6. WARRANT LIABILITY

In connection with certain securities purchase agreements entered into during the third quarter of 2011 and the second quarter of 2012, the Company granted warrants with ratchet provisions. The warrants contain an expiration date of four years from the date of grant. During the first two years of grant, if the Company issues any additional shares of common stock at a price per share less than the exercise price in effect, the exercise price will be adjusted to equal the average price per share received by the Company for the additional shares issued. After the first two years following the issuance date, if the Company issues any additional shares of common stock at a price per share less than the exercise price in effect, the exercise price will be adjusted using a formula based on the existing exercise price, the outstanding shares before and after the issuance of such shares, and the average price during the issuance of such shares. In addition to the exercise price adjustment, the number of shares upon exercise of the warrants is also subject to adjustment.

Upon grant, the Company assesses the fair value of the warrants using the Black Scholes pricing model and records a warrant liability for the value. The Company then assesses the fair value of the warrants quarterly based on the Black Scholes Model and increases or decreases the warrant liability to the new value, and records a corresponding gain or loss (see below for variables used in assessing the fair value). The Company uses expected volatility based primarily on historical volatility using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.

Due to the ratchet provisions, the Company treats the warrants as a derivative liability in accordance with the provisions of ASC 815 “Derivatives and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that potentially settle in an entity’s own common stock.

As of June 30, 2015, these warrants include the following:

Warrants granted during July 2011 in connection with the sale of 35,461 shares of common stock with the right to originally purchase up to 35,461 shares of the Company’s common stock with an original exercise price of $2.50. Due to the issuance of the Company’s common stock in April 2012, the exercise price was adjusted to $0.50 and the number of shares to 1,808,511. Fair value was determined using the following variables:

	Grant Date			June 30, 2015			December 31, 2014
Risk-free interest rate at grant date		1.21	%		1.13	%		1.27	%
Expected stock price volatility		194.9	%		92.2	%		189.65	%
Expected dividend payout		–			–			–
Expected option in life-years		4			.27			1.5

Warrants granted during April 2012 in connection with the sale of 100,000 shares of the Company’s preferred stock to a significant shareholder and brother of the then-Chief Executive Officer with the right to purchase up to 200,000 shares of the Company’s common stock with an exercise price of $0.50. Fair value was determined using the following variables:

	Grant Date			June 30, 2015
Risk-free interest rate at grant date		0.47	%		1.13	%
Expected stock price volatility		137.8	%		92.2	%
Expected dividend payout		–			–
Expected option in life-years		3.75			1.03.

Warrants granted during April 2012 in connection with the sale of 1,000,000 shares of the Company’s common stock with an exercise price of $0.50.

	Grant Date			June 30, 2015
Risk-free interest rate at grant date		0.47	%		1.13	%
Expected stock price volatility		137.8	%		92.2	%
Expected dividend payout		–			–
Expected option in life-years		3.75			1.05

Transactions involving warrants with ratchet provisions are as follows:

	Number of Warrants		Weighted-Average Price Per Share
Outstanding at December 31, 2013		3,008,511	$	0.50
Granted
Exercised
Canceled or expired
Additional due to ratchet trigger
Outstanding at December 31, 2014		3,008,511		0.50
Granted
Exercised
Canceled or expired
Addition due to ratchet trigger
Outstanding at June 30, 2015		3,008,511	$	0.50

As of June 30, 2015 and December 31, 2014, the warrant liability consisted of the following:

	June 30, 2015			December 31, 2014
Warrant liability (beginning balance)	$	51		$	5,618,819
Additional liability due to new grants
Loss(gain) on changes in fair market value of warrant liability		(51	)		(5,618,786	)
Net warrant liability	$	–		$	51

Change in fair market value of warrant liability resulted in a gain of $51 and a loss of $948,857 for the three months ended March 31 2015 and 2014, respectively.