Annual report pursuant to Section 13 and 15(d)

DERIVATIVE LIABILITIES

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DERIVATIVE LIABILITIES
12 Months Ended
Dec. 31, 2015
Notes to Financial Statements  
DERIVATIVE LIABILITIES

In June 2008, a FASB approved guidance related to the determination of whether a freestanding equity-linked instrument should be classified as equity or debt under the provisions of FASB ASC Topic No. 815-40, Derivatives and Hedging – Contracts in an Entity’s Own Stock. The adoption of this requirement will affect accounting for convertible instruments and warrants with provisions that protect holders from declines in the stock price (“down-round” provisions). Warrants with such provisions are no longer recorded in equity and are reclassified as a liability.

 

Instruments with down-round protection are not considered indexed to a company’s own stock under ASC Topic 815, because neither the occurrence of a sale of common stock by the company at market nor the issuance of another equity-linked instrument with a lower strike price is an input to the fair value of a fixed-for-fixed option on equity shares.

 

In connection with the issuance of its 6% convertible debentures and related warrants, the Company has determined that the terms of the convertible warrants include down-round provisions under which the exercise price could be affected by future equity offerings. Accordingly, the warrants are accounted for as liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date. The Company has recognized derivative liabilities of $4,355 and $0 at December 31, 2015 and 2014, respectively. The gain resulting from the decrease in fair value of this convertible instrument was $580 and $0 for the years ended December 31, 2015 and 2014, respectively. Weighted average term is 1.36 years.

 

The convertible notes are accounted for as liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date. The Company has recognized derivative liabilities of $614,036 and $0 at December 31, 2015 and 2014, respectively. The loss resulting from the increase in fair value of this convertible instrument was $64,035 and $0 for the years ended December 31, 2015 and 2014, respectively. Weighted average term is 1.99 years.

 

   

Conversion feature

derivative liability

  Warrant liability     Total
Balance at January 1, 2015     -              
Recapitalization on February 19, 2015     -     4,936       4,936
Convertible notes payable - December 28, 2015     550,001     -       550,001
Change in fair value included in earnings     64,035     (581 )     63,454
Balance at December 31, 2015   $ 614,036   $ 4,355     $ 618,391

  

The Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes option pricing model:

 

    December 31,
2015
    December 31,
2014
Expected volatility   318  %   %
Expected term - years   1.99      
Risk-free interest rate     1.06 %   %
Expected dividend yield     0 %   %