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Note 9 - Fair Value Measurement
 3 Months Ended
Mar. 31, 2018
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
NOTE
9:
FAIR VALUE MEASUREMENT
 
The Company measures the fair value of its assets and liabilities under the guidance of ASC
820,
Fair Value Measurements and Disclosures
(“ASC
820”
), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC
820
does
not
require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.
 
ASC
820
clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC
820
requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
 
 
●
Level
1
: Observable inputs such as quoted prices for identical assets or liabilities in active markets;
 
 
●
Level
2
: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and
 
 
●
Level
3
: Unobservable inputs for which there is little or
no
market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.
 
The valuation techniques that
may
be used to measure fair value are as follows:
 
 
A.
Market approach
- Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
 
 
B.
Income approach
- Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings methods
 
 
C.
Cost approach
- Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)
 
The Company also adopted the provisions of ASC
825,
Financial Instruments
(“ASC
825”
). ASC
825
allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment
may
be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did
not
elect to re-measure any of its existing financial assets or liabilities under the provisions of this Statement.
 
The Company’s financial assets or liabilities subject to ASC
820
as of
March 31, 2018
include the conversion feature and warrant liability associated with convertible debentures issued during
2008
and
2009
and the warrants issued during
2011
and
2016
that are associated with notes payable. The conversion feature and warrants were deemed to be derivatives (the “Derivative Instruments”) since a fixed conversion price cannot be determined for either of the Derivative Instruments due to anti-dilution provisions embedded in the offering documents for the convertible debentures. The derivative instruments were
not
issued for risk management purposes and as such are
not
designated as hedging instruments under the provisions of ASC
815,
Disclosures about Derivative Instruments and Hedging Activities
. See Note
8
– Convertible Notes Payable.
 
Following is a description of the valuation methodologies used to determine the fair value of the Company’s financial liabilities including the general classification of such instruments pursuant to the valuation hierarchy.
 
A summary as of
March 31, 2018
of the fair value of liabilities measured at fair value on a recurring basis follows:
 
   
Fair value at
    
Quoted prices in
active markets for identical assets/ liabilities
   
Significant other observable inputs
    
Significant unobservable inputs
  
   
March 31, 2018
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Derivatives: (1) (2)
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Conversion feature liability
   $
1,654,644
     $
-0-
     $
-0-
     $
1,654,644
  
Warrant liability
    
3,443,686
      
-0-
      
-0-
      
3,443,686
  
Total of derivative liabilities
   $
5,098,330
     $
-0-
     $
-0-
     $
5,098,330
  
 
(
1
)     The fair value of the derivative instruments was estimated using the Income Approach and the Black Scholes option pricing model with the following assumptions for the
three
month period ended
March 31, 2018
 
(
2
)     The fair value at the measurement date is equal to the carrying value on the balance sheet
 
Significant valuation assumptions for derivative instruments at March 31, 2018
  
Risk free interest rate
 1.96%
to
2.36%
  
Dividend yield
 
 0.00%
 
  
Expected volatility
 81.0%
to
112.2%
  
Expected life (range in years)
        
Conversion feature liability
 1.00
to
3.01
  
Warrant liability
 0.01
to
3.01
  
 
 
A summary as of
December 31, 2017
of the fair value of liabilities measured at fair value on a recurring ba
s
is follows:
 
   
Fair value at
    
Quoted prices in
active 
markets for
identical 
assets/
liabilities
   
Significant other observable inputs
    
Significant unobservable inputs
  
   
December 31, 2017
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Derivatives: (1) (2)
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Conversion feature liability
   $
1,685,947
     $
-0-
     $
-0-
     $
1,685,947
  
Warrant liability
    
3,440,799
      
-0-
      
-0-
      
3,440,799
  
Total of derivative liabilities
   $
5,126,746
     $
-0-
     $
-0-
     $
5,126,746
  
 
(
1
)   The fair value of the derivative instruments was estimated using the Income Approach and the Black Scholes option pricing model with the following assumptions for the year ended
December 31, 2017
 
(
2
)   The fair value at the measurement date is equal to the carrying value on the balance sheet
 
Significant valuation assumptions for derivative instruments at December 31, 2017
  
Risk free interest rate
 1.56%
to
1.81%
  
Dividend yield
 
0.00%
 
  
Expected volatility
 87.0%
to
118.4%
  
Expected life (range in years)
        
Conversion feature liability
 1.25
to
3.25
  
Warrant liability
 0.25
to
3.25
  
 
A summary as of
March 31, 2018
of the fair value of assets measured at fair value on a non-recurring basis follows:
 
   
Carrying amount
    
Carrying amount
    
Quoted prices in
active markets
for identical
assets/ liabilities
   
Significant other observable inputs
    
Significant unobservable inputs
  
   
December 31, 2017
    
March 31, 2018
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Acquired assets (3)
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Promasys B.V. customer list (4)
   $
85,786
     $
86,046
     $
-0-
     $
-0-
     $
136,253
  
Promasys B.V. software code (4)    
12,139
      
8,497
      
-0-
      
-0-
      
72,943
  
Acuity software code (5)    
-0-
      
993,936
      
-0-
      
-0-
      
1,052,403
  
Total
   $
97,925
     $
1,088,479
     $
-0-
     $
-0-
     $
1,261,599
  
 
(
3
)  The fair value of the acquired assets was estimated using the Income Approach with a discounted cash flow valuation methodology applied.
 
(
4
)  The acquired Promasys B.V. software code and customer list are
not
measured on a recurring basis since their initial fair value has been deemed to have a finite life and is being amortized periodically. Instead the Company performs an impairment analysis on a quarterly basis in order to determine whether the carrying value of the assets reflects the fair value of the assets in a market based transaction.
 
(
5
)  The acquired Acuity software code is
not
measured on a recurring basis since the initial fair value has been deemed to have a finite life and is being amortized periodically. Instead the Company performs an impairment analysis on a quarterly basis in order to determine whether the carrying value of the assets reflects the fair value of the assets in a market based transaction.
 
A summary as of
December 31, 2017
of the fair value of assets measured at fair value on a non-recurring basis follows:
 
   
Carrying amount
    
Carrying amount
    
Quoted prices in
active markets
for identical
assets/ liabilities
   
Significant other observable inputs
    
Significant unobservable inputs
  
   
December 30, 2016
    
December 31, 2017
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Acquired assets (3)
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Promasys B.V. customer list (4)
   $
82,173
     $
85,786
     $
-0-
     $
-0-
     $
136,253
  
Promasys B.V. software code (4)
    
26,707
      
12,139
      
-0-
      
-0-
      
72,943
  
Total
   $
108,880
     $
97,925
     $
-0-
     $
-0-
     $
209,196
  
 
(
3
)  The fair value of the acquired assets was estimated using the Income Approach with a discounted cash flow valuation methodology applied.
 
(
4
)  The acquired Promasys B.V. software code and customer list are
not
measured on a recurring basis since their initial fair value has been deemed to have a finite life and is being amortized periodically. Instead the Company performs an impairment analysis on a quarterly basis in order to determine whether the carrying value of the assets reflects the fair value of the assets in a market based transaction.
 
Other identifiable intangible assets, which are subject to amortization, are being amortized using the straight-line method over their estimated useful lives ranging from
3
to
15
years. The Impairment or Disposal of Long-Lived Asset subsection of ASC
360,
Property, Plant and Equipment
requires us to test the recoverability of long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount
may
not
be recoverable. In testing for potential impairment, if the carrying value of the asset group exceeds the expected undiscounted cash flows, we must then determine the amount by which the fair value of those assets exceeds the carrying value and determine the amount of impairment, if any.
 
The table below presents the unrealized gains/(losses) for the
three
month periods ended
March 31, 2018
and
March 31, 2017.
 
   
Other income/(expense)
  
   
For the three months ended
  
   
March 31, 2018
    
March 31, 2017
  
The net amount of gains/(losses) for the period included in earnings attributable to the unrealized and realized gain/(losses) from changes in derivative liabilities at the reporting date
   $
28,416
     $
393,340
  
                 
Total unrealized and realized gains/(losses) included in earnings
   $
28,416
     $
393,340
  
 
The tables below set forth a summary of changes in fair value of the Company’s Level
3
financial liabilities at fair value for the
three
month period ended
March 31, 2018
and the year ended
December 31, 2017.
The tables reflect changes for all financial liabilities at fair value categorized as Level
3
as of
March 31, 2018
and
December 31, 2017.
 
   
Level 3 financial liabilities at fair value
  
   
 
 
 
  
 
 
 
  
 
 
 
  
Net
    
Reclassification
    
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
  
purchases,
    
of conversion
    
 
 
 
   
Balance,
    
 
 
 
  
 
 
 
  
issuances
    
feature liability
    
Balance,
  
For the three months ended
  
beginning
    
Net realized
    
Net unrealized
    
and
   
associated with
    
end
  
March 31, 2018
  
of year
    
gains/(losses)
    
gains/(losses)
    
settlements
    
convertible debt
    
of period
  
Derivatives:
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Conversion feature liability
   $
(1,685,947
 )   $
-0-
     $
31,303
     $
-0-
     $
-0-
     $
(1,654,644
 )
Warrant liability
    
(3,440,799
 )    
-0-
      
(2,887
 )    
-0-
      
-0-
      
(3,443,686
 )
Total of derivative liabilities
   $
(5,126,746
 )   $
-0-
     $
28,416
     $
-0-
     $
-0-
     $
(5,098,330
 )
 
 
   
Level 3 financial liabilities at fair value
  
   
 
 
 
  
 
 
 
  
 
 
 
  
Net
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
  
purchases,
    
 
 
 
  
 
 
 
   
Balance,
    
 
 
 
  
 
 
 
  
issuances
    
 
 
 
  
Balance,
  
For the year ended
  
beginning
    
Net realized
    
Net unrealized
    
and
   
Net transfers
    
end
  
December 31, 2017
  
of year
    
gains/(losses)
    
gains/(losses)
    
settlements
    
in and/or out
    
of year
  
Derivatives:
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Conversion feature liability
   $
(2,325,730
 )   $
48,375
     $
188,841
     $
-0-
     $
402,567
     $
(1,685,947
 )
Warrant liability
    
(3,999,362
 )    
-0-
      
558,563
      
-0-
      
-0-
      
(3,440,799
 )
Total of derivative liabilities
   $
(6,325,092
 )   $
48,375
     $
747,404
     $
-0-
     $
402,567
     $
(5,126,746
 )