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5. DERIVATIVE LIABILITIES
 3 Months Ended
Mar. 31, 2014
DerivativeInstrumentsAndHedgingActivitiesAbstract  
DERIVATIVE LIABILITIES

NOTE 5 – DERIVATIVE LIABILITIES

 

As of December 31, 2013, the Company did not have a sufficient number of common shares authorized to fulfill the possible exercise of all outstanding warrants and the conversion of all convertible notes payable. As a result, the Company determined that the outstanding warrants and the embedded conversion features of the outstanding debt instruments did not qualify for equity classification.  Accordingly, the warrants and conversion features were treated as derivative liabilities and were carried at fair value. During the three months ended March 31, 2014, all of the outstanding convertible notes that qualified as derivative liabilities were paid in full or converted to common stock. As of March 31, 2014, only 1,150,000 warrants remained as derivative liabilities due to the existence of reset provisions that qualify the instruments as derivative liabilities under FASB ASC 815.

 

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that they were accounted for at fair value on a recurring basis as of March 31, 2014 and December 31, 2013.

 

    Carrying Value at        
    March 31,     Fair Value Measurement at March 31, 2014  
    2014     Level 1     Level 2     Level 3  
Liabilities:                        
  Warrant derivative liabilities   $ 49,035     $ -     $ -     $ 49,035  
  Convertible debt derivative liabilities     -       -       -       -  
Total   $ 49,035     $ -     $ -     $ 49,035  

 

    Carrying Value at        
    December 31,     Fair Value Measurement at December 31, 2013  
    2013     Level 1     Level 2     Level 3  
Liabilities:                        
  Warrant derivative liabilities   $ 955,350     $ -     $ -     $ 955,350  
  Convertible debt derivative liabilities     85,500       -       -       85,500  
Total   $ 1,040,850     $ -     $ -     $ 1,040,850  

 

The Company estimated the fair value of the derivative warrant liabilities by using the Black-Scholes Option Pricing Model and the derivative liabilities related to the conversion features in the outstanding convertible notes using the Black-Scholes Option Pricing Model assuming maximum value, Level 3 inputs, with the following assumptions used:

 

Dividend yield: 0%
Expected volatility 82% to 174%
Risk free interest rate 0.03% to 1.73%
Expected life (years) 0.00 to 4.52

 

The following table sets forth the changes in the fair value of derivative liabilities for the three months ended March 31, 2014:

 

Balance, December 31, 2013   $ (1,040,850 )
  Convertible debt derivatives recognized as derivative loss     (22,500 )
  Convertible debt derivatives recognized as debt discount     (90,000 )
  Resolution of convertible debt derivatives upon conversions     132,417  
  Resolution of convertible debt derivatives upon debt payoff     59,311  
  Resolution of warrant derivatives no longer qualifying as derivative liabilities     918,580  
  Loss on change in fair value of derivative liabilities     (5,993 )
Balance, March 31, 2014   $ (49,035 )

 

The aggregate gain on derivative liabilities for the three months ended March 31, 2014 was $30,818.