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
9 Months Ended
Sep. 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 measurements.  In March 2015, the Company entered into four separate convertible promissory note agreements and one warrant agreement (see Note 3).  During July 2015, the Company entered into an additional convertible promissory note agreement as discussed in 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 liabilities.  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 until extinguishment in September 2015, as discussed in Note 3, with the change in fair value between those dates being included in earnings. As of September 30, 2015, there were no outstanding liabilities which required measurement at fair value.

 

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 a fair value of $127,395. The fair value change of $19,600 through September 23, 2015, the date of extinguishment, is reported in the accompanying statement of operations. The fair value of the warrant was 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 September 30, 2015:

 

Balance at December 31, 2014   $  
      Issuance of warrant liability     146,995  
      Change in fair value and extinguishment of warrant     (146,995 )
Balance at September 30, 2015   $ -  

 

Convertible Note Derivative Liability

 

The Company entered into four separate convertible note agreements in March 2015, one convertible note agreement in July 2015 and an additional convertible note agreement in September 2015 as discussed in Note 3. 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 in all the agreements except for the September 2015 issued convertible note agreement.

 

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 $0 on date of issuance and prior to extinguishment as discussed in Note 3, respectively.

 

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

 

Balance at December 31, 2014   $  
      Issuance of derivatives in connection with convertible note agreements     274,331  
      Change in fair value and extinguishment of notes     (274,331 )
Balance at September 30, 2015   $ -