Quarterly report pursuant to Section 13 or 15(d)

Fair Value

v3.5.0.2
Fair Value
9 Months Ended
Sep. 30, 2016
Fair Value Disclosures [Abstract]  
Fair Value
Note 4 - Fair Value
 
The Company determines the estimated fair value of amounts presented in these condensed consolidated financial statements using available market information and appropriate methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. The estimates presented in the financial statements are not necessarily indicative of the amounts that could be realized in a current exchange between buyer and seller. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. These fair value estimates were based upon pertinent information available as of September 30, 2016 and December 31, 2015, and, as of those dates, the carrying value of all amounts approximates fair value. The Company estimated the fair value of its common stock during the three and nine months ended September 30, 2016. To determine the value of its common stock, the Company considered the following three possible valuation methods (1) the income approach, (2) the market approach and the (3) cost approach to estimate its enterprise value.
 
The Company has categorized its assets and liabilities at fair value based upon the following fair value hierarchy:
 
Level 1 - Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
 
Level 2 - Inputs use directly or indirectly observable inputs. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
 
Level 3 - Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
 
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.
 
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
 
The following table summarizes the valuation of the Company’s derivative liabilities and accrued compensation by the above fair value hierarchy levels as of September 30, 2016 and December 31, 2015 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):
 
  
       
Quoted Prices
             
         
In Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Liabilities
   
Inputs
   
Inputs
 
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Accrued compensation
  $ 104,033     $ -     $ -     $ 104,033  
Derivative liability
    3,332,900       -       -       3,332,900  
                                 
Balance - September 30, 2016
  $ 3,436,933     $ -     $ -     $ 3,436,933  
                                 
Accrued compensation
  $ 60,000     $ -     $ -     $ 60,000  
Derivative liability
    3,279,600       -       -       3,279,600  
                                 
Balance - December 31, 2015
  $ 3,339,600     $ -     $ -     $ 3,339,600  
 
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. The Company’s Level 3 liabilities shown in the above table consist of warrants with “down-round protection”, as the Company is unable to determine if it will have sufficient authorized common stock to settle such arrangements, warrants deemed to be derivative liabilities according to the Company’s sequencing policy in accordance with ASC 815-40-35-12, the conversion option of convertible notes payable and accrued obligations to issue a warrant and common stock.
 
Assumptions utilized in the valuation of Level 3 liabilities are described as follows:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Risk-free interest rate
    0.29% - 1.28 %     0.33% - 1.53 %     0.21% - 1.28 %     0.33% - 1.71 %
Expected term (years)
    0.04 - 5.00       0.25 - 5.00       0.04 - 5.00       0.25 - 5.00  
Expected volatility
    150% - 152 %     166 %     150% - 159 %     166% - 172 %
Expected dividends
    0.00 %     0.00 %     0.00 %     0.00 %
 
The expected term used is the contractual life of the instrument being valued. Since the Company’s stock has not been publicly traded for a sufficiently long period of time or with significant volume, the Company is utilizing an expected volatility based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the instrument being valued.
 
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all Level 3 liabilities measured at fair value on a recurring basis using unobservable inputs during the nine months ended September 30, 2016:
 
   
Accrued
   
Derivative
       
   
Compensation
   
Liability
   
Total
 
                   
Balance - December 31, 2015
  $ 60,000     $ 3,279,600     $ 3,339,600  
                         
Change in fair value
    (1,072 )     (695,200 )     (696,272 )
                         
Issuance of warrants and conversion options
    -       748,500       748,500  
                         
Accrual of obligations
    45,105       -       45,105  
                         
Balance - September 30, 2016
  $ 104,033     $ 3,332,900     $ 3,436,933  
 
The Company’s significant financial instruments such as cash, other current assets, accounts payable, accrued expenses and notes payable were deemed to approximate fair value due to their short term nature. 
 
See Note 6 – Notes Payable for details associated with the issuance of warrants and conversion options which were deemed to be derivative liabilities.