Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE LIABILITIES

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DERIVATIVE LIABILITIES
3 Months Ended
Mar. 31, 2018
Notes to Financial Statements  
DERIVATIVE LIABILITIES

NOTE 11 – DERIVATIVE LIABILITIES

 

The Company determined that the conversion features of the convertible notes represented embedded derivatives since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature is bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of these derivative instruments is recorded as liabilities on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note, with any excess of the fair value of the derivative component over the face amount of the note recorded as an expense on the issue date. Such discounts are amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the derivative liabilities are recorded in other income or expenses in the condensed consolidated statements of operations at the end of each period, with the offset to the derivative liabilities on the balance sheet. See Note 10.

 

The Company valued the derivative liabilities at issuance, March 31, 2018, and December 31, 2017, at $108,634, $724,289 and $540,965, respectively. The Company used the Monte Carlo simulation valuation model with the following assumptions for new notes issued during the three months ended March 31, 2018, risk-free interest rates from 1.82% to 2.10% and volatility of 303% to 308%, and as of March 31, 2018, risk-free interest rates from 1.93% to 2.09% and volatility of 313% to 518%.

 

A summary of the activity related to derivative liabilities for the three months ended on March 31, 2018, is as follows:

 

    March 31, 2018
Beginning Balance   $ 540,965  
Initial Derivative Liability     108,634  
Fair Value Change     135,734  
Reclassification for principal payments     (61,044 )
Ending Balance   $ 724,289  

 

Derivative liability expense of $151,259 for the three months ended March 31, 2018, consisted of the initial derivative expense of $15,525 and the above fair value change of $135,734.