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DERIVATIVE LIABILITY - WARRANTS AND DERIVATIVE LIABILITY – CONVERSION OPTION

9 Months Ended

Sep. 30, 2014

DERIVATIVE WARRANT LIABILITY AND FAIR VALUE

Note 7: DERIVATIVE LIABILITY - WARRANTs AND DERIVATIVE LIABILITY – CONVERSION OPTION

Determining fair value of share purchase warrants and conversion options, given the Company’s stage of development and financial position, is highly subjective and identifying appropriate measurement criteria and models is subject to uncertainty. There are several generally accepted pricing models for warrants and options and derivative provisions. The Company has chosen to value the warrants on the notes that contain ratchet down provisions using the Black-Scholes model and conversion option on the notes that contain ratchet down provisions using the Black-Scholes model under the following assumptions:

	December 31, 2013				September 30, 2014
	Expected Life (Years)	Risk free Rate	Dividend yield	Volatility	Expected Life (Years)	Risk free Rate	Dividend yield	Volatility
Share purchase warrants	0.85 to 2.78	0.13% to 0.78%	0.00%	199%	0.36 to 3.78	0.03% to 1.58%	0.00%	155.9% -199%

	December 31, 2013				June 27, 2014
	Expected Life (Years)	Risk free Rate	Dividend yield	Volatility	Expected Life (Years)	Risk free Rate	Dividend yield	Volatility
Conversion option	0.16 to 0.53	0.04% to 0.10%	0.00%	199%	Nil	0.04%	0.00%	199%

The foregoing assumptions are reviewed quarterly and are subject to change based primarily on management’s assessment of the probability of the events described occurring. Accordingly, changes to these assessments could materially affect the valuations.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheet under Derivative liability – warrants and Derivative liability – conversion option:

	As of September 30, 2014
		Fair Value Measurements
	Fair Value	Level 1	Level 2	Level 3	Total
Derivative liability - warrants	$ 83,521	-	-	$ 83,521	$ 83,521
Total	$ 83,521	-	-	$ 83,521	$ 83,521

	As of December 31, 2013
		Fair Value Measurements
	Fair Value	Level 1	Level 2	Level 3	Total
Derivative liability - warrants	$ 140,504	-	-	$ 140,504	$ 140,504
Derivative liability – conversion option	582,300	-	-	582,300	582,300
Total	$ 722,804	-	-	$ 722,804	$ 722,804

There were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 2014.

The following table presents changes in Level 3 liabilities measured at fair value for the nine months ended September 30, 2014. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

	Derivative liability – conversion option	Derivative liability – warrants
Balance – December 31, 2013	$582,300	$140,504
Loss on settlement of debt	(4,400)
Change in fair value of conversion option liability	(577,900)	-
Change in fair value of warrant liability		(56,983)
Balance – September 30, 2014	$ -	$ 83,521