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, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
NOTE 6: DERIVATIVE LIABILITIES

During 2014, notes issued by the Company became convertible and qualified as derivative liabilities under ASC 815. In addition, the outstanding nonemployee common stock options and outstanding common stock warrants became tainted and were required to be accounted for as derivative liabilities under ASC 815.

As of December 31, 2014, the aggregate fair value of the outstanding derivative liabilities was $1,765,695. In addition, during the nine months ended September 30, 2015, the Company borrowed an additional $2,989,000, net of original issuance discounts, under convertible notes. As of September 30, 2015, the aggregate fair value of the outstanding derivative liabilities was $55,632,685. For the nine months ended September 30, 2015, the net loss on derivative liabilities was $50,896,732.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model and the following key assumptions during 2015 and 2014:

   
2015
   
2014
 
Expected dividends
   
-
%
   
-
%
Expected term (years)
   
0.04 - 3.92
     
0.01 - 4.67
 
Volatility
   
156% - 237
%
   
130% - 223
%
Risk-free rate
   
0.03% - 1.37
%
   
0.01% - 1.82
%

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, 2015 and December 31, 2014:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
September 30, 2015:
                       
Derivative liabilities – convertible debt
 
$
-
   
$
-
   
$
52,411,143
   
$
52,411,143
 
Derivative liabilities – warrants
   
-
     
-
     
3,166,137
     
3,166,137
 
Derivative liabilities – nonemployee options
   
-
     
-
     
55,405
     
55,405
 
                                 
December 31, 2014:
                               
Derivative liabilities – convertible debt
 
$
-
   
$
-
   
$
1,550,703
   
$
1,550,703
 
Derivative liabilities – warrants
   
-
     
-
     
214,565
     
214,565
 
Derivative liabilities – nonemployee options
   
-
     
-
     
427
     
427
 

The below table presents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2015:

Fair value as of December 31, 2014
 
$
1,765,695
 
Fair value on the dates of issuance recorded as debt discounts
   
2,970,258
 
Fair value on the dates of issuance recognized as loss on derivatives
   
19,500,105
 
Loss on change in fair value of derivatives
   
31,396,627
 
Fair value as of September 30, 2015
 
$
55,632,685