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7. FAIR VALUE

12 Months Ended

Dec. 31, 2016

Level 3 financial instruments consist of certain embedded conversion features. The fair value of these embedded conversion features that have exercise reset features are estimated using a Monte Carlo valuation model. We adopted the disclosure requirements of ASU 2011-04, “Fair Value Measurements.” (See note 6) The unobservable input used by us was the estimation of the likelihood of a reset occurring on the embedded conversion feature of the Convertible Notes. These estimates of the likelihood of completing an equity raise that would meet the criteria to trigger the reset provisions are based on numerous factors, including the remaining term of the financial instruments and the Company’s overall financial condition.

The following table summarizes the changes in fair value of the Company’s Level 3 financial instruments for the years ended December 31, 2016 and 2015. Upon the retirement of the Notes in June 2015, the fair value of the derivative liability was $0.

	December 31,		December 31,
	2016		2015
Beginning Balance	$	—	$	1,728,883
Change in fair value		—		3,810,955
Reclassification to additional paid in capital due to retirement of convertible notes		—		(5,539,838	)
Ending Balance	$	—	$	—

Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input used in the fair value measurement is the estimation of the likelihood of the occurrence of a change to the conversion price based on the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood would result in a higher (lower) fair value measurement. As of December 31, 2016 and 2015, the balance of derivative liability was $0 as the Notes were retired during the second quarter of 2015.