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Derivative Liabilities | 9 Months Ended
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Sep. 30, 2014
Derivative Liabilities [Abstract] |
Derivative Liabilities | Note 7 – Derivative Liabilities Certain warrants issued by the Company do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future, are classified as derivative liabilities, and are revalued at each reporting date. These warrants include (1) warrants issued to 1999 Mt RB, LLC in conjunction with our lease modification on February 4, 2013, which expired on February 4, 2014 (2) warrants issued in conjunction with the Company’s strategic advisory agreement with Sunrise Financial Group, Inc. on May 21, 2013, which were cancelled on June 19, 2014 and (3) warrants issued in conjunction with the Company’s private placements on July 31, 2013, August 6, 2013 and March 31, 2014. The reset provisions protect the warrant holders from the potential dilution associated with future financings. The Company has valued warrants at their date of issue utilizing the Black-Scholes option pricing model. Expected volatility is based upon a weighted average historical volatility of peer companies operating in a similar industry, or if applicable based upon the term of the warrant, based upon the Company’s historical volatility. The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the warrants depending on the date of the issue and their expected life. The expected life of warrants used was based on the term of the warrant. The Company determined the expected dividend rate based on the assumption and expectation that earnings generated from operations are not expected to be adequate to allow for the payment of dividends in the near future. The following weighted-average assumptions were utilized in the fair value calculations for warrants granted and subsequent revaluation:
|  | Nine Months Ended |  |  | Nine Months Ended |
|  | September 30, 2014 |  |  | September 30, 2013 |
Expected dividend yield |  |  | 0 | % |  |  | 0 | %
Expected stock price volatility |  |  | 142-148 | % |  |  | 90-172 | %
Risk-free interest rate |  |  | 1.62-178 | % |  |  | .08-1.41 | %
Expected life of warrants |  |  | 2.9-4.5 years |  |  |  | .35-4.84 years |
Number of warrants |  |  | 14,922,000 |  |  |  | 4,300,351 |
Fair value of warrants |  | $ | 556,070 |  |  | $ | 1,232,676 |
The fair value of these warrant liabilities was $556,070 at September 30, 2014. The change in fair value for the nine months ended September 30, 2014 was $3,240,052 and is reported in our statement of operations as an unrealized gain on the change in fair value of the derivative liabilities. For the nine months ended September 30, 2013, we recorded an unrealized loss on the change in fair value of the derivative liabilities totaling $218,968. The fair value of the derivative liabilities are re-measured at the end of every reporting period and upon the exercise of the warrant. Fair Value Measurement Valuation Hierarchy ASC 820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the liabilities carried at fair value measured on a recurring basis as of September 30, 2014:
|  |  |  |  | Fair Value Measurements at September 30, 2014 |
|  | Total Carrying Value at September 30, 2014 |  |  | Quoted Prices in Active Markets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Derivative liabilities |  | $ | 556,070 |  |  | $ | - |  |  | $ | - |  |  | $ | 556,070 |
The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors, and are classified within Level 3 of the valuation hierarchy. The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:
|  | Nine Months Ended September 30, 2014 |
Beginning balance January 1, 2014 |  | $ | 775,596 |
Issuance of derivative financial instruments in 2014 |  |  | 3,020,526 |
Net unrealized (gain) loss on derivative financial instruments |  |  | (3,240,052 | )
Ending balance as of September 30, 2014 |  | $ | 556,070 |

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