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(7) Derivative Instruments
 9 Months Ended
Sep. 30, 2018
Notes  
(7) Derivative Instruments

(7) Derivative Instruments

 

The Company analyzed the conversion option for derivative accounting consideration under ASC 815, “Derivatives and Hedging,” and determined that the convertible notes should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.

 

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of September 30, 2018 and December 31, 2017. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in September 30, 2018 and December 31, 2017:

 

 

 

Nine Months Ended

 

 

Year Ended

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Expected term

 

0.1- 0.58 years

 

 

 

0.4 –0.96 years

 

Expected average volatility

 

987.1

%

 

 

313.6

 %

Expected dividend yield

 

-

 

 

 

 

-

 

Risk-free interest rate

 

1.65 –2.97

%

 

 

1.28 –1.76

 %

 

The Company valued the conversion feature using the Black-Scholes valuation model. The fair value of the derivative liability for all the notes that became convertible as of September 30, 2018 amounted to $3,452,179. During the nine months ended September 30, 2018, $80,542 of the value assigned to the derivative liability was recognized as a debt discount to the convertible notes and $1,135,539 was recorded as loss on change in fair value of derivative liability.

 

 

 Nine Months Ended September 30, 2018

 

 

Year Ended December 31, 2017

 

 

 Conversion Feature

 

 

 Conversion Feature

 

 

 of

 

 

 of

 

 

 Notes Payable

 

 

 Notes Payable

 

 

 

 

 

 

Beginning balance, January 1

 

                                  1,787,063

 

 

                                                     -  

Reclassification to equity

 

                                              -  

 

 

                                        1,079,942

Change in value of derivative liability

 

                                 2,800,655

 

 

                                           707,121

Excess derivative liability expense

 

                               (1,135,539)

 

 

                                                     -  

Ending balance

 

$                              3,452,179

 

 

$                                     1,787,063