Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENT

v3.10.0.1
FAIR VALUE MEASUREMENT
9 Months Ended
Sep. 30, 2018
Fair Value Measurement  
FAIR VALUE MEASUREMENT

 The guidance regarding fair value measurements prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following:

 

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

 

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

Liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company has not transferred any liabilities between the classification levels.

 

The Company estimates fair values of derivative liabilities utilizing Level 3 inputs. The Company uses the Monte Carlo valuation model for derivatives which embodies all of the requisite assumptions (including trading volatility, remaining term to maturity, market price, strike price, risk-free rates) necessary to determine fair value of these instruments. The Company’s derivative liabilities are marked-to-market with the changes in fair value recorded as a component of change in fair value of derivative liabilities in the Company’s condensed consolidated statements of operations. Estimating fair values of derivative liabilities requires the use of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. 

 

The Company identified financial instruments, the conversion options embedded in the Notes discussed in Note 6, which require liability presentation at fair value. Each of these instruments provide the holder with the right to convert into common stock at a fixed discount market, subject to a cap on the conversion price. These clauses cause uncertainty as to the number of shares issuable upon conversion of convertible debt and accordingly require liability presentation on the balance sheet in accordance with US GAAP.

 

Initial Note

 

The fair value of the Initial Note on September 30, 2018 and on December 31, 2017 was estimated using the Monte Carlo valuation model. This method of valuation involves using inputs such as the fair value of the Company’s common stock, stock price volatility, and risk–free interest rates. Due to the nature of these inputs, the valuation of the Initial Note is considered a Level 3 measurement. The following assumptions were used on September 30, 2018 and December 31, 2017:

 

   

September 30,

2018

   

December 31,

2017

 
Volatility     510.6 %     333.89 %
Risk-free interest rate     2.19 %     1.31 %
Common stock closing price   $ 0.04     $ 0.20  

 

The derivative liability for the Initial Note was adjusted to fair market value of $187,000 and $264,000 as of September, 2018 and December 31, 2017.   

 

Additional Note

 

The fair value of the Additional Note on September 30, 2018 and on December 31, 2017 was also estimated using the Monte Carlo valuation model. The following assumptions were used on September 30, 2018 and December 31, 2017:

 

   

September 30,

2018

   

December 31,

2017

 
Volatility     510.6 %     326.65 %
Risk-free interest rate     2.19 %     1.31 %
Common stock closing price   $ 0.04     $ 0.20  

 

The derivative liability for the Additional Note was adjusted to fair market value of $71,000 and $63,000 as of September 30, 2018 and December 31, 2017.   

 

EMA Note

 

The fair value of the EMA note on September 30, 2018 and on December 31, 2017 was also estimated using the Monte Carlo valuation model. The following assumptions were used on September 30, 2018 and December 31, 2017:

 

   

September 30,

2018

   

December 31,

2017

 
Volatility     427.17 %     303.97 %
Risk-free interest rate     2.19 %     1.76 %
Common stock closing price   $ 0.04     $ 0.20  

 

The derivative liability for the EMA Note was adjusted to fair market value of $210,000 and $169,000 as of September 30, 2018 and December 31, 2017.   

   

Auctus Note

 

The fair value of the Auctus Note on September 30, 2018 and on December 31, 2017 was also estimated using the Monte Carlo valuation model. The following assumptions were used on September 30, 2018 and December 31, 2017:

 

   

September 30,

2018

   

December 31,

2017

 
Volatility     510.60 %     326.65 %
Risk-free interest rate     2.19 %     1.53 %
Common stock closing price   $ 0.04     $ 0.20  

 

The derivative liability for the Auctus Note was adjusted to fair market value of $565,000 and $434,000 as of September30, 2018 and December 31, 2017.   

 

Crossover Note

 

The fair value of the Crossover Note on September 30, 2018 and on March 31, 2018 was also estimated using the Monte Carlo valuation model. The following assumptions were used on September 30, 2018 and March 31, 2018:

 

   

September 30,

2018

   

March 31,

2018

 
Volatility     472.17 %     180.53 %
Risk-free interest rate     2.19 %     1.93 %
Common stock closing price   $ 0.04     $ 0.12  

 

The derivative liability for the Crossover Note was adjusted to fair market value of $238,000 and $119,000 as of September 30, 2018 and March 31, 2018. The initial fair values of the embedded debt derivative were recorded as a $48,000 debt discount with the remaining $43,350 charged to first quarter period of operations as derivative expense.

 

June Note

 

The fair value of the June Note on September 30, 2018 and on June 30, 2018 was also estimated using the Monte Carlo valuation model. The following assumptions were used on September 30, 2018 and June 30, 2018:

 

   

September 30,

2018

   

June 30,

2018

 
Volatility     337.53 %     240.05 %
Risk-free interest rate     2.59 %     2.33 %
Common stock closing price   $ 0.04     $ 0.064  

 

he derivative liability for the June Note was adjusted to fair market value of $156,000 and $120,000 as of September 30, 2018 and March 31, 2018. The initial fair values of the embedded debt derivative were recorded as a $57,000 debt discount with the remaining $63,000 charged to current period operations as derivative expense.

 

July Note

 

The fair value of the July Note on the date of issuance and on September 30, 2018 was also estimated using the Monte Carlo valuation model. The following assumptions were used on July 3, 2018 (issuance date) and September 30, 2018:

 

   

September 30,

2018

   

July 3,

2018

 
Volatility     325.04 %     291.96 %
Risk-free interest rate     2.59 %     2.59 %
Common stock closing price   $ 0.04     $ 0.12  

 

Based on these assumptions, the Company recorded a $68,000 derivative liability on the issuance date of the July Note and was adjusted to fair market value of $75,000 as of September 30, 2018. The initial fair values of the embedded debt derivative were recorded as a $28,000 debt discount with the remaining $40,000 charged to current period operations as derivative expense.

 

During the three and nine months ended September 30, 2018, the Company accrued $12,534 and $30,418, respectively, as interest expenses on the above convertible notes.

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2018:

 

    Derivative  
    Liability (convertible  
    notes)  
Balance, December 31, 2017   $ 930,000  
Initial fair value at note issuances     282,000  
On conversion     (64,355 )
Mark-to-market at September 30, 2018     354,355  
Balance, September 30, 2018   $ 1,502,000  
Net loss for the year included in earnings relating to the liabilities held at September 30, 2018   $ 354,355  
Non- cash interest expenses related to derivative liability   $ 162,850