v3.5.0.2
Fair Value Disclosures
 3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
Fair Value Disclosures

NOTE 5 FAIR VALUE DISCLOSURES

 

Effective July 1 2009, the Company adopted ASC 820, Fair Value Measurements and Disclosures. This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that require or permit fair value measurements. The Company accounted for the convertible debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.

 

Effective July 1 2009, the Company adopted ASC 820-10-55-23A, Scope Application to Certain Non-Financial Assets and Certain Non-Financial Liabilities, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In January 2010, the FASB issued an update to ASC 820, which requires additional disclosures about inputs into valuation techniques, disclosures about significant transfers into or out of Levels 1 and 2, and disaggregation of purchases, sales, issuances, and settlements in the Level 3 roll forward disclosure. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

 

Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives
   
Level 2 inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges
   
Level 3 unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.

 

The fair value of certain of the embedded conversion liabilities was determined using the present value model calculating fair value based on the conversion discount as well as the present value based on term and bond rate. During the three months ended March 31, 2015, following assumptions were used: (1) conversion discounts of 10%; (2) term of less than one year to 7 years and (3) bond rate of 10%. Fluctuations in the conversion discount percentage have the greatest effect on the value of the conversion liabilities valuations during each reporting period. During the three months ended March 31, 2016, the following assumptions were used: (1) conversion discounts of 10%; (2) term of less than one year to 6 years and (3) bond rate of 10%. Fluctuations in the conversion discount percentage have the greatest effect on the value of the conversion liabilities valuations during each reporting period. As the conversion discount percentage increases for each of the related conversion liabilities instruments, the change in the value of the conversion liabilities increases, therefore increasing the liabilities on the Company’s balance sheet. The higher the conversion discount percentage, the higher the liability. A 10% change in the conversion discount percentage would result in more than a $755,462 change in our Level 3 fair value.

 

The fair value of embedded conversion feature of 320,000 shares of Series E Preferred Stock determined using a Black-Scholes Simulation. This model requires the input of highly subjective assumptions, including the expected price volatility, which is based on the historical volatility of a peer group of publicly traded companies. Changes in the subjective input assumptions can materially affect the estimate of fair value of the warrants and the Company’s results of operations could be impacted.

 

The following assumptions were used in calculations of the Black-Scholes model for the three months ended March 31, 2016 and 2015:

 

    For the Three
Months Ended
March 31, 2016		     For the Three
Months Ended
March 31, 2015		  
Annual dividend yield      - %      - %
Expected life (years)     1.00       -  
Risk-free interest rate     0.65 %      - %
Expected volatility     334 %      - %

 

The following table presents the embedded derivative, the Company’s only financial assets measured and recorded at fair value on the Company’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy during the three months ended March 31, 2016:

 

Embedded derivative liabilities as of March 31, 2016        
Level 1     $ —  
Level 2       —  
Level 3       13,012,330  
Total     $ 13,012,330  

 

The following table reconciles, for the period ended March 31, 2016, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:

 

Balance of embedded derivative as of December 31, 2015   $ 11,185,625  
Additions related to embedded conversion features of convertible debt issued     —  
Change in fair value of conversion features     2,082,507  
Gain on extinguishment related to conversion features     (252,531 )
Reductions in fair value due to principal conversions     (3,271 )
Balance at December 31, 2015   $ 13,012,330