Derivative Liability

12 Months Ended

Dec. 31, 2016

NOTE 7 – DERIVATIVE LIABILITY

The Company has determined that the variable conversion prices under its convertible notes causes the embedded conversation feature to be a financial derivative. The Company may not have enough authorized common stock to settle its obligation if the note holder elects to convert the note into common shares when the trading price is lower than a certain threshold. The warrants described in Note 11 also qualify for derivative classification.

The derivative instruments were valued at loan origination date, issuance date, date of debt conversion and at December 31, 2016. The fair values of the derivative liabilities related to the conversion options of these notes and warrants were estimated on the transaction dates (loan original date and date of debt conversion) using the Multinomial Lattice option pricing model, under the following assumptions:

	December 31, 2014			New Issuances			December 31, 2015			New Issuances			December 31, 2016
Shares of common stock issuable upon exercise of debt and warrants		23,193,987			779,115,518			998,958,397			523,366,065			1,490,145,048
Estimated market value of common stock on measurement date		0.17		$	0.001 - 0.03		$	0.001 - 0.05		$	0.001 - 0.002		$	0.001 - 0.05
Exercise price		0.01 - 0.01		$	0.001 – 0.03		$	0.001 – 0.1		$	0.0003 – 0.001		$	0.001 – 0.1
Risk free interest rate (1)		0.04- 0.25	%		0.09 - 1.54	%		0.14 - 1.54	%		0.09 - 1.54	%		0.14 % - 1.54	%
Expected dividend yield (2)		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Expected volatility (3)		62 - 105	%		119 - 199	%		204.5	%		119 - 199	%		228.5	%
Expected exercise term in years(4)		0.25 - 1.00			1.00 – 5.00			0.18 – 4.59			1.00 – 5.00			0.18 – 4.59

(1)	The risk–free interest rate was determined by management using the one-month Treasury bill yield as of the issuance dates.

(2)	The expected dividend yield is based on the Company's current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

(3)	The volatility was determined by referring to the average historical volatility of a peer group of public companies because we do not have sufficient trade history to determine our historical volatility.

(4)	The exercise term is the remaining contractual term of the convertible instrument at the valuation date.

The table below sets forth a summary of changes in the fair value of the Company's Level 3 financial liabilities:

	For the Years Ended December 31,
	2016			2015

Balance at the beginning of the year	$	1,054,708		$	1,256,159
Addition of new derivative liabilities (notes)		427,879			1,263,838
Addition of new derivative liabilities (warrants)		-			9,056
Derecognize of derivative liability upon settlement of convertible notes		(212,105	)		(1,427,518	)
Modification of derivative liabilities		(1,364	)		(234,659	)
Change in fair value of derivative liability (notes)		216,944			194,689
Change in fair value of derivative liability (warrants)		2,767			(6,857	)
Balance at the end of the year	$	1,488,829		$	1,054,708
Less short-term portion		-			(611,793	)
Long-term portion	$	1,488,829		$	442,915

World Moto, Inc. 10-K