Derivative Liability

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liability

Note 7 - Derivative Liability

The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. Certain warrants issued to investors and conversion features of notes payable do not have fixed settlement provisions because their exercise prices will be lowered if the Company issues securities at lower prices in the future. In accordance with the FASB authoritative guidance, the conversion feature of the notes was separated from the host contract (i.e., the notes) and the fair value of the warrants have been recognized as a derivative and will be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

The Company had four convertible notes payable, five convertible note payable to a related party and warrants to purchase a total of 561,250 shares of common stock as of June 30, 2016 that were accounted for as derivative liability. The derivative liability were valued at the following dates using a probability based weighted-average Black-Scholes-Merton model with the following average assumptions:

	December 31, 2015			June 30,  2016
Stock Price	$	0.001		$	0.001
Risk free interest rate		0.003	%		0.39	%
Expected Volatility		404	%		462	%
Expected life in years		0.614			0.625
Expected dividend yield		0	%		0	%
Fair Value – Warrants	$	3,658,000		$	7,283,000
Fair Value – Note Conversion Feature	$	1,015,000		$	1,336,000

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the was determined by the remaining contractual life of the derivative instrument. For derivative instrument that already matured, the Company used the estimated life. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

During the six months ended June 30, 2016, the Company recorded a gain of $257,000 upon the extinguishment of derivative liabilities related to the payment and conversion of certain convertible notes, and a $4,203,000 relating to the change in the fair value of the derivatives during the period. As of June 30, 2016, the aggregate fair value of the derivative liabilities was $8,619,000.