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DERIVATIVE LIABILITIES

12 Months Ended

Dec. 31, 2015

Excessive committed shares

Beginning on April 11, 2013 through December 22, 2015, in connection with the previously issued convertible debt, stock options and warrants, the Company had the possibility of exceeding their common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provisions of these agreements after consideration of all existing instruments that could be settled in shares. This resulted in a derivative liability as a result of the Company having a potential to settle the obligation to issue these excess shares. The accounting treatment of derivative financial instruments required that the Company reclassify the derivative from equity to a liability at their fair values as of the date possible issuable shares exceeded the authorized level and at fair value as of each subsequent balance sheet date. On December 22, 2015, the Company amended the Articles of Incorporation to increase of authorized shares of common stock from 200,000,000 to 500,000,000 thereby having sufficient authorized common shares to meet any settlement provisions.

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.

During the year ended December 31, 2015, the fair value of the net derivative liabilities reclassified from equity of $628,457 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 306.06% to 351.47%; risk free rate: 0.01% to 1.88%; and expected life: 0.09 to 5.00 years.

During the year ended December 31, 2014, the fair value of the net derivative liabilities reclassified from equity of $703,566 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 289.46% to 305.91%; risk free rate: 0.14% to 2.14%; and expected life: 2.00 to 5.00 years.

At December 22, 2015, the fair value of the derivative liabilities of $583,071, determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 333.28%; risk free rate: 0.19% to 0.99%; and expected life: 0.13 to 2.31 years, was reclassified to equity upon the increase in common share authorization.

At December 31, 2014, the fair value of the derivative liabilities of $336,582 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 308.55%; risk free rate: 0.67% to 1.10%; and expected life: 2.08 to 3.29 years.

As of December 31, 2015 and 2014, the Company did not have any derivative instruments that were designated as hedges.

The derivative liability as of December 31, 2014, in the amount of $336,582 has a level 3 classification. At December 31, 2015, the Company did not have any level 3 classifications.

The following table provides a summary of changes in fair value of the Company's Level 3 financial liabilities as of two years ended December 31, 2015:

	Excess Share Derivative
Balance, December 31, 2013	$	376,940
Transfers in of Level 3 upon exceeding in authorized shares		703,566
Mark-to-market at December 31, 2014		(743,924	)
Balance, December 31, 2014		336,582
Transfers in of Level 3 upon exceeding in authorized shares		628,457
Transfers out of Level 3 upon increasing authorized shares		(583,071	)
Mark-to-market at December 31, 2015		(381,968	)
Balance, December 31, 2015	$	-

Fluctuations in the Company's stock price are a primary driver for the changes in the derivative valuations during each reporting period. The Company's stock price decreased by 33% from December 31, 2013 to December 22, 2015. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases, therefore decreasing the liability on the Company's consolidated balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company's derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company's expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.