Annual report pursuant to Section 13 and 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.19.1
FAIR VALUE OF FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
7. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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 December 31, 2018 and 2017 measured at fair value on a recurring basis are summarized below:

 

    December 31,
2018
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Derivative liability   $ 54,242     $     $     $ 54,242  
Warrant liability     925,806                   925,806  
Total   $ 980,048     $     $     $ 980,048  

 

    December 31,
2017
    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Derivative liability   $ 429,141     $     $     $ 429,141  
Warrant liability     1,099,200                   1,099,200  
Total   $ 1,528,341     $     $     $ 1,528,341  

 

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 years ended December 31, 2018 and 2017:

 

Conversion option:

 

    December 31,     December 31,  
    2018     2017  
Common Stock Closing Price   $ 0.03     $ 0.04 to 0.07  
Conversion Price per Share   $ 0.075 to 0.10     $ 0.075 to 0.10  
Conversion Shares     5,333,333       21,666,667  
Call Option Value     0.013 to 0.055       0.0188 to 0.0568  
Dividend Yield     0.00 %     0.00 %
Volatility     221.92 %     208.82% to 214.34%  
Risk-free Interest Rate     2.46% to 2.51%       1.03% to 1.76%  
Term     0.32 to .625 years       0.62 to 2 years  

 

Exercise option:

 

    December 31,     December 31,  
    2018     2016  
Common Stock Closing Price   $ 0.03     $ 0.04 to 0.075  
Conversion Price per Share   $ 0.10 to 0.15     $ 0.10 to 0.15  
Conversion Shares     34,000,000       29,000,000  
Call Option Value     0.026 to 0.028       0.0375 to 0.0723  
Dividend Yield     0.00 %     0.00 %
Volatility     221.92 %     208.82 to 214.34%  
Risk-free Interest Rate     2.46 to 2.51%       1.62 to 2.2%  
Term     2.62 to 4 years       3.62 to 5 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 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 years ended December 31, 2017 and 2016:

 

    Debt     Warrant  
    Derivative     Liability  
Balance December 31, 2016   $ 1,234,106     $ 1,093,765  
Aggregate amount of derivative instruments issued     85,381       644,870  
Transferred in due to conversions     14,551        
Change in fair value of derivative liabilities     (904,897 )     (639,435 )
Balance, December 31, 2017     429,141       1,099,200  
Aggregate amount of derivative instruments issued           226,831  
Transferred in due to conversions     (291,612 )      
Change in fair value of derivative liabilities     (83,287 )     (400,225 )
Balance, December 31, 2018   $ 54,242     $ 925,806