Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v3.19.1
Fair Value of Financial Instruments
3 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

ASC 820 describes three levels of inputs that may be used to measure fair value:

 

  Level 1 — quoted prices in active markets for identical assets or liabilities
     
  Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
     
  Level 3 — inputs that are unobservable based on an entity’s own assumptions, as there is little, if any, related market activity (for example, cash flow modeling inputs based on assumptions)

 

Financial liabilities as of December 31, 2018 measured at fair value on a recurring basis are summarized below:

 

The Company determined that certain conversion option related to convertible notes issued did not have fixed settlement provisions and are deemed to be derivative financial instruments, since the exercise price was subject to adjustment based on certain subsequent equity transactions that would change the exercise price, the Company elected to use a lower reset provision. Accordingly, the Company was required to record such conversion option as a derivative liability and mark such derivative to fair value each reporting period. Such instrument was classified within Level 3 of the valuation hierarchy. For the purpose of calculating the potential embedded derivatives, the Company utilized an estimated conversion price of $0.02 in estimating the fair value of the conversion option.

 

The fair value of the conversion option was calculated using a binomial lattice formula with the following range of assumptions during the three months December 31, 2018:

 

    At Inception     December 31, 2018  
Common Stock Estimated Fair Value   $ 0.05     $ 0.02  
Conversion Price per share      0.05-0.10        0.015-0.25  
Conversion Shares     3,125,000       -  
Call Option Value      0.0104 to 0.0226        0.00 to 0.013  
Dividend Yield     0.00 %     0.00 %
Volatility     120.00 %     68.10 %
Risk-free Interest rate     0.68 %     2.51% to 2.63 %
Contractual Term      0.75 to 1.00 years        .58 to .90 years  

 

In the opinion of management, there is not a sufficient viable market for the Company’s common stock to determine its fair value, therefore management considers recent sales of its common stock to independent qualified investors and estimated fair value of net assets acquired through issuance of common stock. Since the valuation model inputs are not fixed, management has estimated the fair value to be utilizing a binomial lattice model. Considerable management judgment is necessary to estimate the fair value at each reporting period. Accordingly, actual results could vary significantly from management’s estimates.

 

Conversion price per share and conversion shares are based on the lower of reset or floor price of the respective notes.

 

The risk-free interest rate is the United States Treasury rate on the measurement date having a term equal to the remaining contractual life of the instrument. Since the Company’s stock has not been publicly traded with significant volume, the Company is utilizing an expected volatility based on a review of historical volatilities over a period of time equivalent to the expected life of the instrument being valued of similarly positioned public Companies within. The dividend yield is 0% as the Company has not made any dividend payment and has no plans to pay dividends in the foreseeable future.

 

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities.

 

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

Significant observable and unobservable inputs include stock price, exercise price, annual risk-free rate, term, and expected volatility, and are classified within Level 3 of the valuation hierarchy. An increase or decrease in volatility or interest free rate, in isolation, can significantly increase or decrease the fair value of the derivative liabilities. Changes in the values of the derivative liabilities are recorded as a component of other income (expense) on the Company’s condensed consolidated statements of operations and comprehensive loss.

  

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the three months ended December 31, 2018:

 

Balance - Beginning of period   $ 472,670  
Aggregate fair value of derivative instruments issued     -  
Transfers out upon payoff of notes payable     -  
Change in fair value of derivative liabilities     (86,403 )
Balance - End of period   $ 386,267