NOTE 5:

DERIVATIVE LIABILITY

A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s common stock purchase warrants that are categorized within Level 3 of the fair value hierarchy for the years ended 2015 and 2014 is as follows:


Stock Purchase Warrants	Weighted Average Inputs for the Period
Date of valuation	For the Year Ending December 31, 2015			For the Year Ending December 31, 2014
Strike price	$	0.74		$	10.70

Volatility (annual)		155	%		166	%

Risk-free rate		1.8	%		1.00	%

Contractual term (years)		4.2			2. 25

Dividend yield (per share)		0	%		0	%

The foregoing assumptions are recalculated every reporting period 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:


	As of December 31, 2015
	Fair Value Measurements
	Fair Value		Level 1		Level 2		Level 3		Total
Derivative liability - warrants	$	26,493,000		—		—	$	26,493,000	$	26,493,000

Total	$	26,493,000		—		—	$	26,493,000	$	26,493,000


	As of December 31, 2014
	Fair Value Measurements
	Carrying Value		Level 1		Level 2		Level 3		Total
Derivative liability - warrants	$	9,000		—		—	$	9,000	$	9,000

Total	$	9,000		—		—	$	9,000	$	9,000

There were no transfers between Level 1, 2 or 3 during the year ended December 31, 2015.

The following table presents changes in Level 3 liabilities measured at fair value for the year ended December 31, 2015:


	Derivative liability – warrants

Balance – December 31, 2014	$	9,000

Additions during the period		15,446,000

Settlement of debt		(16,835,000	)

Change in fair value of warrant liability		27,873,000


Balance – December 31, 2015	$	26,493,000

The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of common stock, the historical volatility of the stock price, risk-free rates based on U. S. Treasury security yields, the expected term of the warrants and dividend yield. Changes in these assumptions can materially affect the fair value estimate. The Company could ultimately incur amounts to settle the warrant at a cash settlement value that is significantly different than the carrying value of the liability on the financial statements. The Company will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire, or are amended in a way that would no longer require these warrants to be classified as a liability. Changes in the fair value of the common stock warrants liability are recognized as a component of other income (expense) in the Statements of Operations.

The net cash settlement value at the time of any future transactions, where the Company consolidates or merges with another entity, will depend upon the value of the following inputs at that time: the consideration value per share of the Company’s common stock, the volatility of the Company’s common stock, the remaining term of the warrant from announcement date, the risk-free interest rate based on U. S. Treasury security yields, and the Company’s dividend yield. The warrant requires use of a volatility assumption equal to the greater of 100% and the 100-day volatility function determined as of the trading day immediately following announcement of a Fundamental Transaction.