Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

Accounting guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and defines required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

The Company’s balance sheet contains derivative and warrant liabilities that are recorded at fair value on a recurring basis.

The three-level valuation hierarchy for disclosure of fair value is as follows:

Level 1: uses quoted market prices in active markets for identical assets or liabilities.

Level 2: uses observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: uses unobservable inputs that are not corroborated by market data.

The fair value of the Company’s recorded derivative and warrant liabilities is determined based on unobservable inputs that are not corroborated by market data, which require a Level 3 classification. The Black Sholes option pricing model was used to determine the fair value with similar assumptions to those described under “Stock-Based Compensation”. The Company records derivative and warrant liabilities on the condensed consolidated balance sheets at fair value with changes in fair value recorded in the condensed consolidated statements of operation.

The following table presents the balances of derivative liabilities which are measured at fair value on a recurring basis by level as of September 30, 2017:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
As of September 30, 2017
Derivative liability	$	-	$	-	$	1,658,779	$	1,658,779
Warrant liability		-		-		10,496		10,496
Commitment in excess of authorized stock		-		-		5,792		5,792
Total	$	-	$	-	$	1,675,067	$	1,675,067

The following table presents changes in the derivative liabilities with significant unobservable inputs (Level 3) for the nine months ended September 30, 2017:

							Commitment
	Warrant			Derivative			In Excess of			Total
	Liability			Liability			Authorized Stock			Liability
Balance December 31, 2016	$	82,436		$	679,036		$	58,456		$	819,928
Liability on issuance of debt and warrants		4,268			1,233,352			-			1,237,620
Elimination of liability on conversion		-			(1,208,800	)		-			(1,208,800	)
Change in estimated fair value (1)		(76,208	)		955,191			-			878,983
Change in commitment in excess of authorized stock		-			-			(52,664	)		(52,664	)
Balance September 30, 2017	$	10,496		$	1,658,779		$	5,792		$	1,675,067

(1) Included in the Condensed Statements of Operation on the line “Change in fair value of derivative and warrant liabilities.”

Management used the following inputs to value the Derivative and Warrant Liabilities for the nine months ended September 30, 2017:

	Derivative Liability	Warrant Liability
Expected term	6 months to 2 years	5 years
Exercise price	$0.00005 - $0.074	$0.02 - $0.1287
Expected volatility	216% to 375%	242% to 282%
Expected dividends	None	None
Risk-free interest rate	0.79% to 1.31%	1.78% to 1.93%
Forfeitures	None	None

In computing the fair value of the derivative and warrant liability at September 30, 2017, management estimated a 60% probability of a down round financing event at a price of $0.025 and a 9% to 34% probability that existing note holders with exchange privileges would exchange their existing debentures and warrants for new debentures and warrants.