Quarterly report pursuant to Section 13 or 15(d)

NOTE 6: DERIVATIVE LIABILITIES

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NOTE 6: DERIVATIVE LIABILITIES
 3 Months Ended
Mar. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
NOTE 6: DERIVATIVE LIABILITIES

During the three months ended March 31, 2017, the convertible notes issued by the Company 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 March 31, 2017 and December 31, 2016, the aggregate fair value of the outstanding derivative liabilities was $8,669,572 and $18,028,611, respectively. For the three months ended March 31, 2017 and 2016, the net gain on the change of fair value was $8,788,332 and $21,974,032, respectively.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model using the following key assumptions during the three months ended March 31, 2017

Expected dividends 
 
 
-
%
Expected term (years)
 
 
0.25 – 5.00
 
Volatility
 
 
95% - 222
%
Risk-free rate
 
 
0.50% - 1.93
%

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 March 31, 2017 and December 31, 2016:

 
  
Level 1
    
Level 2
    
Level 3
    
Total
  
March 31, 2017:
                        
Liabilities:
                        
Derivative financial instruments
  
$
-
    
$
-
    
$
8,669,572
    
$
8,669,572
  
 
                                
December 31, 2016:
                                
Liabilities:
                                
Derivative financial instruments
  
$
-
    
$
-
    
$
18,028,611
    
$
18,028,611
  

The below table presents the change in the fair value of the derivative liabilities during the three months ended March 31, 2017:

Fair value as of December 31, 2016
  
$
18,028,611
  
Fair value on the dates of issuance recorded as debt discounts
    
150,471
  
Extinguishment of liability to additional paid-in capital
    
(721,178
)
Change in fair value of derivatives
    
(8,788,332
)
Fair value as of March 31, 2017
  
$
8,669,572