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5. DERIVATIVE LIABILITIES
 9 Months Ended
Sep. 30, 2015
DerivativeInstrumentsAndHedgingActivitiesAbstract  
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 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 year ended December 31, 2014, all of the outstanding convertible notes that qualified as derivative liabilities were paid in full or converted to common stock.  As of September 30, 2015, only 410,000 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 September 30, 2015 and December 31, 2014.

 

      Fair Value Measurement at September 30, 2015  
Liabilities:   Carrying Value at September 30, 2015     Level 1     Level 2     Level 3  
  Warrant derivative liabilities   $ 225     $ -     $ -     $ 225  
Total   $ 225     $ -     $ -     $ 225  

 

            Fair Value Measurement at December 31, 2014  
Liabilities:   Carrying Value at December 31, 2014     Level 1     Level 2     Level 3  
  Warrant derivative liabilities   $ 1,708     $ -     $ -     $ 1,708  
Total   $ 1,708     $ -     $ -     $ 1,708  

 

 

The Company estimates 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 lack-Scholes Option Pricing Model assuming maximum value, Level 3 inputs, with the following assumptions used:

 

Dividend yield: 0%
Expected volatility 101% to 115%
Risk free interest rate 0.13% to 1.07%
Expected life (years) 0.08 to 1.82

 

The following table sets forth the changes in the fair value of derivative liabilities for the three months ended September 30, 2015:

 

Balance, December 31, 2014   $ (1,708 )
  Derivative warrants exchanged for debt     1,693  
  Loss on change in fair value of derivative liabilities     (210 )
Balance, September 30, 2015   $ (225 )

 

The aggregate loss on derivative liabilities for the nine months ended September 30, 2015 was $210.