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 Note 1 to Note 2 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. Note 3 to Note 5 can be convertible at the holder’s discretion into common shares of the Company’s stock at $0.02 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 June 30, 2017 (unaudited)				Balance at December 31, 2016
Note 1		October 2, 2014		December 31, 2015			7.0	%		$	100,000			$	100,000			$	100,000
Note 2		December 23, 2015		September 23, 2016			16.0	%		$	21,000			$	21,000			$	21,000
Note 3		March 31,2017		August 30, 2017			5.0	%		$	10,000			$	10,000				-
Note 4		May 22, 2017		August 30, 2017			5.0	%		$	10,000			$	10,000				-
Note 5		June 14, 2017		August 30, 2017			6.0	%		$	12,000			$	12,000				-
Total															153,000				121,000
Debt Discount															(7,233	)			-
Net balance														$	145,767			$	121,000

 

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 $5,346 and $4,281 of interest expense for the quarters ended June 30, 2017 and 2016. No convertible notes were converted as of June 30, 2017 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 December 31, 2016:

 

Embedded Derivative Liabilities		Fair Value at Date of Issuance				Changes in Fair Value				Fair Value at December 31,  2016
Note 1 – Issued in 2014		$	70,334			$	(34,778	)		$	35,556
Note 2 – Issued in 2015		$	21,000			$	(17,800	)		$	3,200
Total						$	(52,578	)		$	38,756

 

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.

 

The following table represents fair value of embedded derivative movement from the date of issuance to June 30, 2017:

 

Embedded Derivative Liabilities		Fair Value at Date of Issuance				Changes in Fair Value				Fair Value at June 30,  2017  (unaudited)
Note 1 – Issued in 2014		$	70,334			$	(35,246	)		$	35,088
Note 2 – Issued in 2015		$	21,000			$	(17,062	)		$	3,938
Total						$	(52,308	)		$	39,026

 

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.