CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES | NOTE 5 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES JMJ Financial On December 3, 2014 (the " Effective Date JMJ JMJ Note OID Maturity Date JMJ Financial (cont’d) The Company recorded a $2,778 discount to the JMJ Note related to the OID which is being accreted over the two year term of the Note. On April 28, 2015, the Company received second $25,000 under the JMJ Note. We have evaluated the terms and conditions of the JMJ Note. Because the economic characteristics and risks of the equity linked conversion options are not clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. The accounting treatment of derivative financial instruments requires that the Company record the initial fair value of the derivative first by allocating the fair value of the embedded derivative as a reduction to the face value of the debt recorded as a contra liability or debt discount to be accreted over the term of the note; and if the fair value of the embedded derivative exceeds the face value of the note, the excess embedded derivative fair value is expensed as other expense and the related liability increased. On each reporting date, the fair value of the embeded derivative is calculated with changes in value recorded to other expense. The initial fair value of the derivative liability was $57,746 and determined using the Black Scholes option pricing model with a quoted market price of $0.35, a conversion price of $0.12, expected volatility of 79%, no expected dividends, an expected term of two years and a risk-free interest rate of 0.57% resulting in a fair value per share of $0.2495 multiplied by the 231,483 shares that would be issued if the JMJ Note was exercised on the Effective Date. As a result, $25,000 was recorded as a debt discount, $35,186 as other expense and $57,746 as a derivative liability. The following table summarizes the derivative liability included in the balance sheet at June 30, 2015 and December 31, 2014: June 30, December 31, Derivative liability rollforward 2015 2014 Beginning balance $ 92,643 $ - Debt discount 25,000 25,000 Day one loss on fair value 42,489 32,746 Loss (gain) on change in fair value (2,706 ) 34,897 Write off due to conversion - - Balance at end of period $ 157,426 $ 92,643 Interest expenses: For the three month period For the six month period June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Amortization of debt discount $ 17,186 $ - $ 30,809 $ - Interest at contractual rate 1,128 - 2,267 - Totals $ 18,314 $ - $ 33,076 $ - LG Capital On December 15, 2014 (the " Closing Date LG Note Lender The Company recorded a $5,250 discount to the LG Note related to the OID which is being accreted over the one year term of the LG Note. On June 16, 2015, the company received a conversion notice from LG Capital to convert $7,750 in principal and $309 of accrued interest from the note above into 427,586 shares at $0.018848. We have evaluated the terms and conditions of the LG Note. Because the economic characteristics and risks of the equitylinked conversion options are not clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. The following table summarizes the derivative liability included in the balance sheet at June 30, 2015 and December 31, 2014: June 30, December 31, Derivative liability rollforward 2015 2014 Beginning balance $ 91,526 $ - Debt discount - 50,000 Day one loss on fair value - 34,748 Loss (gain) on change in fair value 96,743 6,778 Reclassify to additional paid in capital due to conversion (43,285 ) - Balance at end of period $ 144,984 $ 91,526 Interest expenses: For the three month period For the six month period June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Amortization of debt discount $ 17,186 $ - $ 30,809 $ - Interest at contractual rate 1,128 - 2,267 - Totals $ 18,314 $ - $ 33,076 $ - Adar Bays, LLC On December 17, 2014, the Company closed a Securities Purchase Agreement with Adar Bays, LLC (“ Adar Bays Adar Note We have evaluated the terms and conditions of the Adar Note. Because the economic characteristics and risks of the equity linked conversion options are not clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. The accounting treatment of derivative financial instruments requires that the Company record the initial fair value of the derivative first by allocating the fair value of the embedded derivative as a reduction to the face value of the debt recorded as a contra liability or debt discount to be accreted over the term of the note; and if the fair value of the embedded derivative exceeds the face value of the note, the excess embedded derivative fair value is expensed as other expense and the related liability increased. On each reporting date, the fair value of the embedded derivative is calculated with changes in value recorded to other expense. The initial fair value of the derivative liability was $75,278 and determined using the Black Scholes option pricing model with a quoted market price of $0.40, a conversion price of $0.1307, expected volatility of 100%, no expected dividends, an expected term of one year and a risk-free interest rate of 0.12% resulting in a fair value per share of $0.2811 multiplied by the 267,797 shares that would be issued if the Adar Note was exercised on the issuance date. As a result, $29,750 was recorded as a debt discount, $45,528 as other expense and $75,278 as a derivative liability. The following table summarizes the derivative liability included in the balance sheet at June 30, 2015: June 30, Derivative liability rollforward 2015 Beginning balance $ - Debt discount 29,750 Day one loss on fair value 45,528 Loss (gain) on change in fair value (39,825 ) Write off due to conversion - Balance at end of period $ 35,453 Adar Bays, LLC (cont’d) Interest expenses: For the three month period For the six month period June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Amortization of debt discount $ 8,290 $ - $ 17,764 $ - Interest at contractual rate 698 - 1,227 - Totals $ 8,988 $ - $ 18,991 $ - Typenex Co-Investment, LLC On January 16, 2015, the Company entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC (" Typenex Typenex Note Investor Notes The Typenex Note bears interest at the rate of 10% per annum. All interest and principal must be repaid on April 16, 2016. The Typenex Note is convertible into common stock, at Typenex’s option, at the lesser of (i) $0.60, and (ii) 70% (the “Conversion Factor”) of the average of the three (3) lowest Closing Bid Prices in the twenty (20) Trading Days immediately preceding the applicable Conversion, provided that if at any time the average of the three (3) lowest Closing Bid Prices in the twenty (20) Trading Days immediately preceding any date of measurement is below $0.30, then in such event the then-current Conversion Factor shall be reduced to 65% for all future Conversions, subject to other reductions set forth in the Typenex Note. In the event the Company elects to prepay all or any portion of the Typenex Note, the Company is required to pay to Typenex an amount in cash equal to 125% multiplied by the sum of all principal, interest and any other amounts owing. The Typenex Note is secured by all of the assets of the Company and includes customary event of default provisions. Typenex has agreed to restrict its ability to convert the Typenex Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. The Typenex Note is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. The Typenex Note also provides for penalties and rescission rights if we do not deliver shares of our common stock upon conversion within the required timeframes. Additionally, the Company granted Typenex four warrants, corresponding to the delivery of four tranches of cash funds, to purchase shares of the Company’s common stock, $0.001 par value. The first warrant will entitle the holder to purchase a number of shares equal to $30,000 (the “Typenex Warrant”) divided by the closing price on the date the warrants are issued, as such number may be adjusted from time to time pursuant to the terms of the Note, and the remaining warrants will entitle the holder to purchase a number of shares equal to $27,500 divided by the closing price on the date the warrants are issued, as adjusted. The warrants are exercisable for five years at $0.60 per share subject to certain anti-dilution provisions set forth in the warrants, a copy of which is attached as an exhibit hereto. Each warrant is not exercisable until each corresponding tranche is funded. We have evaluated the terms and conditions of the Typenex Note and Typenex Warrant. Because the economic characteristics and risks of the equitylinked conversion options are not clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. Typenex Co-Investment, LLC (cont’d) The Company first allocated Typenex Note principal between the Typenex Note and Typenex Warrant based upon their relative fair values. The initial fair value of the derivative liability related to the Typenex Warrant was $50,749 and determined using the Black Scholes option pricing model with a quoted market price of $0.40, a conversion price of $0.2357, expected volatility of 267%, no expected dividends, an expected term of 5 years and a risk-free interest rate of 1.29% resulting in a fair value per share of $0.3987 multiplied by the 127,298 shares that would be issued if the Typenex Warrant was exercised on the issuance date. The initial fair value of the derivative liability related to the Typenex Note was $58,472 and determined using the Black Scholes option pricing model with a quoted market price of $0.40, a conversion price of $0.2357, expected volatility of 100%, no expected dividends, an expected term of 1.25 years and a risk-free interest rate of 0.11% resulting in a fair value per share of $0.2297 multiplied by the 254,597 shares that would be issued if the Typenex Note was exercised on the issuance date. Since the value of the Typenex Note and Warrant derivative liabilities resulted in a total debt discount that exceeds the Typenex Note face amount, the amount recorded as a derivative liability was limited to the Typenex Note proceeds and debt discount totaling $55,000. The following table summarizes the derivative liability included in the balance sheet at June 30, 2015: Derivative liability rollforward June 30, 2015 Beginning balance $ - Debt discount 55,000 Loss (gain) on change in fair value - Typenex Note 27,963 Loss (gain) on change in fair value - Warrant 24,695 Write off due to conversion - Balance at end of period $ 107,658 Interest expenses: For the three month period For the six month period June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Amortization of debt discount $ 11,974 $ - $ 21,711 $ - Interest at contractual rate 1,546 - 2,774 - Totals $ 13,520 $ - $ 24,485 $ - Additionally, the Company recognized other asset of $3,070 and $5,523 of interest receivable related to the Investor Notes during the three and six month ended June 30, 2015, respectively. |