Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENTS

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FAIR VALUE MEASUREMENTS
6 Months Ended
Jun. 30, 2018
Notes to Financial Statements  
NOTE 9 - FAIR VALUE MEASUREMENTS

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of the dates indicated:

 

   

Fair Value at

June 30,

    Fair Value Measurement Using   
Description    2018     Level 1      Level 2      Level 3   
                         
Derivative Liabilities – Conversion Feature   $ 1,891,400     $ -     $ -     $ 1,891,400  
                                 
    $ 1,891,400     $ -     $ -     $ 1,891,400  

 

           
    Fair Value at December 31,      Fair Value Measurement Using 
Description    2017     Level 1      Level 2      Level 3   
                                 
Derivative Liabilities – Conversion Feature   $ 9,331,400     $ -     $ -     $ 9,331,400  
                                 
    $ 9,331,400     $ -     $ -     $ 9,331,400  

 

The following table presents a reconciliation of the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

Balance at December 31, 2017    $ 9,331,400  
         
Change in Fair Market Value of Conversion Feature     (628,000 )
Derivative Debt Converted into Equity     (15,572,000 )
Fair Value of Derivative Liability Recorded Upon Issuance of Convertible Debt     8,760,000  
         
Balance at June 30, 2018   $ 1,891,400  

 

Effective as of June 2018, the Company estimates the fair value of any new derivative liabilities using the Monte Carlo Simulation (“MCS”) technique because it provides for the necessary assumptions and inputs. The MCS technique, which is an option-based model, is a generally accepted valuation technique for valuing embedded conversion features in convertible notes, because it is an open-ended valuation model that embodies all significant assumption types, and ranges of assumption inputs that the Company agrees would likely be considered in connection with the arms-length negotiation related to the transference of the instrument by market participants. In addition to the typical assumptions in a closed-end option model, such as volatility and a risk-free rate, MCS incorporates assumptions for interest risk, credit risk and redemption behavior. In addition, MCS breaks down the time to expiration into potentially a large population of time intervals and steps. However, there may be other circumstances or considerations, other than those addressed herein, that relate to both internal and external factors that would be considered by market participants as it relates specifically to the Company and the subject financial instruments. The effects, if any, of these considerations cannot be reasonably measured, quantified or qualified.

 

Significant inputs into the Monte Carlo Simulation used to calculate the derivative values are as follows:

 

    June 2018  
Stock Price   $2.16 - $2.88  
Conversion and Exercise Price   $1.92 - $2.29  
Annual Dividend Yield     0%  
Expected Life (Years)   1.44 - 1.50  
Risk-Free Interest Rate   2.41% - 2.47%  
Expected Volatility   94.50% - 95.00%  
         

 

For derivative liabilities issued prior to June 2018, the Company estimates the fair value of the derivative liabilities using the Black-Scholes-Merton option pricing model using the following assumptions for issuances during the period ended:

 

Stock Price   $2.16 - $6.90  
Conversion and Exercise Price   $1.92 - $6.60  
Annual Dividend Yield     0%  
Expected Life (Years)   0.66 - 2.42  
Risk-Free Interest Rate   1.77% - 2.52%  
Expected Volatility   62.36% - 103.43%  
         

 

Volatility is based on historical volatility of our common stock. Historical volatility was computed using weekly pricing observations for our common stock that correspond to the expected term. This method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and conversion features.

 

No financial assets were measured on a recurring basis as of June 30, 2018 and December 31, 2017.

 

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

 

Non-financial assets, such as property, equipment and leasehold improvements, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized.