9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVE LIABILITIES

The carrying value of cash, accounts payable and accrued expenses, and debt (See Notes 8 & 9) approximate their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments. The carrying amount of the Company’s long-term debt is also stated at fair value of $150,000 since the stated rate of interest approximates market rates.

Fair value is defined 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 maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

●

Level 1

Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

●

Level 2

Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.

●

Level 3

Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of September 30, 2018:

Amount

Level 1

Level 2

Level 3

Embedded conversion derivative liability

—

Warrant and option derivative liabilities

—

Total

—

The embedded conversion feature in the convertible debt instruments that the Company issued (See Note 9), was convertible at issuance which qualified them as a derivative instrument since the number of shares issuable under the note is indeterminate based on guidance in ASC Topic No. 815-15, “Derivatives and Hedging (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt. This convertible debt tainted all other equity linked instruments including all outstanding non-employee options and warrants on the date that the instrument became convertible. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component of results of operations.

On September 27, 2018, all derivative instruments held by the Company had been either extinguished through settlement of the associated debts or through amendments to the instruments that removed the derivative aspect of the instrument.

The Black-Scholes model utilized the following inputs to value the derivative liabilities at the date of issuance of the convertible note through September 27, 2018 which was the date the derivative liability was terminated:

Fair value assumptions:	March 23, 2018 through September 27, 2018
Risk free interest rate		1.92-2.81%
Expected term (years)		0.26-6.99
Expected volatility		134%-334%
Expected dividends		0%

The following table presents a summary of the Company’s derivative liabilities associated with its convertible notes as of September 30, 2018:

	Amount
Balance September 30, 2017	$	—
Debt discount originated from derivative liabilities		789,219
Initial derivative loss recorded		4,160,476
Fair value of derivative liability at issuance reclassified from additional paid in capital		12,537,117
Resolution of derivative liability reclassified to additional paid in capital		(52,291,024)
Change in fair market value of derivative liabilities		34,804,212
Balance September 30, 2018	$	—