4. DERIVATIVE LIABILITIES

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

4. DERIVATIVE LIABILITIES

NOTE 4 DERIVATIVE LIABILITIES

The Company identified conversion features embedded within convertible debt and warrants issued and the Company also identified derivative liabilities embedded within warrants issued together with subscription agreements and for services. The Company has determined that the features associated with the embedded conversion option, in the form a ratchet provision, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.

During the nine months ended September 30, 2015, the Company and the holders of warrants previously issued as part of our offering in March 2014 with an exercise price of $0.40 agreed to amend the warrants to remove the ratchet provision. This, along with the Warrant exercises that occurred during the period, reduced the Company’s derivative liability by $2,574,683.

As a result of the application of ASC No. 815, the fair value of the ratchet feature related to convertible debt and warrants is summarized as follows:

	Warrants with Convertible Debt			Warrants with Subscription Agreements			Warrants Issued For Services		TOTAL
Derivative liabilities as of December 31, 2014	$	517,137		$	582,571		$	0	$	1,099,708
Derivative liabilities - generated from new issued warrants		0			125,708			195,422		321,130
Changes in derivative liabilities		937,189			1,314,158			232,241		2,483,588
Exercise of warrant		0			(584,977	)		0		(584,977	)
Warrant - Amendment		(1,454,326	)		(535,380	)		0		(1,989,706	)
Balance as of September 30, 2015	$	0		$	902,080		$	427,663	$	1,329,743

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of September 30, 2015:

	Commitment Date		Remeasurement Date
Expected dividends		0%		0%
Expected volatility		150%		75% - 150%
Expected term		3-5 years		1.83 – 4.70 years
Risk free interest rate		0.75% - 1.1%		0.89% - 1.37%