Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE LIABILITY

v2.4.0.8
DERIVATIVE LIABILITY
6 Months Ended
Sep. 30, 2014
DERIVATIVE LIABILITY [Text Block]

NOTE 6 – DERIVATIVE LIABILITY

On November 7, 2013, we sold to certain institutional investors 10% Series B Convertible Preferred Shares (“Series B Preferred Stock”) which are subject to mandatory redemption and include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument.

Between April 16 and April 24, 2014, the Company redeemed 247 shares of the 10% Series B Preferred Stock for $247,171 plus accrued interest of $46,456 and $10,212 penalty related to the delayed registration. The effect of this redemption resulted in a reduction of $56,098 derivative liability.

On May 1, 2014, the Company completed the offering and sale of an aggregate of 17,333,329 shares of our common stock and warrants to purchase an aggregate of 8,666,665 shares of our common stock, for aggregate gross proceeds of $2,599,999. Each share of common stock sold in the offering was accompanied by a warrant to purchase one-half of a share of common stock at an exercise price of $0.15 per share for a period of five years from the date of issuance. Each share of common stock, together with each warrant was sold at a price of $0.15. The warrants include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding were not indexed to the Company’s own stock and therefore a derivative instrument.

On August 20, 2014, the Company entered into a warrant amendment agreement with certain holders of the Company’s outstanding common stock purchase warrants whereby the Company agreed to reduce the exercise price of the Existing Warrants to $0.10 per share in consideration for the immediate exercise of the Existing Warrants by the Holders and the Holders are to be issued new common stock purchase warrants of the Company in the form of the Existing Warrants to purchase up to a number of shares of our common stock equal to the number of Existing Warrants exercised by the Holders, provided that the exercise price of the New Warrants will be $0.125 per share, subject to adjustment in the New Warrants. Each New Warrant has a term of five years from the date of issuance. Each share of common stock, together with each warrant was sold at a price of $0.125. The warrants include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument. The derivative liability was increased by $167,384 as a result of the issued warrants.

On August 21, 2014, pursuant to the Warrant Amendment Agreement, the Company issued an aggregate of 9,829,455 shares of the Company’s common stock upon exercise of the Existing Warrants at an exercise price of $0.10 per share for aggregate gross proceeds of $982,945.50. An aggregate of 8,666,664 shares of our common stock issued upon exercise of the Existing Warrants. The derivative liability was reduced by $168,273 as a result of the warrants exercised.

Pursuant to the engagement agreement dated March 12, 2014 with H.C. Wainwright & Co., LLC (“Wainwright”), Wainwright agreed to act as our exclusive placement agent in connection with the offering. Pursuant to the engagement agreement, the Company, we issued warrants to purchase an aggregate of 5.5% of the aggregate number of shares of our common stock sold in the offering, or 953,333, to Wainwright and its designees. These warrants have an exercise price of $0.1875 per share and expire on April 16, 2019. The warrants include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument.

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at April 24, 2014 is as follows:

    Conversion feature  
Stock price $ 0.3275  
Term (Years)   Less than 1  
Volatility   331%  
Exercise prices $ 0.43  
Dividend yield   0%  

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at May 1, 2014 is as follows:

    Issuance Warrants     Placement agent Warrants  
Stock price $ 0.15   $ 0.15  
Term (Years)   5     5  
Volatility   306%     306%  
Exercise prices $ 0.15   $ 0.1875  
Dividend yield   0%     0%  

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at August 20, 2014 is as follows:

    New Warrants  
Stock price $ 0.12  
Term (Years)   5  
Volatility   247%  
Exercise prices $ 0.125  
Dividend yield   0%  

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at August 21, 2014 is as follows:

    Existing Warrants  
Stock price $ 0.17  
Term (Years)   5  
Volatility   247%  
Exercise prices $ 0.10  
Dividend yield   0%  

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at September 30, 2014 is as follows:

    Warrants (including placement agent)  
Stock price $ 0.1081  
Term (Years)   4 to 5  
Volatility   223%  
Exercise prices $ 0.55 to 0.125  
Dividend yield   0%  

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that were accounted for at fair value on a recurring basis as of May 1, 2013.

          Fair Value Measurement at May 1, 2014  
    Carrying                    
    Value at                    
    May 1, 2014     Level 1     Level 2     Level 3  
Liabilities:                        
                         
Derivative warrant liability $ 216,236   $   -   $   -   $ 216,236  
Derivative placement agent warrant liability $ 23,787   $   -   $   -   $ 23,787  
Total derivative liability $ 240,023   $   -   $   -   $ 240,023  

The following table sets forth the fair value hierarchy added to our financial liabilities by level that were accounted for at fair value on a recurring basis as of August 21, 2013.

          Fair Value Measurement at August 21, 2014  
      Carrying                        
      Value at                          
    August 21, 2014     Level 1     Level 2     Level 3  
Liabilities:                        
                         
Derivative warrant liability $ 149,687 $     -   -   $ 149,687  

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that were accounted for at fair value on a recurring basis as of September 30, 2014.

          Fair Value Measurement at September 30, 2014  
    Carrying                    
    Value at                    
    September 30, 2014     Level 1     Level 2     Level 3  
Liabilities:                        
                         
Derivative convertible debt liability $   -   $   -   $   -   $   -  
Derivative warrant liability convertible preferred stock $ 29,928   $ -   $ -   $ 29,928  
Derivative warrants liability on common stock issuance
            including placement agent warrants
$ 136,020   $ -   $ -   $ 136,020  
Total derivative liability $ 165,948   $   -   $   -   $ 165,948  

The Company analyzed the warrants and conversion feature under ASC 815 to determine the derivative liability. The Company estimated the fair value of these derivatives using a multinomial distribution (Lattice) valuation model. The fair value of these warrant liabilities at September 30, 2014 was $165,948 and the conversion feature liability was $0. At March 31, 2014 the fair value of these warrant liabilities was $209,320 and the conversion feature liability was $128,668. Changes in the derivative liability for the period ended September 30, 2014 consist of:

    Three Months  
    Ended  
    September 30, 2014  

Derivative liability at March 31, 2014

$ 337,998  

Redemption of convertible preferred stock

  (56,098 )

Warrants issued May 1, 2014

  216,236  

Placement agent warrants May 1, 2014

  23,787  

Exercise of Warrants August 21, 2014

  (168,273 )

Issuance of warrants August 21, 2014

  167,384  

Change in derivative liability – mark to market

  (355,086 )

Derivative liability at September 30, 2014

$ 165,948