DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2015

Notes to Financial Statements

NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 4, the Company issued convertible notes payable to non-related parties that contain anti-dilutive, or down round, price protection. Pursuant to ASC 815-15 Embedded Derivatives and ASC 815-40 Contracts in Entity's Own Equity, the Company recorded a derivative liability for the price protection provisions issued within the convertible debt transactions. 

The fair values of the Company's derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a multinomial lattice model simulation discussed below. At June 30, 2015 and December 31, 2014, the Company recorded current derivative liabilities of $755,239 and $438,374, respectively. The net change in fair value of the derivative liabilities for the three months and six months ended June 30, 2015 was a loss of $211,769 and $220,522, respectively, and a loss of $18,702 and $155,592 for the three months and six months ended June 30, 2014, respectively, which was reported as other expense in the statements of operations. 

The following table presents details of the Company's derivative liabilities for the six months ended June 30, 2015: 

Balance, December 31, 2014	$	438,374
Increases in derivative value due to new issuances of notes		232,551
Derivative adjustment due to debt conversion		(136,208	)
Change in fair value of derivative liabilities		220,522
Balance, June 30, 2015	$	755,239

The Company calculated the fair value of the compound embedded derivatives using a multinomial lattice model simulation. The model is based on a probability weighted discounted cash flow model using projections of the various potential outcomes. 

Key inputs and assumptions used in valuing the Company's derivative liabilities are as follows for issuances of notes: 

· Stock prices on all measurement dates were based on the fair market value

· Down round protection is based on the subsequent issuance of common stock at prices less than the conversion feature

· The probability of future financing was estimated at 100%

· Computed volatility ranging from 302% to 310%

See Note 5 for a discussion of fair value measurements.