12. DERIVATIVE INSTRUMENT

The Company has a note payable with elements that qualify as a derivative instrument. The note payable had a variable conversion feature that similarly prevented the calculation of the number of shares into which they were convertible. The note bears interest at 12%, has a maturity of October 24, 2018 and convertible at the lowest trading price during the previous 25 days ending on the last trading day prior to notice, or 50% of the Lowest trading price during the previous 25 days ending on the last trading day prior to notice. This variable conversion feature requires bifrucation from the convertible debenture and measurement at fair value.

The derivative liability, as it relates to the instrument, is shown in the following table:

Beginning balance, January 1, 2018	$	-
Additional issuance		53,000
Exercised/converted		-
Reclassification to equity		-
Change in value of derivative liability		79,870

Fair value, September 30, 2018	$	132,870

The derivative liability was valued using the Black-Scholes method with the following inputs:

Expected life	9 months
Stock price volatility		220	%
Annual risk-free interest rate		1.5	%
Expected dividends	None

ASC 820, "Fair Value Measurements" and ASC 825, Financial Instruments, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument is categorized within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis were presented on the Company's consolidated balance sheet as at September 30, 2018 as follows:

Description	Fair Value Measurements at September 30, 2018 Using Fair Value Hierarchy
	Total			Level 1			Level 2			Level 3
Derivative liability		$	96,000		$	-		$	-		$	96,000
Total		$	96,0000		$	-		$	-		$	96,000