The embedded conversion features in the convertible debentures and attached warrants are accounted for as derivative liabilities. The warrants contain full ratchet reset features (subject to adjustment for dilutive share issuances) and should be valued as derivative liabilities.

The valuation of the derivative liability attached to the Debentures arrived at through the use of multinomial lattice models based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes. The features in the note that were analyzed and incorporated into the model included the conversion feature with the reset provisions and the call/redemption options. Based on these features, there are six primary events that can occur: payments are made in cash; payments are made with stock; the holder converts upon receiving a change notice; the holder converts the note; the Issuer redeems the note; or the company defaults on the note.

The model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. interest rates, stock price, conversion price, etc.). Projections were then made on these underlying factors which led to a set of potential scenarios. Probabilities were assigned to each of these scenarios over the remaining term of the note based on management projections. This led to a cash flow projection over the life of the note and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed, and it was compared to the discounted cash flow of the note without the embedded features, thus determining a value for the derivative liability. As of September 30, 2016 and December 31, 2015, the Company recorded derivative liabilities for issuance of convertible notes payable initial fair value of $854,547 and $1,014,703, respectively.

The Company recorded unrealized gains of $105,245 and $315,465 for the nine months ended September 30, 2016 and 2015, respectively. The Company recorded an unrealized gain of $117,368 and an unrealized loss of $161,963 for the three months ended September 30, 2016 and 2015, respectively. The fair value of the derivative liability was $533,733 and $138,957 as of September 30, 2016 and December 31, 2015, respectively.

		Derivative Values

									Fair Value
Valuation		December 31,							Increase			September 30,
Date		2015		Additions		Conversions			(Decrease)			2016

April 29, 2011 debenture	$	3,363	$	-	$	-		$	1,979		$	5,342

Feb 21, 2012 debenture		-		-		-			148			148

2015 convertible notes		135,594		-		(154,939	)		19,345			-

2016 convertible notes		-		854,547		(199,587	)		(126,717	)		528,243

Total	$	138,957	$	854,547	$	(354,526	)	$	(105,245	)	$	533,733