Quarterly report pursuant to Section 13 or 15(d)

9. FAIR VALUE OF FINANCIAL MEASUREMENTS

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9. FAIR VALUE OF FINANCIAL MEASUREMENTS
6 Months Ended
Jun. 30, 2015
Fair Value Disclosures [Abstract]  
NOTE 9. FAIR VALUE OF FINANCIAL MEASUREMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurments.  In March 2015, the Company entered into four separate convertible promissory note agreements and one warrant agreement (see Note 3).  The Company evaluated these notes and determined that the conversion options and certain and put options embedded in the convertible debt instruments met the requirement for classification as compound derivative liabilties.  In addition, a warrant agreement associated with one of these convertible debt instruments included antidilution provisions that also require the warrant to be classified as a liability.  These liabilities were measured at fair value at issuance and remeasured on a recurring basis at June 30, 2015 with the change in fair value between those dates being included in earnings.

 

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:

 

    Fair Value of Measurements at June 30, 2015  
    Total     Level 1     Level 2     Level 3  
Liabilities                                
Warrant liability   $ 127,395     $     $     $ 127,395  
Convertible note compound derivative liabilities   $   252,014     $   –     $   –     $  252,014  

 

Warrant Liability

 

On March 12, 2015, the Company entered into a warrant agreement in conjunction with one of its convertible promissory note agreements as discussed in Note 3.  Due to the existence of an antidilution provision, which reduces the exercise price and conversion price in the event of subsequent dilutive issuances, the warrant was recorded as a liability in the balance sheet at its fair value of $146,995 at the date of issuance.  The fair value of the warrant was revalued at June 30, 2015 at a fair value of $127,395. The fair value change of $19,600 and any changes in subsequent reporting periods, is reported in the statement of operations. The fair value of the warrant is measured using Monte Carlo Simulation modeling.  The assumptions used in the Monte Carlo simulation models used to estimate the fair value of the warrant liability upon issuance at March 12, 2015 and June 30, 2015 were:

 

    March 12, 2015       June 30, 2015
Risk-free interest rate     1.59 %     1.63 %
Expected dividend yield     0       0  
Volatility factor     80 %     81 %
Expected life of warrant   5 years 4.7 years

 

The following table reflects the change in the Company’s Level 3 warrant liability from its initial recording on March 12, 2015 through June 30, 2015:

 

Balance at December 31, 2014   $  
      Issuance of warrant liability     146,995  
      Change in fair value     (19,600 )
Balance at June 30, 2015   $ 127,395  

 

Convertible Note Derivative Liability

 

The Company entered into four separate convertible note agreements in March 2015. The Company assessed the embedded features within these debt instruments and determined that the conversion options and certain put options were required to be separated from the notes and accounted for as compound derivative liabilities.

 

The fair value of the convertible note compound derivative liabilities were valued using a series of valuation approaches including a binomial lattice approach and single income valuation approach. The Company estimated the fair value of the redemption rights derivative using a ‘‘with and without’’ income valuation approach. Under this approach, the Company estimated the present value of the fixed interest rate debt based on the fair value of similar debt instruments excluding the embedded feature. This amount was then compared to the fair value of the debt instrument including the embedded feature using a probability weighted approach by assigning each embedded derivative feature a probability of occurrence, with consideration provided for the settlement amount including conversion discounts, prepayment penalties, the expected life of the liability and the applicable discount rate.

 

The fair value of the convertible note compound derivate liabilities were valued at an aggregate of $274,331 and $252,014 on date of issuance and June 30, 2015, respectively.

 

The following table reflects the change in the Company’s Level 3 convertible note derivative liabilities from their initial value at issuance through June 30, 2015:

 

Balance at December 31, 2014   $  
      Issuance of derivatives in connection with convertible note agreements     274,331  
      Change in fair value     (22,317 )
Balance at June 30, 2015   $ 252,014