DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2016

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 September 30, 2016 and December 31, 2015, the Company recorded current derivative liabilities of $1,625,117 and $841,677, respectively. The net change in fair value of the derivative liabilities resulted in a loss of $592,785 and $398,509 for the three months and nine months ended September 30, 2016, respectively, and a gain of $145,300 and a loss of $75,222 for the three months and nine months ended September 30, 2015, which are reported as other income (expense) in the statements of operations.

The following table presents details of the Company’s derivative liabilities for the nine months ended September 30, 2016:

Balance, December 31, 2015	$	841,677
Increases in derivative value due to new issuances of notes		427,296
Derivative adjustment due to debt conversion		(42,365	)
Change in fair value of derivative liabilities		398,509
Balance, September 30, 2016	$	1,625,117

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 258% to 271%

See Note 5 for a discussion of fair value measurements.