Fair Value Measurements and Derivative Liability

9 Months Ended

Sep. 30, 2016

Fair Value Measurements and Derivative Liability

NOTE 9.

Fair Value Measurements and Derivative Liability

The Company evaluates all of it financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

On October 6, 2015, the Company entered into an agreement with Auctus Fund LLC to invest $55,250 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable July 6, 2016. The note is convertible by Auctus into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance. On March 31, 2016 the note was bought by EMA Financial LLC for $55,250 plus accrued interest of $2119.18.

On October 7, 2015, the Company entered into an agreement Kodiak Capital Group to invest $50,000 into the Company in exchange for the issuance of a $60,000 convertible promissory note which includes OID of $10,000. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable October 7, 2016. The note is convertible by Kodiak into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% multiplied by the average of the three lowest trading prices of the Common Stock on the OTC Market for the 10 prior trading days. The Company has the option to repay this note up to 180 days after issuance.

On November 11, 2015, the Company entered into an agreement with EMA Financial LLC to invest $50,000 into the Company in exchange for the issuance of a $50,000 convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable November 11, 2016. The note is convertible by EMA Financial into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance.

On December 16, 2015, the Company entered into an agreement with Auctus Fund LLC to invest $110,000 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable December 16, 2016. The note is convertible by Auctus into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days.

On January 12, 2016, the Company entered into an agreement with Crown Bridge Partners LLC to invest $36,000 into the Company in exchange for the issuance of a $40,000 convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable January 12, 2017. Unpaid balance bears an interest at the rate of 22%. The note is convertible by Crown Bridge Partners into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% of the lowest trading prices of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance.

On January 20, 2016, the Company entered into an agreement with Yoshar Trading LLC to invest $30,000 into the Company in exchange for the issuance of a $31,100 convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable January 20, 2017. The note is convertible by Yoshar into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% of the lowest trading prices of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance.

On January 22, 2016, the Company entered into an agreement with Auctus Fund LLC to invest $77,750 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable October 22, 2016. The note is convertible by Auctus into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 70% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days.

On February 28, 2016, the Company entered into an agreement with APG Capital Holdings, LLC to invest a total of $63,000 into the Company in exchange for the issuance of 2 convertible promissory notes, each $31,500. The first $31,500 note is a front end note and was purchased by APG Capital Holdings, LLC on February 28, 2016. The second $31,500 note is a back end note and will be funded no later than October 29, 2016. The Company has the option to cancel the back end note and any obligation thereof by giving 30 days written notice of cancellation no later than the 5^th month anniversary of the issuance of the front end note. The notes bear interest at the rate of 8%. All outstanding interest and principle on the front end note is due and payable February 28, 2017. The note is convertible by APG Capital Holdings, LLC into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% multiplied by average of the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to prepay this note up to 180 days after issuance

On February 29, 2016, the Company entered into an agreement with Auctus Fund LLC to invest $77,750 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable November 29, 2016. The note is convertible by Auctus into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 70% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days.

On March 15, 2016, the Company entered into an agreement with Crown Bridge Partners LLC to invest $36,000 into the Company in exchange for the issuance of a $40,000 convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable March 15, 2017. Unpaid balance bears an interest at the rate of 22%. The note is convertible by Crown Bridge Partners into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% of the lowest trading prices of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance.

On March 29, 2016, the Company entered into an agreement with Auctus Fund LLC to invest $108,000 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable December 29, 2016. The note is convertible by Auctus into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 70% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days.

On March 31, 2016, the Company entered into an agreement with EMA Financial LLC to invest $50,000 into the Company in exchange for the issuance of a $50,000 convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable March 28, 2017. The note is convertible by EMA Financial into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance

On March 31, 2016, EMA Financial, LLC entered a debt purchase agreement with Auctus Fund LLC to purchase the note dated October 6, 2015 for the amount of $55,250 principal and $2,119.18 of accrued interest. Conversion of this note is subject to a leak-out agreement executed the same date.

On May 6, 2016, Auctus Fund LLC entered a debt purchase agreement with EMA Financial to purchase the note dated November 15, 2015 for the amount of $50,000 principal and $1,940 of accrued interest. Conversion of this note is subject to a leak-out agreement executed the same date.

On May 6, 2016, the Company entered into an agreement with Auctus Fund LLC to invest $76,250 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable February 6, 2017. The note is convertible by Auctus into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 70% of the lowest trading prices of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance.

On May 23, 2016, the Company entered into an agreement with Black Mountain Equities, Inc. to invest up to $100,000 into the Company in exchange for a convertible promissory note. The note bears interest at the rate of 9.99%. All outstanding principle and interest is due and payable on May 26, 2017. The note is convertible by Black Mountain into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 65% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to prepay this note up to 90 days after issuance. As of September 30, 2016 only $25,000 of this note is funded.

On May 24, 2016, the Company entered into an agreement with Adar Bays, LLC to invest into the Company $35,000 in exchange for a convertible promissory note. The note bears interest at the rate of 8%. All outstanding principle and interest is due and payable on May 24, 2017. The note is convertible by Adar Bays into shares of the Company’s common stock at any time after 180 days from note issuance (November 20, 2016). The conversion price for each share is equal to 65% multiplied by the lowest trading price of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to prepay this note plus accrued interest at 115% of face within 60 days from note issuance, at 125% of face within 61 to 120 days from note issuance, and at 135% of face within 121 to 180 days from note issuance, after which time the note may not be prepaid.

On July 15, 2016 EMA Financial elected to convert $7,150 of the principal of the note the purchased from Auctus Fund, LLC on March 31, 2016 originally issued on October 6, 2015. The Company issued to EMA Financial 55,000 shares of company stock.

On July 29, 2016, Crownbridge elected to convert $8,060 of the principal amount of note issued on January 12, 2016. The Company issued to Crownbridge 62,000 shares of Company stock.

On August 3, 2016 the Company issued 9,204 shares of Company stock to a consultant for services performed under an agreement originally signed on May 6, 2015.

On August 3, 2016 the Company issued 20,000 shares to a consultant for services performed under an agreement originally signed on June 6, 2016.

On August 5, 2016, Crownbridge elected to convert $7,508 of the principal amount of note issued on January 12, 2016. The Company issued to Crownbridge 77,000 shares of Company stock.

On August 15, 2016 Yoshar Trading, LLC elected to convert $3,000 of the principal of the note issued on January 20, 2016. The Company issued to Yoshar 43,956 shares of Company stock.

On August 24, 2016 EMA Financial elected to convert $6,825 of the principal of the note the purchased from Auctus Fund, LLC on March 31, 2016 originally issued on October 6, 2015. The Company issued to EMA Financial 100,000 shares of Company stock.

On August 24, 2016 the Company entered into an agreement with EMA Financial, LLC to invest $40,000 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable August 24, 2017. The note is convertible by EMA into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 50% of the lowest trading prices of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 3 months after issuance.

On August 26, 2016 the Company entered into an agreement with Auctus Fund LLC to invest $41,250 into the Company in exchange for the issuance of a convertible promissory note. The note bears interest at the rate of 8%. All outstanding interest and principle is due and payable May 26, 2017. The note is convertible by Auctus into shares of the Company’s common stock at any time on or after the Issuance Date. The conversion price for each share is equal to 70% of the lowest trading prices of the Common Stock on the OTC Market for the 20 prior trading days. The Company has the option to repay this note up to 180 days after issuance.

On August 31, 2016, Crownbridge elected to convert $7,956 of the principal amount of note issued on January 12, 2016. The Company issued to Crownbridge 390,000 shares of Company stock.

On August 31, 2016 Yoshar Trading, LLC elected to convert $3,000 of the principal of the note issued on January 20, 2016. The Company issued to Yoshar 153,846 shares of Company stock.

On September 6, 2016 Yoshar Trading, LLC elected to convert $4,000 of the principal of the note issued on January 20, 2016. The Company issued to Yoshar 361,991 shares of Company stock.

On September 6, 2016, APG Capital Holdings, LLC elected to convert $4,000 of the principal amount and $165 of interest of a note issued on February 29, 2016. The Company issued to APG 376,906 shares of Company stock.

On September 6, 2016, Crownbridge elected to convert $7,007 of the principal amount of note issued on January 12, 2016. The Company issued to Crownbridge 687,000 shares of Company stock.

On September 6, 2016 EMA Financial elected to convert $4,420 of the principal of the note the purchased from Auctus Fund, LLC on March 31, 2016 originally issued on October 6, 2015. The Company issued to EMA Financial 400,000 shares of Company stock.

On September 6, 2016 the Company issued 92,105 shares of Company stock to a consultant for services performed under an agreement originally signed on May 6, 2015.

On September 26, 2016, Crownbridge elected to convert $2,473 of the principal amount of note issued on January 12, 2016. The Company issued to Crownbridge 687,000 shares of Company stock.

The company identified embedded derivatives related to the EMA, Auctus Fund LLC, Kodiak, Yoshar, Adar, APG, Black Mountain and Crownbridge Convertible Promissory Notes. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date. Under ASC-815, the conversion options embedded in the notes payable described in Note 8 require derivate liability classification because they do not contain an explicit limit to the number of shares that could be issued upon settlement.

As defined in FASB ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date.

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

Derivative liability — the Company’s derivative liability is classified within Level 3 of the fair value hierarchy.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as at September 30, 2016 and December 31, 2015.

Recurring Fair Value Measurements	Level 1		Level 2		Level 3			Total

Liabilities:
Derivative liability – September 30, 2016	$	—	$	—	$	8,391,814		$	8,391,814

Derivative Liability – December 31,2015	$	—	$	—	$		1,428,075	$	1,428,075

At September 30, 2016, convertible notes payable consisted of:

Date of Note		Noteholder	Interest Rate		Maturity date		Face Value			OID		Proceeds		Unamortized Debt Discount		Net Carrying Amount
	10/7/2015	Kodiak		8%		10/7/2016		60,000	(b)		10,000		50,000		966		59,034
	11/11/2015	Auctus		8%		11/11/2016		14,096	(a)				14,096		1,630		12,466
	12/16/15	Auctus		8%		9/16/16		80,266	(a)				80,266		—		80,266
	1/12/2016	Crownbridge		8%		1/12/2017		6,996	(a)		4,000		2,996		1,773		5,223
	1/20/2016	Yoshar		8%		1/20/2017		22,500	(a)		1,500		21,000		6,847		15,653
	1/22/2016	Auctus		8%		10/22/16		77,750	(c)				77,750		6,297		71,453
	2/29/2016	APG Securities		8%		2/28/2017		27,500	(a)		1,500		26,000		10,880		16,620
	2/29/2016	Auctus		8%		11/29/2016		77,750	(c)				77,750		17,138		60,612
	3/15/2016	Crownbridge		8%		3/15/2017		40,000	(a)		4,000		36,000		16,436		23,564
	3/16/16	EMA		8%		7/16/2016		952	(a)				952		—		952
	3/28/2016	Auctus		8%		12/30/2016		108,000	(c)				108,000		35,933		72,067
	3/29/2016	EMA		8%		3/28/2017		52,500	(a)				52,500		25,842		26,658
	5/6/2016	Auctus		8%		12/30/2016		76,750	(c)				76,750		—		76,750
	05/23/2016	Black Mountain		9.99%		5/26/2017		25,000	(d)				25,000		16,252		8,748
	5/24/2016	Adar Bays		8%		5/24/2017		35,000	(d)				35,000		22,561		12,439
	8/24/2016	EMA		8%		8/24/2017		40,000	(e)				40,000		35,945		4,055
	8/26/2016	Auctus		8%		5/26/2017		41,250					41,250		—		41,250
	1/20/2016	Yoshar		8%		1/20//2017		30,000					30,000		20,364		9,636
	Totals							816,310			21,000		795,310		218,864		597,446

(a) Convertible in shares of common stock 65% of the lowest closing for the twenty days trading immediately preceding the date of conversion.

(b) Convertible in shares of common stock 65% of the lowest closing for the ten days trading immediately preceding the date of conversion.

(c) Convertible in shares of common stock 70% of the lowest closing for the twenty days trading immediately preceding the date of conversion.

(d) Convertible in shares of common stock 65% multiplied by the average of the 3 lowest closing trading prices ten days prior to conversion.

(e) Convertible in shares of common stock 50% multiplied by the average of the 3 lowest closing trading prices twenty days prior to conversion.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

GeneSYS ID, Inc. 10-Q