Note 4 - Convertible Debt | 9 Months Ended |
Sep. 30, 2014 |
Notes | ' |
Note 4 - Convertible Debt | ' |
NOTE 4 – CONVERTIBLE DEBT |
On March 26, 2014, the Company borrowed $290,000 under a convertible note agreement with an investor. The note bears an interest rate of 10%, matures on March 26, 2015, and is convertible at $1.00 per share. The investor received warrants to purchase 500,000 shares of common stock at $0.50 per share with a two year exercise term. |
|
We evaluated the warrants for derivative accounting consideration under ASC Topic 815-40, Derivatives and Hedging – Contracts in Entity’s own stock. We concluded that the warrants meet the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable for the warrants. Accordingly, we allocated the proceeds from the transaction to the debt, stock, and warrants based on their relative fair value. We determined the fair value of the warrants using a Black-Sholes option pricing model with the following inputs: |
|
|
Risk-free interest rate | | | 0.45 | % |
Dividend yield | | | - | % |
Volatility factor | | | 145 | % |
Expected life (years) | | | 2 | |
|
The volatility was determined by referring to the average historical volatility of a peer group of public companies because we do not have a trading history from which to determine historical volatility. |
|
The fair value of the investment was allocated between the note and warrant as follows: |
|
Relative fair value of warrants | | | $167,447 | |
Relative fair value of note payable | | | $122,553 | |
|
Because the price for recent sales of common stock exceeded the effective conversion price, we also recognized a beneficial conversion feature of $122,553. The total discount on the note, $290,000, will be recognized as additional interest over the life of the note. As of September 30, 2014, the remaining amount of the discount is $221,346. |
|
On June 7, 2013, we entered into a convertible note in the principal amount of 100,000 which bears interest at the rate of 10% per annum. At the option of the investor, the outstanding principal and interest due under the note may be converted into shares of our common stock at the price of $1.00 per share. The note had originally had a due date of June 1, 2014 and was convertible at the most recent price we offered or sold common in an offering registered with the Securities and Exchange Commission. On September 7, 2013, the note was amended to allow the amounts outstanding to be converted into our common stock at the price of $1.00 per share. |
|
The note became due on June 1, 2014 and has not been paid as of September 30, 2014. Subsequent to September 30, 2014, the note was amended and granted new due date of June 1, 2015. |
|
On August 26, 2013, we entered into a note agreement with an investor with a principal amount of $200,000. The note bears interest at the rate of 15% per annum and is due on August 26, 2014. Under the terms of the note, the investor received 250,000 common shares and 500,000 common stock purchase warrants. The warrants are exercisable at the price of $0.75 per share at any time prior to August 26, 2015. |
|
The note became due August 26, 2014 and has not been paid as of September 30, 2014. Subsequent to September 30, 2014, the note was amended and granted new due date of August 26, 2015. |
|
On June 23, 2014, the Company borrowed $30,000 under a convertible note agreement with an investor. The note bears an interest rate of 10%, matures on June 23, 2015, and is convertible at $1.00 per share. Because the market price for our common stock on the date of the note exceeded the note’s conversion price, $1.00 per share, we recognized a beneficial conversion feature of $21,600 as a discount on the note. The discount will be recognized as additional interest over the life of the note. As of September 30, 2014, the remaining amount of the discount is $18,382. |
|
On August 27, 2014, the Company borrowed $50,000 under a convertible note agreement with an investor. The note bears an interest rate of 10%, matures on January 2 2015, and is convertible at $1.00 per share. The investor also received 50,000 shares of common stock with the issuance of the note. |
|
The fair value of the investment was allocated among the shares, note payable, and beneficial conversion feature: |
|
Relative fair value of shares | | | $27,778 | |
Relative fair value of conversion feature | | | $22,222 | |
Relative fair value of note payable | | | $ - | |
|
The note is fully discounted in the amount of $50,000 will be amortized over the life of the note. As of September 30, 2014, the remaining balance on the debt discount is $42,622. |
|
We evaluated the conversion features embedded in the notes payable described above for derivative accounting in accordance with ASC 815-40, Derivatives and Hedging embedded in the modified notes payable for derivative accounting in accordance with the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable. |