DERIVATIVE LIABILITY

6 Months Ended

Jun. 30, 2014

DERIVATIVE LIABILITY.

DERIVATIVE LIABILITY

4. DERIVATIVE LIABILITY

The conversion feature of the Loan Agreement was determined to be an embedded derivative under ASC 815 as the exercise price is subject to downward adjustment as discussed in Note 3 above and, therefore, does not meet the “fixed-for-fixed” criteria. As a result, the conversion feature of the convertible Loan Agreement is required to be bifurcated and classified as a derivative liability recorded at an initial fair value and subsequently marked-to-market each period with the changes in fair value reported in the Company’s results of operations. The initial fair value measurement of the derivative liability as determined on the date of each advance has been recognized as a debt discount and will be amortized over the life of the Loan Agreement.

The fair value of the derivative liability has been calculated using the Black-Scholes option pricing model with the following assumptions:

Risk-free interest rate	0.65% - 0.91%
Expected life of derivative liability	2.51 — 2.91 years
Expected volatility	84% - 94%
Dividend rate	0.00%

The changes in the derivative liabilities related to the conversion feature are as follows:

	Derivative
	Liability
Fair value of derivative liability at January 31, 2014	$  2,169,408
Fair value of $2,000,000 drawdown	1,555,806
Fair value of $3,000,000 drawdown	1,691,319
Unrealized gain on derivative liability	(1,459,647)
Fair value of derivative liability at June 30, 2014	$  3,956,886