Quarterly report pursuant to Section 13 or 15(d)


6 Months Ended
Jun. 30, 2019
Notes to Financial Statements  



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 12.


The Company used the Monte Carlo simulation valuation model with the following assumptions for new notes issued during the six months ended June 30, 2019, risk-free interest rates from 2.00% to 2.59% and volatility of 319% to 387%, and as of December 31, 2018, risk-free interest rates from 2.56% to 2.62% and volatility of 355% to 391%.


A summary of the activity related to derivative liabilities for the six months ended June 30, 2019, is as follows:


    June 30, 2019
Beginning Balance   $ 1,807,404  
Initial Derivative Liability     2,717,846  
Fair Value Change     (696,761 )
Reclassification for conversions     (746,421 )
Ending Balance   $ 3,082,068  


Derivative liability expense of $342,360 for the six months ended June 30, 2019, consisted of the initial derivative expense of $1,039,121 and the above decrease in the fair value of $696,761.