Annual report pursuant to Section 13 and 15(d)

FAIR VALUE MEASUREMENTS

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FAIR VALUE MEASUREMENTS
 12 Months Ended
Dec. 31, 2017
Notes to Financial Statements  
NOTE 13. FAIR VALUE MEASUREMENTS

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of the dates indicated:

 

    Fair Value at December 31,     Fair Value Measurement Using  
Description   2017     Level 1     Level 2     Level 3  
                         
Derivative Liabilities – Conversion Feature   $ 9,331,400     $ -     $ -     $ 9,331,400  
                                 
    $ 9,331,400     $ -     $ -     $ 9,331,400  
                                 
    Fair Value at December 31,     Fair Value Measurement Using   
Description   2016     Level 1     Level 2     Level 3  
                                 
Derivative Liabilities – Conversion Feature   $ 6,987,000     $ -     $ -     $ 6,987,000  
Liability – Contingent Consideration     12,085,859       -       -       12,085,859  
                                 
    $ 19,072,859     $ -     $ -     $ 19,072,859  

  

The following table presents a reconciliation of the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

Balance at December 31, 2015   $ 743,400  
         
Change in Fair Market Value of Conversion Feature     501,700  
Issuance of Equity Instruments with Debt Greater Than Debt Carrying Amount     1,487,500  
Derivative Debt Converted into Equity     (14,232,100 )
Issuance of Debt Instruments with Derivatives     18,486,500  
         
Balance at December 31, 2016   $ 6,987,000  
         
Change in Fair Market Value of Conversion Feature     3,494,550  
Derivative Debt Converted into Equity     (14,223,550 )
Issuance of Debt Instruments with Derivatives     13,073,400  
         
Balance at December 31, 2017   $ 9,331,400  

  

The following table presents a reconciliation of the Black Oak Contingent Consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

Balance at December 31, 2015   $ -  
         
Purchase of Black Oak Gallery     12,754,553  
Change in Fair Market Valuation of Black Oak Contingent Consideration     (668,694 )
         
Balance at December 31, 2016   $ 12,085,859  
         
Change in Fair Market Valuation of Contingent Consideration     4,426,047  
Payment of Contingent Consideration in Cash     (2,088,000 )
Settlement of Contingent Consideration     (4,739,638 )
Settlement of Contingent Consideration Recorded Against Additional Paid-In Capital     (4,692,697 )
Gain on Settlement of Contingent Consideration     (4,991,571 )
         
Balance at December 31, 2017   $ -  

 

The Company estimates the fair value of the derivative liabilities using the Black-Scholes-Merton option pricing model using the following assumptions:

 

      December 31,  
      2017     2016     2015  
                     
Stock Price     $2.25 - $5.85     $4.35 - $7.35     $1.35 - $3.30  
Conversion and Exercise Price     $1.80 - $6.60     $3.30 - $7.50     $1.05 - $2.40  
Annual Dividend Yield     -     -     -  
Expected Life (Years)     0.46 - 3.42     1.5 - 4.0     1.0 - 4.0  
Risk-Free Interest Rate     1.04% - 2.50%     2.50%     2.50%  
Expected Volatility     43.80% - 123.56%     120.30% - 144.03%     98.35% - 148.71%  

  

Volatility is based on historical volatility of our common stock. Historical volatility was computed using weekly pricing observations for our common stock that correspond to the expected term. This method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and conversion features.

 

No financial assets were measured on a recurring basis as of December 31, 2017 and 2016.

 

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

 

Non-financial assets, such as property, equipment and leasehold improvements, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized. The Company recorded an impairment charge related to property during the third quarter 2017, see“Note 8 - Property, Equipment and Leasehold Improvements, Net” for further information. In addition, the Company recorded an impairment charge related to certain intangible assets, see “Note 9 – Intangible Assets, Net” for further information. There were no impairment charges recorded for the fiscal years ended 2016 and 2015.