4. Fair Value Measurements

ASC 820 “Fair Value Measurements,” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 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. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1—Quoted prices in active markets for identical assets or liabilities;

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The following table presents information about the Company's derivative, conversion option and warrant liabilities that were measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation:


	September 30, 2018
	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	48,240	$	48,240
Derivative liability		—		—		—		—
Conversion option liability		—		—		—		—
Total fair value	$	—	$	—	$	48,240	$	48,240


	December 31, 2017
	Level 1		Level 2		Level 3		Total
Warrant liability	$	—	$	—	$	103,860	$	103,860
Derivative liability		—		—		11,000		11,000
Conversion option liability		—		—		111,841		111,841
Total fair value	$	—	$	—	$	226,701	$	226,701

The change in the estimated fair value of level 3 liabilities is summarized below:


	For the Nine Months Ended
	September 30, 2018
	Warrant		Derivative		Conversion Option
	Liability		Liability		Liability
Beginning value of liability	$	103,860	$	11,000	$	111,841
Extinguishment		—		—		(286,595)
Change in fair value of liability		(55,620)		(11,000)		174,754
Ending fair value of level 3 liability	$	48,240	$	—	$	—

Warrant Liability

The warrants associated with the level 3 liability were issued in 2016. The $103,860 valuation at December 31, 2017 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.14, the strike price was $0.75 per share, the expected life was 4.41 years, the volatility was 96.36% and the risk-free rate was 2.14%.The $48,240 valuation at September 30, 2018 was computed using the Black-Scholes-Merton pricing model using a stock price of $0.86, the strike price was $11.25 per share, the expected life was 3.66 years, the volatility was 131.93% and the risk-free rate was 2.90%. The resulting $55,620 gain is included in change in fair value of warrants in the statements of operations.

Derivative Liability

The derivative liability associated with the level 3 liability were associated with the June 2017 issuance of a convertible note payable. The Company computed fair values at the date of issuance of $15,000 and $5,000 for the repayment and the interest rate increase feature, respectively, using the Binomial Lattice Model, which was based on the generalized binomial option pricing formula. The $20,000 combined fair value was carved out and is included as a derivative liability on the Balance Sheet. The derivatives were revalued at December 31, 2017 using the same Model resulting in a combined fair value of $11,000. The derivatives were revalued again at September 30, 2018 using the same Model resulting in a combined minimal fair value. The resulting $11,000 gain is included in other income and expense in the Company's statements of operations.

Conversion Option Liability

In March 2017, Napo entered into an exchangeable note purchase agreement with two lenders for the funding of face amount of $1,312,500 in two $525,000 tranches of face amount $656,250. The Company assumed the notes at fair value of $1,312,500 as part of the Napo Merger. In December 2017, Napo amended the exchangeable note purchase agreement to extend the maturity of the first tranche and second tranche of notes to February 15, 2018 and April 1, 2018, respectively, increase the principal amount by 12%, and reduce the conversion price from $0.56 per share to $0.20 per share. The Company also issued 2,492,084 shares of common stock to the lenders in connection with this amendment to partially redeem $299,050 from the first tranche of the notes. The optional conversion option in the notes was bifurcated and accounted as a derivative liability at its fair value of $111,841 using the Black-Scholes-Merton model and the following criteria: stock price of $0.14 per share, conversion prices of $0.20 per share, expected life of 0.13 to 0.25 years, volatility of 86.29% to 160.78%, risk free rate of 1.28% to 1.39% and dividend rate of 0%. The $111,841 was included in conversion option liability on the balance sheet and in loss on extinguishment of debt on the statements of operations. The fair value of the conversion option liability was again revalued at March 23, 2018 using the Black-Scholes-Merton model using the following criteria: stock price of $0.21 per share, expected life of 0.11 years, volatility of 288.16%, risk free rate of 1.69% and dividend rate of 0%, resulting in an increase of $174,754 to the fair value of the conversion option liability and included in the change in fair value of warrants and conversion option liability in the statements of operations. The underlying debt was paid off in March of 2018 and the $286,595 conversion option liability was written off to other income in the statements of operations.