Quarterly report pursuant to Section 13 or 15(d)

CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES

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CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES
9 Months Ended
Sep. 30, 2015
Notes to Financial Statements  
Note 10 - CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES

On February 3, 2015, the Company sold to JMJ Financial a $250,000 Convertible Promissory Note. The JMJ note provides up to an aggregate of $225,000 in gross proceeds after taking into consideration an Original Issue Discount ("OID") of $25,000. The maturity date is two years from the effective date of each payment paid under the promissory note. 

 

The Company, at its sole discretion, has an option to repay all consideration received pursuant to the JMJ note within 120 days of the effective date, there will be zero percent interest charged under the JMJ Note. Otherwise, there will be a one-time interest charge of 12% for all consideration received by the Company pursuant to the JMJ Note. 

 

The Notes earn an interest rate of 12% per annum after four months of each advance and are convertible six months after the issuance date of the each advance at a conversion price equal to 60% discount to the lowest trading price of the common stock for the 25 trading days immediately prior the conversion date. 

 

In the event of default, the Purchaser has the right to require the Company to repay in cash all or a portion of the Note at a price equal to 125% of the aggregate principal amount of the Note plus all accrued but unpaid interest. 

 

As of September 30, 2015, the Company has been funded by the purchaser as aggregate of, in the principal amount of $121,000, consisting of the aggregate principal sum of $110,000 advanced by the holder and $11,000 in OID.

 

The Company has identified the embedded derivatives related to the above described notes. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date. 

 

At the funding dates of the JMJ note tranches, the Company determined the aggregate fair value of $239,511 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 144.83% to 172.85%, (3) weighted average risk-free interest rate of 0.52% to 0.70%, (4) expected life of 2.00 years, and (5) estimated fair value of the Company's common stock from $0.049 to $0.093 per share. 

 

The determined fair value of the debt derivatives of $239,511 was charged as a debt discount up to the net proceeds of the note with the remainder of $134,554 charged to current period operations as non-cash interest expense. 

 

During the nine months ended September 30, 2015, the Company paid off an aggregate of $75,000 of the outstanding notes. At the date of payoff, the Company marked to market the fair value of the debt derivatives and determined a fair value of $158,959 and transferred to equity. The fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 148.32% to 151.27%, (3) weighted average risk-free interest rate of 0.60% to 0.68%, (4) expected life of 1.58 to 1.67 years, and (5) estimated fair value of the Company's common stock of $0.04 to $0.05 per share. 

 

At September 30, 2015, the Company marked to market the fair value of the debt derivatives and determined a fair value of $65,893. The Company recorded a gain (loss) from change in fair value of debt derivatives of $(25,252) and $19,702 for the three and nine months ended September 30, 2015. The fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 146.21%, (3) weighted average risk-free interest rate of 0.64%, (4) expected life of 1.97 years, and (5) estimated fair value of the Company's common stock of $0.0449 per share. 

 

The charge of the amortization of debt discounts and costs for the three and nine months ended September 30, 2015 was $69,905 and $83,185, respectively, which was accounted for as interest expense.