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
3 Months Ended
Mar. 31, 2016
Notes to Financial Statements  
Note 9 - CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES

On February 1, 2016, the Company issued to Iconic Holdings, LLC a $88,000 Convertible Promissory Note. The proceeds from the Iconic note provides was up to an aggregate of $79,200 in net proceeds after taking into consideration an Original Issue Discount ("OID") of $8,800. The maturity date is one year from the date of issuance. 

 

The Company, at its sole discretion, has an option to repay the Iconic note within 90 days of the effective date at a rate of 110% of unpaid principal or 135% from 91-180 days of effective date. After 180 days, the note may not be prepaid without the consent of the holder. 

 

The Note is convertible after 180 days into shares of the Company's common stock at a conversion price equal to 60% discount to the lowest closing price of the common stock for the 10 trading days immediately prior the conversion date.

 

The Company has identified the embedded derivatives related to the above described note. 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 inception, the Company determined the aggregate fair value of $96,170 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 150.09%, (3) weighted average risk-free interest rate of 0.47%, (4) expected life of 1.00 year, and (5) estimated fair value of the Company's common stock of $0.0121 per share. 

 

The determined fair value of the debt derivatives of $96,170 was charged as a debt discount up to the net proceeds of the note with the remainder of $21,722 charged to current period operations as non-cash interest expense. 

 

During the three months ended March 31, 2016, the Company paid off an aggregate of $123,500 of the previously issued convertible notes. At the date of payoff, the Company marked to market the fair value of the debt derivatives and determined a fair value of $173,787 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 147.99% to 148.167%, (3) weighted average risk-free interest rate of 0.73% to 0.99%, (4) expected life of 0.69 to 1.70 years, and (5) estimated fair value of the Company's common stock of $0.027 per share. 

 

At March 31, 2016, the Company marked to market the fair value of the debt derivatives and determined a fair value of $124,932. The Company recorded a loss from change in fair value of debt derivatives of $32,018 for the three months ended March 31, 2016. 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 155.27%, (3) weighted average risk-free interest rate of 0.59%, (4) expected life of 0.84 years, and (5) estimated fair value of the Company's common stock of $0.0226 per share. 

 

The charge of the amortization of debt discounts and costs for the three months ended March 31, 2016 and 2015 was $111,022 and $4,063, respectively, which was accounted for as interest expense.