DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 5, 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 December 31, 2016 and 2015, the Company recorded current derivative liabilities of $1,934,617 and $841,677, respectively. The net change in fair value of the derivative liabilities resulted in losses of $616,286 and $106,543 for the years ended December 31, 2016 and 2015, respectively, which are reported as other expense in the statements of operations.

The following table presents details of the Company’s derivative liabilities for the years ended December 31, 2016 and 2015:

Balance, December 31, 2014	$	438,374
Increases in derivative value due to new issuances of notes		455,141
Derivative adjustment due to debt conversion		(158,381	)
Change in fair value of derivative liabilities		106,543
Balance, December 31, 2015		841,677
Increases in derivative value due to new issuances of notes		552,858
Derivative adjustment due to debt conversion		(76,204	)
Change in fair value of derivative liabilities		616,286
Balance, December 31, 2016	$	1,934,617

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 271% to 336%