Quarterly report pursuant to Section 13 or 15(d)

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

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4. FAIR VALUE OF FINANCIAL INSTRUMENTS
9 Months Ended
Sep. 30, 2016
Fair Value Of Financial Instruments  
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUEMENTS

The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

ASC 820 describes three levels of inputs that may be used to measure fair value:

   Level 1 —  quoted prices in active markets for identical assets or liabilities

 

   Level 2 —  quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

   Level 3 —  inputs that are unobservable based on an entity’s own assumptions, as there is little, if any, related market activity (for example, cash flow modeling inputs based on assumptions)

 

Financial liabilities as of September 30, 2016 measured at fair value on a recurring basis are summarized below (none at December 31, 2015):

  

 

 

September 30,

2016

   

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 
Derivative liability   $ 2,623,013     $ -     $ -     $ 2,623,013  
Warrant liability     2,157,978       -       -       2,157,978  
  Total   $ 4,780,991     $ -     $ -     $ 4,780,991  

 

The Company determined that certain conversion/exercise option related to a convertible note and issued warrants did not have fixed settlement provisions and are deemed to be derivative financial instruments, since the conversion/exercise prices was subject to reset adjustment should the Company issue any option to acquire the Company’s common stock lower than the conversion /exercise price. Accordingly, the Company was required to record such conversion/exercise options as a liability and mark such derivative to fair value each reporting period. Such instrument was classified within Level 3 of the valuation hierarchy.

The fair value of the conversion/exercise options were calculated using a binomial lattice formula with the following weighted average assumptions during the nine months ended September 30, 2016:

Conversion option:

      At     September 30,  
 

 

 

  Inception     2016  
 

Common Stock Closing Price

 

 

  $ 0.0945     $ 0.14  
 

Conversion Price per Share

 

 

  $ 0.075     $ 0.075  
 

Conversion Shares

 

 

    21,333,334       21,333,334  
 

Call Option Value

 

 

    0.0839       0.1233  
 

Dividend Yield

 

 

    0.00 %     0.00 %
 

Volatility

 

 

    212.53 %     214.57 %
 

Risk-free Interest Rate

 

 

    0.725 %     0.77 %
 

Term

 

 

  2.0 years     1.92 years  

Exercise option:

      At     September 30,  
 

 

 

  Inception     2016  
 

Common Stock Closing Price

 

 

  $ 0.0945     $ 0.14  
 

Conversion Price per Share

 

 

  $ 0.100     $ 0.100  
 

Conversion Shares

 

 

    16,000,000       16,000,000  
 

Call Option Value

 

 

    0.0929       0.1349  
 

Dividend Yield

 

 

    0.00 %     0.00 %
 

Volatility

 

 

    212.53 %     214.57 %
 

Risk-free Interest Rate

 

 

    1.15 %     1.14 %
 

Term

 

 

  5.0 years     4.92 years  

The risk-free interest rate is the United States Treasury rate on the measurement date having a term equal to the remaining contractual life of the instrument. The volatility is a measure of the amount by which the Company’s share price has fluctuated or is expected to fluctuate.  The dividend yield is 0% as the Company has not made any dividend payment and has no plans to pay dividends in the foreseeable future.

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Chief Financial Officer, who reports to the Chief Executive Officer, determine its valuation policies and procedures.

The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Chief Financial Officer and are approved by the Chief Executive Officer.

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility, and are classified within Level 3 of the valuation hierarchy. An increase or decrease in volatility or interest free rate, in isolation, can significantly increase or decrease the fair value of the derivative liabilities. Changes in the values of the derivative liabilities are recorded as a component of other income (expense) on the Company’s condensed statements of operations.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis using significant unobservable input for the nine months ended September 30, 2016:

 

    Debt     Warrant  
    Derivative     Liability  
Balance, December 31, 2015   $ -0-     $ -0-  
Aggregate amount of derivative instruments issued     1,189,040       1,014,296  
Change in fair value of derivative liabilities     1,433,973       1,143,682  
Balance, September 30, 2016   $ 2,623,013     $ 2,157,978