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Note 9 - Fair Value Measurement
 6 Months Ended
Jun. 30, 2019
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 GAAP 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
June 30, 2019
include the conversion feature and warrant liability associated with convertible debentures issued during
2008
and
2009
and the warrants issued during
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
June 30, 2019,
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
  
Derivatives: (1) (2)
  
June 30, 2019
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Conversion feature liability
   $
1,526,170
     $
-0-
     $
-0-
     $
1,526,170
  
Warrant liability
    
1,872,949
      
-0-
      
-0-
      
1,872,949
  
Total of derivative liabilities
   $
3,399,119
     $
-0-
     $
-0-
     $
3,399,119
  
 
(
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 period ended
June 30, 2019.
 
(
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 June 30, 2019
Risk free interest rate
  
 2.16%
to
2.34%
Dividend yield
  
 
0.00%
 
Expected volatility
  
 99.7%
to
110.4%
Expected life (range in years)
        
Conversion feature liability
  
 3.76
to
3.76 
Warrant liability
  
 0.76
to
3.76 
 
A summary, as of
December 31, 2018,
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
  
Derivatives: (1) (2)
  
December 31, 2018
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Conversion feature liability
   $
706,339
     $
-0-
     $
-0-
     $
706,339
  
Warrant liability
    
1,288,899
      
-0-
      
-0-
      
1,288,899
  
Total of derivative liabilities
   $
1,995,238
     $
-0-
     $
-0-
     $
1,995,238
  
 
(
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, 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 December 31, 2018
Risk free interest rate
  
 2.70%
to
2.70%
Dividend yield
  
 
0.00%
 
Expected volatility
  
92.2%
to
97.0%
Expected life (range in years)
        
Conversion feature liability
  
 1.25
to
2.25 
Warrant liability
  
 0.00
to
2.25 
 
A summary, as of
June 30, 2019,
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
  
Acquired assets (1)
  
December 31, 2018
    
June 30, 2019
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Promasys B.V. customer list (2) (3)
   $
-0-
     $
-0-
     $
-0-
     $
-0-
     $
136,253
  
Promasys B.V. software code (2)
    
-0-
      
-0-
      
-0-
      
-0-
      
72,943
  
Acuity software code (4)
    
730,835
      
555,435
      
-0-
      
-0-
      
1,052,403
  
Total
   $
730,835
     $
555,435
     $
-0-
     $
-0-
     $
1,261,599
  
 
(
1
) The fair value of the acquired assets was estimated using the Income Approach with a discounted cash flow valuation methodology applied.
 
(
2
) 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.
 
(
3
) During the
second
quarter of
2018
we recognized an impairment loss of
$79,634
on the Promasys B.V. customer list after performing a fair value analysis on the asset utilizing a discounted cash flow model. The impairment charge is separately presented on the Statement of Operations.
 
(
4
) 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, 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
  
Acquired assets (1)
  
December 31, 2017
    
December 31, 2018
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Promasys B.V. customer list (2) (3)
   $
85,786
     $
-0-
     $
-0-
     $
-0-
     $
136,253
  
Promasys B.V. software code (2)
    
12,139
      
-0-
      
-0-
      
-0-
      
72,943
  
Acuity software code (4)
    
-0-
      
730,835
      
-0-
      
-0-
      
1,052,403
  
Total
   $
97,925
     $
730,835
     $
-0-
     $
-0-
     $
1,261,599
  
 
(
1
) The fair value of the acquired assets was estimated using the Income Approach with a discounted cash flow valuation methodology applied.
 
(
2
) 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.
 
(
3
) During the
second
quarter of
2018
we recognized an impairment loss of
$79,634
on the Promasys B.V. customer list after performing a fair value analysis on the asset utilizing a discounted cash flow model. The impairment charge is separately presented on the Statement of Operations.
 
(
4
) 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.
 
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
six
month periods ended
June 30, 2019
and
June 30, 2018.
 
   
Other income/(expense)
  
   
For the six months ended
  
   
June 30, 2019
    
June 30, 2018
  
The net amount of gains/(losses) for the period included in earnings attributable to the unrealized and realized gains/(losses) from changes in derivative liabilities at the reporting date
   $
(1,544,875
 )   $
1,758,413
  
                 
Total unrealized and realized gains/(losses) included in earnings
   $
(1,544,875
 )   $
1,758,413
  
 
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
six
month period ended
June 30, 2019
and the year ended
December 31, 2018.
The tables reflect changes for all financial liabilities at fair value categorized as Level
3
as of
June 30, 2019
and
December 31, 2018.
 
The table below presents the Level
3
financial liabilities at fair value for the
six
month period ended
June 30, 2019.
 
   
Level 3 financial liabilities at fair value
  
   
 
 
 
  
 
 
 
  
 
 
 
  
Net
    
Reclassification
    
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
  
purchases,
    
of conversion
    
 
 
 
   
Balance,
    
 
 
 
  
 
 
 
  
issuances
    
feature liability
    
Balance,
  
   
beginning
    
Net realized
    
Net unrealized
    
and
   
associated with
    
end
  
Derivatives:
  
of year
    
gains/(losses)
    
gains/(losses)
    
settlements
    
convertible debt
    
of period
  
Conversion feature liability
   $
(706,339
 )   $
-0-
     $
(846,044
 )   $
-0-
     $
26,213
     $
(1,526,170
 )
Warrant liability
    
(1,288,899
 )    
-0-
      
(698,831
 )    
114,781
      
-0-
      
(1,872,949
 )
Total of derivative liabilities
   $
(1,995,238
 )   $
-0-
     $
(1,544,875
 )   $
114,781
     $
26,213
     $
(3,399,119
 )
 
 
 
The table below presents the Level
3
financial liabilities at fair value for the year ended
December 31, 2018.
 
   
Level 3 financial liabilities at fair value
  
   
 
 
 
  
 
 
 
  
 
 
 
  
Net
    
Reclassification
    
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
  
purchases,
    
of conversion
    
 
 
 
   
Balance,
    
 
 
 
  
 
 
 
  
issuances
    
feature liability
    
Balance,
  
   
beginning
    
Net realized
    
Net unrealized
    
and
   
associated with
    
end
  
Derivatives:
  
of year
    
gains/(losses)
    
gains/(losses)
    
settlements
    
convertible debt
    
of year
  
Conversion feature liability
   $
(1,685,947
 )   $
-0-
     $
969,108
     $
-0-
     $
10,500
     $
(706,339
 )
Warrant liability
    
(3,440,799
 )    
-0-
      
2,142,652
      
9,248
      
-0-
      
(1,288,899
 )
Total of derivative liabilities
   $
(5,126,746
 )   $
-0-
     $
3,111,760
     $
9,248
     $
10,500
     $
(1,995,238
 )