DERIVATIVE LIABILITY

12 Months Ended

Dec. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE LIABILITY

NOTE 9 –DERIVATIVE LIABILITY

Due to the potential adjustment in the conversion price associated with certain of the convertible debentures and the potential adjustment in the exercise price of certain of the warrants, the Company had determined that certain conversion features and warrants are derivative liabilities.

As described in Note 6 above, the Company on January 31, 2017 entered into Conversion Agreements with Investors pursuant to which each Investor agreed to convert all amounts of debt accrued and payable to such persons including interest under the terms of their respective financing or loan agreement into shares of Company common stock at $0.10 per share. Certain Investors that had a conversion price less than $0.10 converted at such applicable conversion price. The investors at the time of conversion also agreed to waive any existing rights with respect to certain price protection and anti-dilution rights contained in their Stock Purchase Warrants.

Additionally, on February 22, 2017, the Company entered into an Agreement and Release with a holder of certain debentures that represented final and full payment of all amounts owed under such debentures which included debt with a face value of $300,000, accrued interest of approximately $31,000, cancellation of 3,600,000 warrants (previously accounted for as derivative liabilities) as well as certain pledged shares (2,500,000 shares) in exchange for $300,000 in cash. These debentures also had potential price adjustments on these debentures that have also been eliminated.  

Therefore, as a result of the conversion and repayment of the outstanding indebtedness and related accrued interest as well as the elimination of anti-dilution rights of Stock Purchase Warrants, the Company no longer holds liabilities with derivatives requiring fair value as of December 31, 2017.

The fair values of the embedded conversion features and the warrants are estimated and recorded as derivative liabilities on the date of issuance, offset by a discount on the related convertible note payable up to the face amount of the note, with any excess fair value recorded as derivative expense on the date of issuance. The Company’s convertible debt is convertible into common stock at conversion rates that vary based on certain triggering events. Accordingly, the conversion feature is required to be presented at fair value on the dates of issuance, settlement, and at each reporting date. The Company also has warrants to purchase common stock outstanding that provide for adjustments to the exercise prices upon the future dilutive issuances. The Company utilizes Monte Carlo simulations and stochastic forecasting to estimate the fair value of the warrants and conversion options. The ranges of assumptions utilized in estimating the fair value of the warrants and conversion options on the dates of issuance, settlement, and as of and for the years ended December 31, 2017 and 2016, are as follows:

	2017	2016
Expected Volatility	19% to 87%	19% to 87%
Expected Term	0.0 to 5.0 Years	0.0 to 5.0 Years
Risk Free Rate	0.036% to 1.93%	0.036% to 1.93%
Dividend Rate	0.00%	0.00%
Triggering Capital raise probabilities	50% to 75%	50% to 75%

A summary of derivative activity for the years ended December 31, 2017 and 2016 is as follows:

Balance at January 1, 2016	$	25,445,645
New issuances		648,836
Conversion feature reclassified to equity upon conversion of related notes payable.		(692,850	)
Change in fair value		(7,345,000	)
Balance at December 31, 2016	$	18,056,631
Modification of derivatives		319,770
Cancellation of warrants previously accounted for as derivative liabilities and elimination of derivative conversion features resulting from conversion of related party debt to equity		(11,213,573	)
Change in fair value		452,146
Reclassification of derivatives to equity upon removal of price protection in warrants		(7,614,974	)
Balance at December 31, 2017	$	—

As discussed above (Notes 7 and 8) certain notes payable, convertible notes payable and related interest were converted into equity in January 2017. Accordingly, the associated derivative liability related to these notes payable, convertible notes payable and related interest is classified as long-term liabilities at December 31, 2016 in accordance with US GAAP.