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  March 31, 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
Total															121,000				121,000
Debt Discount															-				-
Net balance														$	121,000			$	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 $2,554 and $1,665 of interest expense for the quarter (3 months) ended March 31, 2017 and 2016. No convertible notes were converted as of March 31, 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.

 

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		$	10,500			$	(17,800	)		$	3,200
Total						$	(52,578	)		$	38,756

  

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. 

 

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 March 31, 2017:

 

Embedded Derivative Liabilities		Fair Value at Date of Issuance				Changes in Fair Value				Fair Value at March 31, 2017  (unaudited)
Note 1 – Issued in 2014		$	70,334			$	(37,001	)		$	33,333
Note 2 – Issued in 2015		$	21,000			$	(7,857	)		$	13,143
Total						$	(44,858	)		$	46,476

 

The Company recorded accretion of $5,483 and $7,350 for the three months ended on March 31, 2017 and 2016 which is recorded as interest expense.