In February 2018, the Company issued a convertible promissory note in the amount of $43,000 (the “February 2018 Note”). The total proceeds were approximately $40,000, due to approximately $3,000 for debt issuance costs. The February 2018 Note accrues interest at 8% per annum with the principal and accrued interest due and payable in November 2018. The principal amount and all accrued interest are convertible into shares of the Company’s common stock beginning on the 181 st day from the issuance date until the later of the maturity date or upon an event of default. The principal and all unpaid and accrued interest is convertible at a rate calculated at 63% of the average for the lowest three trading prices for the Company’s common stock during the 10-day period ending on the latest complete trading day prior to the conversion date. Events of default include, the following among others, non-compliance with the Exchange Act, delisting of the Company’s common stock, failure to issue converted shares, financial statement restatements and cross default with other financial instruments. Should the Company be found in default, the interest rate would be adjusted to 22% and the amount due would be equal to 150% or 200% of the sum of the then outstanding principal amount of the note, accrued and unpaid interest on the unpaid principal amount of the note to the date of payment, default interest, if any, on the amounts referred to above.
The February 2018 Note contains a prepayment provision. If the February 2018 Note is paid in full prior to 30 days after the issued date the principal payment would be 112% of the amount of the promissory note. The prepayment penalty increase by 5% for each 30-day period following for total amount of 137% on the 180 th day, at which the Company shall have no right to prepay the principal amount.
The Company determined that the variable conversion rate of the February 2018 Note would be an embedded feature to be bifurcated and accounted for as a derivative in accordance with ASC 818-15 Derivatives and Hedging. Therefore, the conversion feature was accounted for at fair value on the date of issuance. The fair value of approximately $55,000, at issuance, was determined using the Black-Scholes Option Pricing Model. At each reporting period, the change in fair value will be recorded in the statement of operations under other income (expense). The assumptions used in the Black-Scholes Pricing Model was a term of 0.78 years, volatility rate of 278%, rate of quarterly dividends 0% and a risk free interest rate of 1.67%. The original fair value was first recorded as a note discount for $40,000 and the remaining $15,000 was recorded as financing expenses.
As of March 31, 2018, the Company is in default for all but $131,000 of its convertible promissory notes. The Company was required to record an approximately 54,000, default penalty for the quarter ended March 31, 2018.
During the three months ended March 31, 2018, certain of the convertible note holders converted principal and accrued interest of approximately $43,000 and $7,000, respectively. The Company was required to issue 12,700,000 shares of the Company’s common stock with a fair market value, as of the dates of issuance, of approximately $180,000.
In June 2018, the Company received a letter of demand from one of the convertible note holders (“Noteholder”). The Noteholder asserts the Company has breached several default provisions of the convertible promissory note dated March 6, 2017 (Convertible Note”) in the principal amount of $110,000. The Noteholder has demanded payment of approximately $475,000, or for the Company to cure certain breach of default, as to provide the Noteholder to convert the principal and interest into shares of the Company’s common stock and file the Company’s form 10Q for the three months ended March 31, 2018. Management believes the Company has properly accrued and recorded all penalties and interest due the Noteholder as of March 31, 2018. Should the Company agree with the Noteholders assessment of certain defaults occurring during the quarter ending June 30, 2018, it may record an additional expense and increase its liability to the Noteholder by approximately $270,000 as of the date of the letter.
