Quarterly report pursuant to Section 13 or 15(d)

NOTE 6: DERIVATIVE LIABILITIES

v3.5.0.2
NOTE 6: DERIVATIVE LIABILITIES
9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
NOTE 6: DERIVATIVE LIABILITIES

During the nine months ended September 30, 2016, twenty eight convertible notes issued by the Company became convertible and qualified as derivative liabilities under Accounting Series Codification 815, Derivatives (ASC 815). In addition, all outstanding nonemployee common stock options and outstanding common stock warrants are tainted and required to be accounted for as derivative liabilities under ASC 815.

As of September 30, 2016 and December 31, 2015, the aggregate fair value of the outstanding derivative liabilities was $13,354,786 and $70,004,318, respectively. For the nine months ended September 30, 2016 the net gain on the change of fair value was $58,197,261. For the nine months ended September 30, 2015, the net loss on the change in fair value of derivative liabilities was $50,896,732.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model using the following key assumptions during the nine months ended September 30, 2016

Expected dividends 
   
-
%
Expected term (years)
   
0.17 – 5.00
 
Volatility
   
74% - 190
%
Risk-free rate
   
0.16% - 1.57
%

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, 2016 and December 31, 2015:

 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
September 30, 2016:
                       
Derivative liabilities – convertible debt
 
$
-
   
$
-
   
$
12,958,760
   
$
12,958,760
 
Derivative liabilities – warrants
   
-
     
-
     
387,904
     
387,904
 
Derivative liabilities – nonemployee options
   
-
     
-
     
8,122
     
8,122
 
Total
 
$
-
   
$
-
   
$
13,354,786
   
$
13,354,786
 
 
                               
December 31, 2015:
                               
Derivative liabilities – convertible debt
 
$
-
   
$
-
   
$
67,316,227
   
$
67,316,227
 
Derivative liabilities – warrants
   
-
     
-
     
2,677,717
     
2,677,717
 
Derivative liabilities – nonemployee options
   
-
     
-
     
10,374
     
10,374
 
Total
 
$
-
   
$
-
   
$
70,004,318
   
$
70,004,318
 

The below table presents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2016:

Fair value as of December 31, 2015
 
$
70,004,318
 
Fair value on the dates of issuance recorded as debt discounts
   
1,975,986
 
Fair value on the dates of issuance recognized as loss on derivatives
   
3,176,463
 
Extinguishment of liability to additional paid-in capital
   
(428,257
)
Change in fair value of derivatives
   
(61,373,724
)
Fair value as of September 30, 2016
 
$
13,354,786