NOTE 8 – CONVERTIBLE NOTES PAYABLE

 

The Company issued convertible notes payable. The outstanding balance and any accrued interest is due on maturity date or when the cash is available to repay the notes payable. Under the agreement, the notes can be convertible at the holder’s discretion into common shares of the Company’s stock at a 25% discount to the price at the date of exercise.

 

The Company’s convertible notes payable is as follows:

 

Convertible Note		Issuance Date		Maturity Date		Interest Rate				Original Borrowing				Balance at  September 30,  2016  (unaudited)				Balance at December 31,  2015
Note 1		October 2, 2014		December 31, 2015			5.0%			$	100,000			$	100,000			$	100,000
Note 2		June 10, 2015		March 13, 2016			8.0%			$	28,000			$	-			$	-
Note 3		December 23, 2015		September 23, 2016			8.0%			$	21,000			$	21,000			$	21,000
Total															121,000				121,000
Debt Discount															-				(9,333	)
Net balance														$	121,000			$	111,667

 

The convertible notes with the maturity date that has matured at the time the financial statements are issued continued to accrue interest and no default penalties were incurred. The Company incurred $1,683 and $0 of interest expense for the quarter (3 months) ended September 30, 2016 and 2015. No convertible notes were converted as of September 30, 2016 and up to the date the financial statements are issued.

 

The Company adopted the provisions of FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) (previously EITF 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”), as the convertible note agreement contained certain provision that the convertible note failed to pass the “fixed for fixed” criteria of ASC815, the conversion feature of the convertible debt should have to be bifurcated and recorded separately until the conversion date.

 

Based on ASC 815, the Company determined that the convertible debt contained embedded derivatives and full-ratchet provision which the Company valued the embedded derivative using the Black-Scholes method. The following table represents fair value of embedded derivative movement from the date of issuance to September 30, 2016:

 

Embedded Derivative Liabilities		Fair Value at Date of Issuance				Changes in Fair Value				Fair Value at September 30, 2016  (unaudited)
Note 1 – Issued in 2014		$	70,334			$	(42,556	)		$	27,778
Note 2 – Issued in 2015		$	20,000			$	(20,000	)		$	-
Note 3 – Issued in 2015		$	21,000			$	(15,126	)		$	5,874
Total						$	(77,682	)		$	33,652

 

As a result of initial recording of derivative liability of $41,000 for convertible notes issued in 2015 with proceeds of $49,000 the Company recorded debt discount of $30,500 at the date of issuance of convertible note payable for issuances occurred in 2015. The Company recorded additional debt discount of $10,500 in June 2015 to true up the debt discount balance. The original debt discount amount of $30,500 should have been recorded as $41,000. The Company accretes debt discount of $41,000 for convertible notes issued in 2015 and $70,334 for convertible note issued in 2014 over the life of the convertible note. The Company recorded accretion of $5,483 and $0   for the three months ended on September 30, 2016 and 2015 which is recorded as interest expense.

The following table represents fair value of embedded derivative movement from the date of issuance to December 31, 2015:

 

Embedded Derivative Liabilities		Fair Value at Date of Issuance				Changes in Fair Value				Fair Value at December 31, 2015
Note 1 – Issued in 2014		$	70,334			$	5,856			$	76,190
Note 2 – Issued in 2015		$	20,000			$	(20,000	)		$	-
Note 3 – Issued in 2015		$	10,500			$	21,000			$	31,500
Total						$	6,856			$	107,690

 

 

As a result of initial recording of derivative liability of $30,500 for convertible notes issued in 2015 with proceeds of $49,000 the Company recorded debt discount of $30,500 at the date of issuance of convertible note payable for issuances occurred in 2015. The Company accretes debt discount of $30,500 for convertible notes issued in 2015 and $70,334 for convertible note issued in 2014 over the life of the convertible note.