NOTE 6: DERIVATIVE LIABILITIES

During the six months ended June 30, 2017, eight convertible notes issued by the Company became convertible and qualified as derivative liabilities under Financial Accounting Standards Board (FASB) Accounting Series Codification 815, Derivatives (ASC 815).

During the six months ended June 30, 2017, debt holders of the convertible debt that tainted the convertible instrument pool and required all outstanding convertible debt, nonemployee common stock options and common stock warrants to be accounted for as derivative liabilities under ASC 815, converted the remaining balances, resulting in the pool no longer being tainted as all remaining convertible instruments have fixed conversion amounts.

Additionally, During July 2017, the Company elected to early adopt the provisions of FASB Accounting Series Update 2017-11 (ASU 2017-11) effective July 1, 2017. ASU 2017-11 revises the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. If an entity qualifies for the scope exception, freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated. As a result of the early adoption, 310,863 outstanding warrants containing down round features were afforded equity classification as of June, 30, 2017.

As of June 30, 2017 and December 31, 2016, the aggregate fair value of the outstanding derivative liabilities was $0 and $18,028,611, respectively. For the six months ended June 30, 2017 and 2016, the net gain on the change of fair value was $4,825,687 and $34,124,945, respectively.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model using the following range of key assumptions during the three months ended June 30, 2017

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:

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 June 30, 2017 and December 31, 2016:

The below table presents the change in the fair value of the derivative liabilities during the six months ended June 30, 2017: