Quarterly report pursuant to Section 13 or 15(d)

NOTE 6: DERIVATIVE LIABILITIES

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NOTE 6: DERIVATIVE LIABILITIES
 9 Months Ended
Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
NOTE 6: DERIVATIVE LIABILITIES

During 2013, notes issued by the Company became convertible and qualified as derivative liabilities under ASC 815. As a result of the convertible notes outstanding, in 2013, an aggregate of 142,856 previously issued nonemployee common stock options and 310,863 previously issued common stock warrants became tainted under ASC 815 and were reclassed from equity to derivative liabilities.

As of December 31, 2013, the aggregate fair value of the outstanding derivative liabilities was $355,281. During the nine months ended September 30, 2014, additional convertible notes with an aggregate principal amount of $1,074,500 became convertible. The fair value of the conversion options associated with these notes was determined to be $821,100 of which $647,514 was recorded as a discount to the notes and $173,586 was expensed as a loss on derivative liabilities. Also during the nine months ended September 30, 2014, an additional 38,571 previously issued common stock warrants became tainted under ASC 815. The fair value of these warrants was determined to be $6,026 and was reclassed from equity to derivative liabilities.  In addition, during the nine months ended September 30, 2014, the Company granted 4,180,000 warrants with convertible debt. These warrants are tainted under ASC 815. The fair value of these warrants associated with the notes was determined to be $855,440 of which $400,000 was recorded as a discount to the notes and $455,440 was expensed as a loss on derivative liabilities. Also during the nine months ended September 30, 2014, convertible notes with an aggregate principal amount of $1,393,041 and accrued interest of $37,498 were converted into common shares. The fair value of the derivative liabilities associated with these converted notes was determined to be $1,599,990 on the dates of conversion. This amount was reclassified from derivative liabilities to stockholder’s deficit as resolution of derivative liabilities. As of September 30, 2014, the aggregate fair value of the outstanding derivative liabilities was $714,505. For the nine months ended September 30, 2014, the net loss on derivative liabilities was $905,674.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model and the following key assumptions during 2014 and 2013:

   
2014
   
2013
 
Expected dividends
   
-
%
   
-
%
Expected term (years)
   
0.04 - 4.42
     
0.17 - 5.01
 
Volatility
   
71% - 199
%
   
105% - 155
%
Risk-free rate
   
0.07% - 1.82
%
   
0.09% - 1.34
%

The Company determines the fair market values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs may be used to measure fair value:

Level 1
Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company uses Level 3 inputs to estimate the fair value of its derivative liabilities.

The following table sets forth by level with the fair value hierarchy the Company’s assets and liabilities measured at fair value as of September 30, 2014 and December 31, 2013:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
September 30, 2014:
                       
Derivative liabilities
 
$
-
   
$
-
   
$
714,505
   
$
714,505
 
                                 
December 31, 2013:
                               
Derivative liabilities
 
$
-
   
$
-
   
$
355,281
   
$
355,281
 

The below table presents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2014:

Fair value as of December 31, 2013
 
$
355,281
 
Fair value on the dates of issuance recorded as debt discounts
   
1,047,514
 
Fair value on the dates of issuance recognized as loss on derivatives
   
629,026
 
Fair value on the dates of issuance reclassified from equity
   
6,026
 
Resolution of derivative liabilities
   
(1,599,990
)
Loss on change in fair value of derivatives
   
276,648
 
Fair value as of September 30, 2014
 
$
714,505