Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines

required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

The Company's balance sheet contains derivative and warrant liabilities that are recorded at fair value on a recurring basis. The three-level valuation hierarchy for disclosure of fair value is as follows:

Level 1: uses quoted market prices in active markets for identical assets or liabilities.

Level 2: uses observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: uses unobservable inputs that are not corroborated by market data.

The fair value of the Company’s recorded derivative and warrant liabilities is determined based on unobservable inputs that are not corroborated by market data, which require a Level 3 classification. A Binomial Lattice option valuation model was used to determine the fair value with similar assumptions to those described under “Stock-Based Compensation”. The Company records derivative and warrant liabilities on the condensed consolidated balance sheets at fair value with changes in fair value recorded in the condensed consolidated statements of operation.

The following table presents the balances of liabilities measured at fair value on a recurring basis by level as of September 30, 2015:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
As of September 30, 2015
Derivative liability	$	-	$	-	$	744,642	$	744,642
Warrant liability		-		-		362,474		362,474
Total	$	-	$	-	$	1,107,116	$	1,107,116

The following table presents changes in the liabilities with significant unobservable inputs (Level 3) for the nine months ended September 30, 2015:

	Warrant			Derivative			Total
	Liability			Liability			Liability
Balance December 31, 2014	$	764,958		$	296,881		$	1,061,839
Elimination on extinguishment of debt		-			(57,732	)		(57,732	)
Initial value on issuance of debt		-			456,324			456,324
Change in estimated fair value (1)		(402,484	)		49,169			(353,315	)
Balance September 30, 2015	$	362,474		$	744,642		$	1,107,116

(1) Included in the Condensed Statements of Operation on the line “Change in fair value of derivative and warrant liabilities.”

Management used the following inputs to value the Derivative and Warrant Liabilities for the nine months ended September 30, 2015:

	Derivative Liability	Warrant Liability
Expected term	1 year	5 years
Exercise price	$0.01 - $0.099	$0.075 - $0.1287
Expected volatility	286% to 322%	219% to 234%
Expected dividends	None	None
Risk-free interest rate	0.22% to 0.33%	1.32% to 1.63%
Forfeitures	None	None

In computing the fair value of the derivative and warrant liability at September 30, 2015 for instruments under the Binomial Lattice option-pricing model, management estimated a 60% probability of a down round financing event at a price of $0.025 and a 9% to 34% probability that existing note holders with exchange privileges would exchange their existing debentures and warrants for new debentures and warrants.