10. Warrant Liabilities

9 Months Ended

Sep. 30, 2014

Warrants and Rights Note Disclosure [Abstract]

Warrants acquired in connection with the reverse merger, contain provisions that protect holders from a decline in the issue price of our common stock (or “down-round” provisions) or that contain net settlement provisions. The Company accounts for these warrants as liabilities, not equity. Down-round provisions reduce the exercise or conversion price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise or conversion price of those instruments or issues new warrants or convertible instruments that have a lower exercise or conversion price. Net settlement provisions allow the holder of the warrant to surrender shares underlying the warrant equal to the exercise price as payment of its exercise price, instead of physically exercising the warrant by paying cash. The Company evaluates whether warrants to acquire its common stock contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant agreements based on a variable that is not an input to the fair value of a “fixed-for-fixed” option.

On April 3, 2014, the Company issued 30,136,713 warrants with an exercise price of $0.0001 in connection with the $10,180,000 14% Senior Secured Promissory Note. As the note contained a variable share settlement provision, these warrants are recognized as a liability recorded at fair value.

The Company recognizes these warrants as liabilities at their fair value and remeasures them at fair value on each reporting date.

The assumptions used in connection with the valuation of warrants issued were as follows:

	September 30,	April 3,	April 2,
	2014	2014	2014
Number of shares underlying the warrants	77,862,807	30,136,713	47,726,094
Exercise price	$0.0001 - $0.80	$0.0001	$0.595 - $0.80
Volatility	151.64% - 216.02%	183.30%	134% - 158%
Risk-free interest rate	0.03% - 1.78%	0.11%	0.28% - 1.73%
Expected dividend yield	0.00%	0.00%	0.00%
Expected warrant life (years)	0.5 - 3.13	1	1.42 - 3.63
Stock price	$0.06	$0.08	$0.09

			Acquisition				Increase
			Measurement				(Decrease)
	December 31,		Date		Initial		in			September 30,
	2013		April 2, 2014		Measurement		Fair Value			2014
2011 Unit Offering	$	–	$	1,242,333	$	–	$	(329,803	)	$	912,530
2011 Unit Offering Placement Agent		–		156,367		–		(26,748	)		129,619
2012 Bridge Warrant		–		20,690		–		(2,070	)		18,620
2012 Bridge Warrant Placement Agent		–		4,138		–		(414	)		3,724
2012 Unit Offering		–		137,178		–		(25,090	)		112,088
2012 Unit Offering Placement Agent		–		96,481		–		(47,435	)		49,046
2013 Merger related notes converted		–		11,608		–		(2,808	)		8,800
2014 Senior Note Purchase		–		–		2,407,930		(602,740	)		1,805,190
	$	–	$	1,668,795	$	2,407,930	$	(1,037,108	)	$	3,039,617

The approximate $1,037,000 decrease in fair value of warrants is recognized as a gain in the Other (Income) Expense section of the condensed consolidated statement of operations. The gain is also recognized within the Corporate segment’s results of operations.

Number of Warrants Subject to Remeasurement

Number of Warrants

December 31,

April 2, 2014

Warrant

September 30,

2013

Acquisition

Additions

Reductions

2014

2011 Unit Offering

–

33,277,837

–

33,277,837

2011 Unit Offering Placement Agent

–

4,726,891

–

4,726,891

2012 Bridge Warrant

–

1,137,735

–

1,137,735

2012 Bridge Warrant Placement Agent

–

227,546

–

227,546

2012 Unit Offering

–

6,300,213

–

6,300,213

2012 Unit Offering Placement Agent

–

1,561,544

–

1,561,544

2013 Merger related notes converted

–

494,328

–

494,328

2014 Senior Note Purchase

–

30,136,713

–

30,136,713

–

47,726,094

30,136,713

–

77,862,807

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