UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Amendment No. 1)

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 2015

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to __________

Commission File Number 033-25126-D

MedeFile International, Inc.

(Exact name of registrant as specified in its charter)

301 Yamato Rd, Suite 1200

Boca Raton, FL 33431

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code(561) 912-3393

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes     ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes     ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes   ☒ No

Number of shares outstanding of registrant’s common stock, par value $0.0001: 28,653,873 as of December 7,August 11, 2015.

Explanatory Note

This Amendment No. 1 to Form 10-Q for the period ended June 30, 2015, amends our Quarterly Report on Form 10-Q for the period ended June 30, 2015, which was originally filed with the Securities and Exchange Commission on August 12, 2012 (the “Original 10-Q”) This amendment is being filed solely to restate the financial statements as of and for the quarter ended June 30, 2015 and the six months ended June 30, 2015 for a failure to properly account for the derivative liability on a convertible note. Except with respect to the financial statements, and corresponding changes to Management’s Discussion and Analysis of Financial Condition and Financial Statement and Note of Operations, the Original 10-Q has not been amended, updated or otherwise modified.

Table of Content

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

MedeFileMedefile International, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

MedeFile International, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

MedeFileMedefile International, Inc.

Condensed Consolidated Statements of Cash FlowsOperations

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

Medefile International, Inc.

Consolidated Statement of Stockholders' Equity

The accompanying notes are an integral part of these condensed consolidated financial statements

Medefile International, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

Medefile International, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of MedeFile International Inc., a Nevada corporation (the "Company"), have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company's Form 10-K for the fiscal year ended December 31, 2014. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly the financial position of the Company as of SeptemberJune 30, 2015, and the results of operations and cash flows for the ninesix months ended SeptemberJune 30, 2015 and 2014. The results of operations for the ninesix months ended SeptemberJune 30, 2015 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Restatement

The Company entered into two 10% Secured Convertible Debentures with a significant shareholder. The debentures carry a one year term. The debentures were issued in the amount of $50,000 on November 4, 2013 and $60,000 on December 17, 2013.

The company assessed the fair value of the conversion option using the Black Scholes pricing model and recorded a derivative liability for the value. The adjustment for this valuation to Derivative Liability is $3,030. An adjustment to change in fair value of derivative liability is a gain of $30,213 for the quarter ended June 30, 2015 loss of $3,030 for the six months ended June 30, 2015.

During the first quarter of 2015, the company recognized a change in derivative for the convertible debenture in amount of $33,243, the resulting derivative liability balance at March 31, 2015 is $33,243. During the second quarter 2015 the Company recognized a gain on the derivative liability of $30,213, the resulting derivative liability as of June 30, 2015 is $3,030.

The following table provides additional details regarding the changes to the balance sheet, statement of operations and statement of cash flows as of and for the three and six months ended June 30, 2015

Nature of Business Operations

Medefile International, Inc., has developed and globally markets a proprietary, patient-centric, Internet-enabled Personal Health Record (iPHR) system for gathering, digitizing, maintaining, accessing and sharing an individual’s actual medical records. Medefile's goal is to revolutionize the medical industry by bringing patient-centric digital technology to the business of medicine. Medefile intends to accomplish its objective by providing individuals with a simple and secure way to access their lifetime of actual medical records in an efficient and cost-effective manner. Medefile's products and services are designed to provide healthcare providers with the ability to reference their patients’ actual past medical records, thereby ensuring the most accurate treatment and services possible while simultaneously reducing redundant procedures.

Interoperable with most electronic medical record systems utilized by physician practices, clinics, hospitals and other care providers, the highly secure, feature-rich MedeFileiPHR solution has been designed to gather all of its members’ actual medical records on behalf of each member, and create a single, comprehensive Electronic Health Record (EHR). The member can access his/her records 24-hours a day, seven days a week – or authorize a third party user – on any web-enabled device (PC, cell phone, PDA, e-reader, et al), as well as the portable MedeFile flash drive/keychain or branded UBS-bracelet.

By subscribing to the MedeFile system, members empower themselves to take control of their own health and well-being, and empower their healthcare providers to make sound and lifesaving decisions with the most accurate, up-to-date medical information available. In addition, with MedeFile, members enjoy the peace of mind that comes from knowing that their medical records are protected from fire, natural disaster, document misplacement or the closing of a medical or dental practice.

MedeFile believes it enjoys a number of competitive advantages over other firms within the medical records marketplace, including:including that:

Going Concern

The accompanying financial statements have been prepared contemplating a continuation of the Company as a going concern. However, the Company has reported an operating loss of $593,692$459,288 and a net loss of $598,362$464,660 for the ninesix months ended SeptemberJune 30, 2015. During the comparable ninesix month period of 2014, the Company had an operating loss of $423,239$259,248 and net income of $548,096$732,752 (as a result of the change in the valuation of the Company’s warrant derivative). The Company had an accumulated deficit of $27,952,905$27,819,203 as of SeptemberJune 30, 2015. The Company has working capital of $141,771$253,323 as of SeptemberJune 30, 2015.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The operating losses raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to obtain additional financing depends on the success of its growth strategy and its future performance, each of which is subject to general economic, financial, competitive, legislative, regulatory, and other factors beyond the Company's control.

We will need additional investments in order to continue operations. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms.

However, the trading price of our common stock could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, we may incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Cash and Cash Equivalents

For purposes of these financial statements, cash and cash equivalents includes highly liquid debt instruments with maturity of less than three months.

Concentrations of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. Currently our operating account is not above the FDIC limit.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Property and Equipment

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized and depreciated over their estimated useful lives being 3 years up to 10 years.

Trademark Costs

Trademark costs incurred in the registration and acquisition of trademarks and trademark rights are capitalized. These costs will be amortized over the legal life of the related trademark once the trademark is awarded. The Company performs an annual review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of the assets may not be recoverable.

The Company expenses all software costs associated with the conceptual formulation and evaluation of alternatives until the application development stage has been reached. Costs to improve or support the technology are expensed as these costs are incurred.

Website Development

The Company's policy is to capitalize website development costs at original cost and amortize the balance over the life of the product. The life of website development cost is determined at completion of the project. The Company reviews the amounts capitalized for impairment whenever events or circumstances indicate that the carrying amounts of the assets may not be recoverable.

The Company expenses all development costs associated with the conceptual formulation and evaluation of alternatives until the application development stage has been reached. Costs to improve or support the technology are expensed as these costs are incurred.

Revenue Recognition

The Company generates revenue from licensing the right to utilize its proprietary software for the storage and distribution of healthcare information to individuals and affinity groups. For revenue from product sales, the Company recognizes revenue on four basic criteria which must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.

Deferred Revenue

The Company generally receives subscription fees for its services. From time to time, the Company will receive quarterly or annual subscriptions paid in advance and deferred revenue is recorded at that time. The deferred revenue is amortized into revenue on a pro-ratapro- rata basis each month. Customers with quarterly or annual subscriptions may cancel their subscriptions and request a refund for future months' revenues at any time. Therefore, a liability is recorded to reflect the amounts that are potentially refundable. At SeptemberJune 30, 2015 and December 31, 2014, deferred revenue totaled $480$902 and $684, respectively.

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Statements—Going Concern.The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s financial statements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning November 1, 2017 and, at that time the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method and impact of the adoption of ASU 2014-09 will have on the Company’s condensed consolidated financial statements and disclosures.

In January 2014, the FASB issued ASU 2014-04, an update to ASC 310, "Receivables." The ASU clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption of the guidance is permitted. The impact of this guidance is currently being evaluated by the Company, but is not expected to have a significant impact on the Company's financial position, results of operations or disclosures.

Fair Value of Financial Instruments

Cash and Equivalents, Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities

The carrying amounts of these items approximated fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, Financial Accounting Standards Board (“FASB”) ASC Topic 820-10-35 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).

Level 1—Valuations —Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations —Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations —Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The application of the three levels of the fair value hierarchy under Topic 820-10-35 to our assets and liabilities as of September 30, 2015 are described below:

Website development for the nine months ending September 30, 2015 is $199,344 compared to $265,792 for the year ended December 31, 2014. Deferred revenue for the nine months ended September 30, 2015 is $480, compared to $684 compared to the year ended December 30, 2014. Warrant liability for the nine months ended September 30, 2015 is $0, compared to $51 for the year ended December 31, 2014. Derivative liability for convertible note for the nine months ended September 30, 2015 is $1,958, compared to $0 for the year ended December 31, 2014

Impairment of Long Lived Assets

In accordance with Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. ASC 360-10 relates to assets that can be amortized and the life can be determinable. The Company reviews property and equipment and other long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the asset’s carrying amount to future undiscounted net cash flows the assets are expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the assets or their fair values, whichever is more determinable.

Inventory

Inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first-out basis and market being determined as the lower of replacement cost or net realizable value. The Company records inventory write-downs for estimated obsolescence of unmarketable inventory based upon assumptions about future demand and market conditions. For the year ended December 31, 2014 the Company had an inventory write down in the amount of $30,000. There was no write down of inventory in the ninesix months ended SeptemberJune 30, 2015.

Net Loss per Share

Basic loss per share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method.

Management Estimates

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Stock Based Compensation

The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement.

2. ACCOUNTS RECEIVABLE

Due to the collection history of the Company, the Company does not maintain an allowance for doubtful accounts. Recognition of a specific uncollectible account is written directly against the invoice in accounts receivable and expensed in the current period. Accounts receivables totaled $4,794$3,926 as of SeptemberJune 30, 2015 and $5,425 as of December 31, 2014.2014

3. WEBSITE DEVELOPMENT

Website development consists of the following:

The Company completed the redesign in January 2015. The redesign is being amortized over a three year period. Amortization expense for the three month period ending SeptemberJune 30, 2015 was $22,148$22,149 compared to $0 for the three month period ended SeptemberJune 30, 2014, respectively. Amortization expense for the ninesix month period ending SeptemberJune 30, 2015 was $66,447$44,299 compared to $0 for the ninesix month period ended SeptemberJune 30, 2014, respectively.

4. FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

Depreciation is calculated by using the straight-line method over the estimated useful life. Furniture and equipment was fully depreciated as of SeptemberJune 30, 2015. Depreciation expense for the three months ended SeptemberJune 30, 2015 and 2014 totaled $0 and $0,$307, respectively. Depreciation expense for the ninesix months ended SeptemberJune 30, 2015 and 2014 totaled $0 and $412, respectively.

5. CONVERTIBLE DEBENTUREDEBENTURES – RELATED PARTY

The Company has entered into two 10% Secured Convertible Debentures with a significant shareholder. The debentures carry a one year term. The debentures were issued in the amounts of $50,000 on November 4, 2013 and $60,000 on December 17, 2013. Both debentures are convertible into common stock at a conversion price of the lower of $0.10 (subject to adjustments for the events of stock splits, stock dividends and similar transaction) or 80% of the previous day’s market price of common stock

stock.

6. DERIVATIVE LIABILITY

The Secured Convertible Debentures entered into in November and December 2013 contain ratchet provisions regarding the conversion of debt into shares of common stock.

The Company entered into a 10% Secured Convertible Debenture in November 2013, for a term of 12 months. The debenture is in the amount of $110,000. The conversion price of the note is based on 80% of the previous day’s market price.

The Company assesses the fair value of the convertible debenture using the Black Scholes pricing model and records a derivative expense for the value. The Company then assesses the fair value of the warrants quarterly based on the Black Scholes Model and increases or decreases the liability to the new value, and records a corresponding gain or loss. The Company uses expected volatility based primarily on historical volatility using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.

Due to the ratchet provisions, the Company treats the convertible debenture as a derivative liability in accordance with the provisions of ASC 815 “Derivatives and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that potentially settle in an entity’s own common stock.

As of September 30 2015, derivative liability for this note is $1,958 and the change of derivative liability for the nine months ended September 30, 2015 was $1,958.

During November 2015, the Company determined that the Company’s financial statements included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2015 and June 30, 2015 filed with the Securities Exchange Commission could not be relied upon due to errors in valuation of derivative liability on the convertible note described above. The Company plans to restate such financial statements and file amended quarterly reports for these periods.

7. WARRANT LIABILITY

In connection with certain securities purchase agreements entered into during the third quarter of 2011 and the second quarter of 2012, the Company granted warrants with ratchet provisions. The warrants contain an expiration date of four years from the date of grant. During the first two years of grant, if the Company issues any additional shares of common stock at a price per share less than the exercise price in effect, the exercise price will be adjusted to equal the average price per share received by the Company for the additional shares issued. After the first two years following the issuance date, if the Company issues any additional shares of common stock at a price per share less than the exercise price in effect, the exercise price will be adjusted using a formula based on the existing exercise price, the outstanding shares before and after the issuance of such shares, and the average price during the issuance of such shares. In addition to the exercise price adjustment, the number of shares upon exercise of the warrants is also subject to adjustment.

Upon grant, the Company assesses the fair value of the warrants using the Black Scholes pricing model and records a warrant liability for the value. The Company then assesses the fair value of the warrants quarterly based on the Black Scholes Model and increases or decreases the warrant liability to the new value, and records a corresponding gain or loss (see below for variables used in assessing the fair value). The Company uses expected volatility based primarily on historical volatility using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.

Due to the ratchet provisions, the Company treats the warrants as a derivative liability in accordance with the provisions of ASC 815 “Derivatives and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that potentially settle in an entity’s own common stock.

In July 2011 the company issued 90,426 warrants in connection with the sale of 1,773 shares of common stock. As of July 2015, these warrants have expired.

Warrant liability for the outstanding warrants amounted to $0 for the period ending September 30, 2015, compared to $51 for the year ended December 31, 2014. As of SeptemberJune 30, 2015, these warrants include the following:

Warrants granted during July 2011 in connection with the sale of 35,461 shares of common stock with the right to originally purchase up to 35,461 shares of the Company’s common stock with an original exercise price of $2.50. Due to the issuance of the Company’s common stock in April 2012, the exercise price was adjusted to $0.50 and the number of shares to 1,808,511. Fair value was determined using the following variables:

Warrants granted during April 2012 in connection with the sale of 5,000100,000 shares of the Company’s preferred stock to a significant shareholder and brother of the then-Chief Executive Officer with the right to purchase up to 10,000200,000 shares of the Company’s common stock with an exercise price of $10.$0.50. Fair value was determined using the following variables:

Warrants granted during April 2012 in connection with the sale of 50,0001,000,000 shares of the Company’s common stock with an exercise price of $10.$0.50.

Transactions involving warrants with ratchet provisions are as follows:

As of SeptemberJune 30, 2015 and December 31, 2014, the warrant liability consisted of the following:

Change in fair market value of warrant liability resulted in a gain of $0 and a gain of $9,999 for the three months ended September 30, 2015 and 2014, respectively. Change in fair market value of warrant liability resulted in a gain of $51 and a gainloss of $1,062,120$948,857 for the ninethree months ended September 30,March 31 2015 and 2014, respectively.

7. DERIVATIVE LIABILITY

The following Secured Convertible Debentures entered into in November and December 2013 contain ratchet provisions regarding the conversion of debt into shares of common stock.

The Company entered into 10% Secured Convertible Notes in November 2013 and December 2013, both for a term of 12 months. The debentures are in the amount of $50,000 and $60,000 respectively. The conversion price of the note is based on 80% of the previous day’s market price.

The Company assesses the fair value of the conversion option using the Black Scholes pricing model and records a derivative expense and a corresponding derivative liability for the value. The Company then assesses the fair value of the derivative quarterly based on the Black Scholes Model and increases or decreases the liability to the new value, and records a corresponding gain or loss. The Company uses expected volatility based primarily on historical volatility using daily pricing observations for recent periods that correspond to the expected life of the notes. The risk-free interest rate is based on U.S. Treasury securities rates.

Due to the ratchet provisions, the Company treats the convertible debenture as a derivative liability in accordance with the provisions of ASC 815 “Derivatives and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that potentially settle in an entity’s own common stock.

As of June 30 2015, derivative liability for this note is $3,030 and the change of derivative liability for the quarter ended June 30, 2015 was $30,213 and for the six months ended June 30, 2015 was $3,030.

8. EQUITY

Common Stock

On October 8, 2012, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada, pursuant to which (i) the Company effected a 5,000-to-1 reverse split of its common stock and (ii) the number of authorized shares of the Company’s common stock decreased from 75,000,000,000 to 100,000,000. The market effective date of the reverse split was October 9, 2012. The effect of the stock split has been applied retroactively. On December 19, 2013 the Company increased its authorized shares of common stock from 100,000,000 to 500,000,000. On February 10, 2015 the Company increased its authorized shares of common stock from 500,000,000 to 700,000,000.

2013

On July 6, 2015,January 17, 2013 the Company effectedentered into a 20-to-1 reverse splitSecurities Purchase Agreement pursuant to which the Company sold 400,000 shares of its common stock.stock for an aggregate purchase price of $200,000

On April 15, 2013, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold 2,000,000 shares of common stock for an aggregate purchase price of $400,000.

On May 1, 2013 the Company issued an aggregate of 11,872,281shares of common stock to purchasers under the securities purchase agreements entered into by the Company in July 2011 and April 2012 pursuant to anti-dilution rights held by such purchasers.

On August 27, 2013, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold 42,743 shares of common stock for an aggregate purchase price of $29,920.

On September 23, 2013, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold 21,429 shares of common stock for an aggregate purchase price of $15,000.

On December 17, 2013, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold 2,000,000shares of common stock for an aggregate purchase price of $40,000.

On December 20, 2013, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold 15,000,000 shares of common stock for an aggregate purchase price of $300,000.

2014

On April 17, 2014, the Company issued an aggregate of 7,506,483150,129,655 shares of common stock to certain shareholders of the Company, in accordance with anti-dilution rights held by such shareholders, including 6,279,210125,584,200 shares to Lyle Hauser and 1,227,27324,545,455 shares to purchasers under Securities Purchase Agreements entered into by the Company in July 2011. Lyle Hauser is the Company's largest shareholder.

On July 3, 2014, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold 750,00015,000,000 shares of common stock for an aggregate purchase price of $200,000.

On July 6, 2014, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which the Company sold 1,000,00020,000,000 shares of common stock for an aggregate purchase price of $150,000.

2015

During the first quarter of 2015, the Company issued an aggregate of 13,954,955279,099,100 shares of common stock to purchasers under the securities purchase agreements entered into by the Company in January and February 2015 for an aggregate price of $620,000.

On March 18, 2015 the Company issued 900,90118,018,018 shares of common stock in exchange for $40,000 of debt owed by the Company.

On May 11, 2015 the Company issued 2,500,00050,000,000 shares of common stock to its CEO and a consultant for a total expense of stock based compensation of $111,000.

Preferred Stock

On April 10, 2012, the Company filed a certificate of designation of Series B Preferred Stock (the “Series B Certificate of Designation”) with the Secretary of State of Nevada, pursuant to which 100,000 shares of the Company’s preferred stock were designated as Series B Convertible Preferred Stock (the “Series B Preferred Stock”). Pursuant to the Series B Certificate of Designation, the Series B Preferred Stock:

On April 12, 2012, the Company entered into a securities purchase agreement with Lyle Hauser (the “Preferred Stock Investor”). Lyle Hauser is the Company’s largest shareholder and the brother of Kevin Hauser, the Company’s then-chief executive officer. Pursuant to the purchase agreement, on April 12, 2012, the Company sold 100,000 shares of Series B Preferred Stock to the Preferred Stock Investor for an aggregate purchase price of $100,000, and the Company issued four-year warrants to purchase 10,000200,000 shares of common stock to the Preferred Stock Investor with an exercise price of $0.50. On April 23, 2012, 100,000 Series B Preferred shares were converted to 10,000200,000 shares of common stockstock.

Stock Options

2008 Amended and Restated Incentive Stock Plan

In November 2008, our Board of Directors adopted the 2008 Equity Incentive Plan and subsequently amended it in January 2009, June 2009 and July 2009 (the “2008 Plan”). The purpose of the 2008 Plan was to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2008 Plan will be administered by our Board of Directors until such time as such authority has been delegated to a committee of the board of directors.

Other Warrants

Transactions involving warrants are summarized as follows: