Annual report pursuant to Section 13 and 15(d)

DERIVATIVE LIABILITY

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DERIVATIVE LIABILITY
12 Months Ended
Mar. 31, 2014
DERIVATIVE LIABILITY [Text Block]

NOTE 6 – DERIVATIVE LIABILITY

On November 7, 2013, we sold to certain institutional investors 10% Series B Convertible Preferred Shares which are subject to mandatory redemption and include down-round provisions that reduce the exercise price of a warrant and convertible instrument. As required by ASC 815 “Derivatives and Hedging”, if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price, the investors will be entitled to down-round protection. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instruments contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument.

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at March 31, 2014 is as follows:

  Warrant   Conversion feature
Stock price $.25 $.25
Term (Years) 1 to 5 1
Volatility 138% to 338% 138% to 338%
Exercise prices $0.55 to 0.25 $0.43
Dividend yield 0% 0%

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

            Fair Value Measurement at March 31, 2014  
     Carrying                    
     Value at      Level 1     Level 2       Level 3  
    March 31, 2014                    

Liabilities:

                       
                         

Derivative convertible debt liability

$ 128,668   $   -   $   -   $ 128,668  

Derivative warrant liability

$ 209,320   $   -   $   -   $ 209,320  

Total derivative liability

$ 337,988   $   -   $   -   $ 337,988  

The Company analyzed the warrants and conversion feature under ASC 815 to determine the derivative liability. The Company estimated the fair value of these derivatives using a multinomial distribution (Lattice) valuation model. The fair value of these warrant liabilities at March 31, 2014 was $209,320 and their conversion feature liability was $128,668. At November 7, 2013 the fair value of these warrant liabilities was $606,044 and the conversion feature liability was $349,883. The change in fair value of derivative liabilities of $617,937 was included in the consolidated statement of operations for the nine months ended March 31, 2014.

The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that were accounted for at fair value on a recurring basis as of November 7, 2013.

          Fair Value Measurement at November 7, 2013  
    Carrying                    
    Value at                    
    November 7, 2013     Level 1     Level 2     Level 3  
Liabilities:                        
                             
Derivative convertible debt liability $ 349,883   $   -   $   -   $ 349,883  
Derivative warrant liability $ 606,044   $   -   $   -   $ 606,044  
Total derivative liability $ 955,927   $   -   $   -   $ 955,927  

The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at November 7, 2013 is as follows:

  Warrant   Conversion feature
Stock price $.50 $.50
Term (Years) 1 to 5 1
Volatility 120% to 265% 120% to 265%
Exercise prices $0.55 $0.43
Dividend yield 0% 0%