Quarterly report pursuant to Section 13 or 15(d)

Convertible Notes payable and Derivative Liability

v3.5.0.2
Convertible Notes payable and Derivative Liability
9 Months Ended
Sep. 30, 2016
Convertible Notes Payable and Derivative Liability [Abstract]  
CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
6. CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY

 

On September 29, 2016, the Company issued Convertible Promissory Notes Series 2016 due October 1, 2017 in the aggregate principal amount of $3,000,000 in a private placement to the Chairman of the Board and the Chairman of the Strategic Advisory Board of the Company. The notes bear interest at a rate of six percent (6%) per annum. The Company may prepay the notes at any time without penalty. If the Company does not prepay a note in full or the holder does not convert the note before the maturity date, the Company may pay the outstanding principal amount and any accrued and unpaid interest on the maturity date with cash or with common stock or through a combination of cash and stock at the Company’s discretion. The conversion price of the notes is the lesser of $3.00 per share or eight-five percent (85%) of the lowest per share purchase price of common stock in the next sale of common stock in which the Company receives gross proceeds of an amount greater than or equal to $3,000,000. 

 

Under ASC 815, these notes require liability classification and must be measured at fair value at the end of each reporting period.

 

As defined in FASB ASC 820, the 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 at the measurement date (exit price). The Company utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. FASB ASC 820 established a fair value hierarchy that prioritizes the inputs 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 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

 

Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

 

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of September 30, 2016 and December 31, 2015:

 

      Level 1     Level 2     Level 3     Total  
  LIABILITIES:                        
  Derivative liabilities as of September 30, 2016   $ 0     $ 0     $ 2,394,950     $ 2,394,950  
  Derivative liabilities as of December 31, 2015   $ 0     $ 0     $ 0     $ 0  

 

The following table represents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2016:

 

  Fair value of derivative liabilities as of December 31, 2015   $ 0  
  Fair value of derivative liability at September 29, 2016 recorded as debt discount     2,394,974  
  Change in fair value of derivative liabilities     (24 )
  Fair value of derivative liabilities as of September 30, 2016   $ 2,394,950  

 

The amortization of the debt discount is $2,822 for the nine months ended September 30, 2016. The $3,000,000 payable associated with the Convertible Promissory Notes Series 2016 due October 1, 2017 as of September 30, 2016 is $607,484, which is net of a $2,392,152 debt discount.