Annual report pursuant to Section 13 and 15(d)

Fair Value Measurement

v3.19.1
Fair Value Measurement
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurement

NOTE 10 – FAIR VALUE MEASUREMENT

 

The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

  Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
     
  Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
     
  Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

As disclosed in Note 9, the Bridge Notes are reported at fair value, with changes in fair value recorded through the Company’s consolidated statements of operations as other income (expense) in each reporting period.

 

The following tables set forth the Company’s consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy at December 31, 2018 and 2017. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

    Fair value at                    
    December 31, 2018     Level 1     Level 2     Level 3  
Convertible Bridge Notes   $ 2,960,000     $ -     $ -     $ 2,960,000  
Total   $ 2,960,000     $ -     $ -     $ 2,960,000  

 

    Fair value at                    
    December 31, 2017     Level 1     Level 2     Level 3  
Convertible Bridge Notes   $ 3,270,000     $ -     $ -     $ 3,270,000  
Total   $ 3,270,000     $ -     $ -     $ 3,270,000  

 

There were no transfers between levels during 2017 and through December 31, 2018. However, in accordance with ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);” Derivatives and Hedging (Topic 815), the financial instruments previously classified and fair valued as derivative liabilities due to down round features, have been retrospectively adjusted by means of a cumulative-effect to the consolidated balance sheet as of January 1, 2017. The cumulative change effect of $388,667 was recognized as an adjustment of the opening balance of accumulated deficit for 2017.

 

The following tables present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that use significant unobservable inputs (Level 3) and the related realized and unrealized gains (losses) recorded in the consolidated statement of operations during the periods.

 

    Year Ended
December 31, 2018
 
Fair value, December 31, 2017   $ 3,270,000  
Issuances of debt     980,000  
Accrued interest     339,146  
Conversions of debt and accrued interest to shares of common stock     (57,664 )
Amortization of debt issuance costs     5,000  
Net unrealized gain on convertible bridge notes     (1,576,482 )
Fair value, December 31, 2018   $ 2,960,000  

 

    Year Ended
December 31, 2017
 
Fair value, December 31, 2016   $ 0  
Issuances of debt     1,841,908  
Accrued interest     184,963  
Amortization of debt issuance costs     (11,250 )
Net unrealized loss on convertible bridge notes     1,254,379  
Fair value, December 31, 2017   $ 3,270,000  

 

The Company’s convertible Bridge Notes are valued by using Monte Carlo Simulation methods and discounted future cash flow models. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. These convertible Bridge Notes do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy. The following assumptions were used to value the Company’s convertible Bridge Notes at December 31, 2018: dividend yield of -0-%, volatility of 170%, risk free rate of 2.59% and an expected term of 1.25 years. The fair value of the Bridge Note was estimated based on the present value expected future cash flows using a discount rate of 20%.