Note 6 - Fair Value Measurements and Financial Instruments

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE

6

– FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

ASC Topic

820,

Fair Value Measurement and Disclosures

, 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. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of

three

levels:

● Level 1 – Quoted prices in active markets for identical assets and liabilities;

● Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and

● Level 3 – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Liabilities measured at fair value on a recurring basis are summarized as follows:

	Fair value measurement using inputs						Carrying amount
	Level 1		Level 2		Level 3		December 31, 201 7		December 31, 201 6
Financial instruments:
Series 2023 Note Derivative	$	-0-	$	-0-	$	163,634	$	163,634	$	142,909
Series A Note Derivative	$	-0-	$	-0-	$	1,883,630	$	1,883,630	$	2,033,643

The following table summarizes the activity for financial instruments at fair value using Level

3

inputs for

2017

and

2016:

	201 7			201 6
Balance at beginning of year	$	2,176,552		$	5,138,857
Issuance of additional Series 2023 Notes		13,155			18,807
Issuance of additional Series A Notes		85,834			247,931
Net unrealized gain included in operations		(228,277	)		(3,229,043	)
Balance at end of year	$	2,047,264		$	2,176,552

The recorded value of certain financial assets and liabilities, which consist primarily of cash and cash equivalents, receivables, and accounts payable and accrued expenses approximate their fair value at

December 31, 2017

and

2016

based upon the short-term nature of the assets and liabilities. Based on borrowing rates currently available to the Company for loans with similar terms, and the remaining short-term period outstanding, the carrying value of notes payable other than PIK notes approximate fair value. The estimated fair value of the PIK Notes Payable was approximately

$11,395,208

and

$23,361,553

at

December 31, 2017

and

2016

(Level

3

), respectively.

For the Company's warrant and PIK note derivative liabilities, Level

3

fair value hierarchy was estimated using a Monte Carlo Model using the following assumptions:

Series 2023 Note derivative liability	Fair Value Measurements
	Using Inputs
	December 31, 2017			December 31, 2016
Market price and estimated fair value of stock	$	0.05		$	0.12
Exercise price (1)	$	0.59		$	1.28
Term (years)		5.58			6.58
Dividend yield		-0-			-0-
Expected volatility		115.3	%		86.2	%
Risk-free interest rate		2.24	%		2.18	%

(

1

) Exercise price is reflective of amended Series

2023

Notes issued in

December 2017

as discussed in Note

8.

Series A Note derivative liability	Fair Value Measurements
	Using Inputs
	December 31, 2017			December 31, 2016
Market price and estimated fair value of stock	$	0.05		$	0.12
Exercise price (1)	$	0.40		$	0.83
Term (years)		5.58			6.58
Dividend yield		-0-			-0-
Expected volatility		115.3	%		86.2	%
Risk-free interest rate		2.24	%		2.18	%

 (

1

) Exercise price is reflective of amended Series A Notes issued in

December 2017

as discussed in Note

8.