstanding warrants and the conversion of all outstanding convertible notes payable. As a result, the Company determined that the warrants and the embedded beneficial conversion features of the debt instruments do not qualify for equity classification.  Accordingly, the warrants and conversion options are treated as derivative liabilities and are carried at fair value.

  

As of December 31, 2012, the aggregate fair value of the outstanding derivative liabilities was $1,336,547. During the year ended December 31, 2013, an aggregate of 6,615,544 warrants were issued that qualified as derivative liabilities (see Note 9). The fair value of these warrants was determined to be $812,705 as of the grant date of the warrants and this amount was reclassified from equity to derivative liabilities. Also during 2013, the Company issued convertible promissory notes with an aggregate principal amount of $628,900 which qualified as derivative liabilities (see Note 5). The fair value of these conversion options was determined to be $768,736 of which $617,399 was recorded as a discount to the associated notes and $151,337 was recognized as a loss on derivative liabilities.

 

During the year ended December 31, 2013, an aggregate of 1,539,769 warrants were exercised (see Note 9). The fair value of these warrants on their date of exercise was determined to be $48,630 and this amount was reclassified to equity on the date of resolution of these derivative liabilities. Also during 2013, convertible notes with an outstanding principal amount of $901,145 were converted to common stock and Series C preferred stock. The fair value of these conversion options on their date of conversion was determined to be $1,311,702 and this amount was reclassified to equity on the date of resolution of these derivative liabilities.

 

As of December 31, 2013, the aggregate fair value of the outstanding derivative liabilities was $1,040,850. The total gain on derivative liabilities recognized for the year ended December 31, 2013 was $365,496.

 

During 2012, the Company estimated the fair value of the derivative liabilities using the American Options Binomial Method. During 2013, the Company the derivative liabilities related to stock purchase warrants were valued using the Black-Scholes Option Pricing Model and the derivative liabilities related to the conversion features in the outstanding convertible notes were valued using the Black-Scholes Option Pricing Model assuming maximum value. The following table represents the assumptions used in these models:

 

Year:   2012     2013  
Dividend yield:     1 %     0 %
Expected volatility   284.83% to 337.73%     106.09% to 196.26%  
Risk free interest rate   .31% to 1.01%     .07% to 1.75%  
Expected life (years)   1.00 to 5.00     0.16 to 5.00  
                 

 

The following table sets forth the changes in the fair value of derivative liabilities for the years ended December 31, 2013 and 2012:

 

Balance, December 31, 2011   $ (5,417,525 )
  Change in Fair Value of Warrant Derivative Liability     3,461,614  
  Change in Fair Value of Beneficial Conversion Derivative Liability     879,514  
  Change in Fair Value of Debenture Derivative Liability     309,933  
  Adjustments to Warrant Derivative Liability     (1,245,647 )
  Adjustment to Beneficial Conversion Derivative Liability     164,657  
  Adjustment to Debenture Derivative Liability     510,880  
Balance, December 31, 2012     (1,336,574 )
  Fair value of warrant derivatives on date of grant     (812,705 )
  Convertible debt derivatives recognized as derivative loss     (151,336 )
  Convertible debt derivatives recognized as debt discount     (617,399 )
  Resolution of warrant derivatives upon exercises     48,630  
  Resolution of convertible debt derivatives upon conversions     1,311,702  
  Gain on change in fair value of derivative liabilities     516,832  
Balance, December 31, 2013     (1,040,850 )