10. Embedded Conversion Option Liabilities

9 Months Ended

Sep. 30, 2013

Due to the conversion terms of certain promissory notes, the embedded conversion options met the criteria to be bifurcated and presented as derivative liabilities. The Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at the original note inception date and as of September 30, 2013 using the Black-Scholes option pricing model, using the share prices of the Company’s stock on the dates of valuation, and using the following ranges for volatility, expected term and the risk free interest rate at each respective valuation date, no dividend has been assumed for any of the periods:

	Note Inception Date			September 30, 2013
				(Unaudited)

Expected dividend yield (1)		0	%		0	%
Risk-free interest rate (2)		0.16 – 0.71	%		0.09 – 1.39	%
Expected volatility (3)		153.3 – 280.1	%		123.5 – 384.8	%
Expected life (in years) (4)		1.00 – 4.00			0.08 – 4.25

__________________

(1)	The Company has no history or expectation of paying cash dividends on its common stock.
(2)	The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.
(3)	The volatility for the period ended September 30, 2013 is based upon the historical volatility of the Company’s stock price, a period equal to the expected life of the note or thirty-five and one-half months following the reverse capitalization transaction.
(4)	The expected life represents the due date of the note.

The following reflects the initial fair value on the note inception date and changes in fair value through September 30, 2013:

Note inception date fair value allocated to debt discount	$	296,769
Change in fair value – (gain)		(168,281	)
Embedded conversion option derivative liability fair value on September 30, 2013	$	128,488

- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

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+ Details

DNA BRANDS INC 10-Q