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
6 Months Ended
Jun. 30, 2016
Notes to Financial Statements  
Note 9 - CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES

Iconic Holdings, LLC

 

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.

 

On June 2, 2016, the Iconic Holdings, LLC note was paid in full.

 

BICX Holding Company LLC

 

On June 10, 2016, the Company issued to BICX Holding Company, LLC a $2,500,000 senior secured convertible promissory note due June 10, 2019 and bearing interest at 8% per annum due annually beginning June 10, 2018.

 

Under the terms of the note, the note holder may, at any time, convert the unpaid principal of the note, or any portion thereof, into shares of the Company's common stock at an initial conversion price equal to 25% of the Company's total authorized common stock, determined at $0.019 per share at the date of issuance. In addition, the note contains certain anti-dilution provisions, as defined.

 

The Company is required to maintain a cash balance of 10% of the outstanding principal amount at all times, unrestricted and lien free.

 

The note holder has the right, until December 10, 2016, to purchase another convertible note from the Company in a principal amount of up to $2,500,000 for a total aggregate purchase price of $5,000,000. Based on the percentage of the maximum purchase price the note holder invests, they will receive another convertible note for a pro rata percentage the Company's total authorized common stock (up to another 26% of the Company's total authorized common stock, for a total of 51%, if the note holder invests the maximum purchase price). If the note holder does not exercise the right to pay the maximum purchase price, the note holder will pay the Company a break-up fee equal to 5% of the remaining balance of the maximum purchase price.

 

The note is secured by all of assets of the Company and is ranked senior to all of the Company's debt currently outstanding or hereafter, unless prohibited by law.

 

The Company has identified the embedded derivatives related to the above described note. These embedded derivatives included certain conversion and reset 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 $2,225,907 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 164.06%, (3) weighted average risk-free interest rate of 0.73%, (4) expected life of 3.00 years, and (5) estimated fair value of the Company's common stock of $0.0201 per share.

 

The determined fair value of the debt derivatives of $2,225,907 was charged as a debt discount.

 

During the six months ended June 30, 2016, the Company paid off an aggregate of $211,500 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 $262,271 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 164.09%, (3) weighted average risk-free interest rate of 0.48% to 0.99%, (4) expected life of 0.67 to 1.70 years, and (5) estimated fair value of the Company's common stock of $0.017 to $0.027 per share.

 

At June 30, 2016, the Company marked to market the fair value of the debt derivatives and determined a fair value of $2,699,418. The Company recorded a loss from change in fair value of debt derivatives of $437,063 and $469,081 for the three and six months ended June 30, 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 163.50%, (3) weighted average risk-free interest rate of 0.71%, (4) expected life of 2.95 years, and (5) estimated fair value of the Company's common stock of $0.024 per share.

 

The charge of the amortization of debt discounts and costs for the three and six months ended June 30, 2016 was $114,471, and $225,493; and $9,217 and $13,280 for the three and six months ended June 30, 2015, respectively, which was accounted for as interest expense.