DERIVATIVE WARRANT LIABILITY

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE WARRANT LIABILITY

DERIVATIVE WARRANT LIABILITY

The Series C Warrants issued in connection with the agreements, as amended, with the Full Circle private placement offering initially provided Full Circle with the opportunity to purchase 1,000,000 shares of the Company’s common stock at the exercise price of $5.50 per share. In September 2014, through amendment, the shares of common stock were increased to 1,400,000 and the exercise price reduced to $4.00 per share. The Series C Warrants have non-standard anti-dilution protection provisions and, under certain conditions, grant the right to the holder to require the Company to adjust the warrant’s exercise price to a lower price. Accordingly, through December 31, 2014, these warrants were accounted for as derivative liabilities.

On January 21, 2014, the value of the initial warrant derivative liability was calculated to be $1,368,908. The Company received $500,000 in cash of which $100,000 was identified as deferred financing costs, resulting in an initial loss on the fair value of the derivative liability of $868,908 on the grant date. The price of $5.00 per share of the Series A and Series B Warrants granted in conjunction with the December 2013 Issuance and the January 2014 Issuance resulted in the revaluation of the Series C Warrants granted to Full Circle and an increase to the derivative liability of $153,994.

The Company used the binomial pricing model and assumptions that consider, among other factors, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. The Company’s common stock has been thinly traded since being delisted in the first quarter of 2014, and all conversions of debt from the January 2014 Issuance during 2014 were converted using a stock price of $5.00 per share. Using the binomial pricing model and a stock price of $5.00 per share, management utilized initial scenario stock prices of $3.00, $4.00, $6.00, and $7.00.  Initially assuming a three-year expected term, management assessed the probabilities of the stock prices for each year, with probabilities more heavily weighted toward lower stock prices, in light of the Company’s delisted status, changes in leadership, and the Company’s current inability to execute its initial financing with Full Circle.

On January 21, 2015, Full Circle executed its option to cashlessly exercise 1,215,000 warrants in exchange for 660,263 common shares of the Company’s stock. At the time of the cashlessly exercise, the fair value of the common shares was determined to be $3,314,520 based on the Company's closing share price of $5.02 on January 21, 2015. Accordingly, the Company decreased the derivative liability by $3,314,520 and increased common stock by $660 and additional paid-in capital by $3,313,860.

On May 1, 2015, the Company and Full Circle entered into Amendment No. 2 to the Series C Warrants, pursuant to which Full Circle cashlessly exercised 160,000 warrants and received 100,000 shares of the Company’s common stock. On May 4, 2015, Full Circle exercised its remaining warrants under the Series C Warrants to purchase 25,000 shares of the Company’s common stock for $4.00 per share. Immediately preceding Full Circle’s exercises the fair values of the Series C Warrants were determined to be $593,394. The fair value of the 125,000 common shares issued to Full Circle were determined to be approximately $468,750, based on closing prices per share of $3.75 on May 1, 2015. Accordingly, the Company decreased the derivative liability by $601,617 and increased common stock by $125 and additional paid-in capital by $454,796, and $86,171 in cash received from Full Circle, net of $13,829 of settlement expenses paid. The Company recorded a net gain in the settlement of the warrant liability of $232,867 and $210,634 for the three and six-month periods ended June 30, 2015. There are no more warrants under the Series C Warrants outstanding.

In determining the value of Full Circle’s remaining warrants prior to exercise, the Company used the binomial pricing model and a stock price of $5.00 per share and utilized initial scenario stock prices of $3.00, $4.00, $6.00, and $7.00.  The Company utilized an expected term of 1.81 years which is the remaining term of Full Circle’s warrants and an early exercise factor of 1.33 to factor in an anticipation of early exercise of in-the-money warrants. The underlying assumptions used in our value of the derivative warrant liability at June 30, 2015 were:

	May 1, 2015			May 4, 2015
Current stock price	$	3.75		$	3.50
Exercise price of warrant	$	4.00		$	4.00
Risk-free interest rate	0.60		%	0.60		%
Expected dividend yield	0.00		%	0.00		%
Expected term (in years)	1.81 years			1.81 years
Expected volatility	133		%	133		%
Early exercise factor	1.33			1.33

Changes in fair value of the derivative financial instruments are recognized in the Company’s consolidated statements of operations as a derivative gain or loss and are included in other income (expense). The warrant derivative gains (losses) are non-cash income (expenses); and loss on derivative liability, net, was included in other income (expense) in the Company’s consolidated statements of operations. The primary underlying risk exposure pertaining to the warrants was the change in fair value of the underlying common stock for each reporting period.

Changes in the derivative warrant liability for the three and six-month periods ended June 30, 2015 and 2014 are as follows:

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
Balance at beginning of period	$	601,617		$	1,147,640		$	3,893,904		$	—
Fair value of warrants issued	—			—			—			1,368,908
Increase in derivative liability resulting from anti-dilution provision in agreement, with Full Circle	—			—			—			153,994
Increase (decrease) in the fair value of warrant liability	(8,223		)	(223,876		)	14,010			(599,138		)
Reclassification to APIC for shares issued for Full Circle as a result of warrant exercises, net of cash received	(368,750		)	—			(3,683,270		)	—
(Gain) loss on settlement of derivative	(224,644		)	—			(224,644		)	—
Balance at end of period	$	—		$	923,764		$	—		$	923,764

Changes in the aggregate loss of the derivative warrant liability for the three and six-month periods ended June 30, 2015 and 2014 are as follows:

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
Beginning balance at beginning of period	$	101,617		$	647,640		$	3,393,904		$	—
Initial loss on recognition of derivative liability	—			—			—			868,908
Increase (decrease) in the fair value of warrant liability	(8,223		)	(223,876		)	14,010			(445,144		)
Reclassification from (to) APIC for shares issued for Full Circle as a result of warrant exercises, net of initial consideration	131,250			—			(3,183,270		)	—
(Gain) loss on settlement of derivative	(224,644		)	—			(224,644		)	—
Balance at end of period	$	—		$	423,764		$	—		$	423,764