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CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE
 3 Months Ended
Jun. 30, 2012
Payables and Accruals [Abstract]  
CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

NOTE 9 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

 

Upon inception, the Company evaluates each financial instrument to determine whether it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was ultimately superseded by ASC 470.

 

Convertible Notes Payable

 

The following table reflects the convertible notes payable, other than the one remeasured to fair value, which is discussed in Note 10, as of June 30, 2012 and December 31, 2011:

 

Issue Date   Maturity Date   June 30, 2012     December 31, 2011     Interest Rate    

Conversion

Rate

  
Convertible notes payable:                        
November 9, 2011   December 31, 2012   $ 35,000     $ 35,000     6.00 %   0.004  
February 17, 2012   February 17, 2013   7,500     --     6.00 %   0.004  
April 5, 2012   April 5, 2013   20,000     --     6.00 %   0.005  
      62,500         35,000                  
                                     
Convertible notes payable -related party:                        
                                     
January 18, 2012   July 18, 2012     50,000       --       8.00 %   $ 0.004  
                                     
                                     
Convertible notes payable, in default :                                
 August 28, 2009   November 1, 2009     4,300       4,300       10.00 %   $ 0.0150  
April 7, 2010   November 7, 2010     70,000       70,000       6.00 %   $ 0.0080  
November 12, 2010   November 7, 2010     40,000       40,000       6.00 %   $ 0.0080  
          114,300       114,300                  
                                     
Convertible notes payable – related parties, in default:                                
 January 9, 2009   January 9, 2010     10,000       10,000       10.00 %   $ 0.0150  
January 25, 2010   January 25, 2011     6,000       6,000       6.00 %   $ 0.0050  
          16,000       16,000                  
                                     
        $ 242,800     $ 165,300                  

 

The convertible notes payable classified as “in default” are in default as of the date this quarterly report on Form 10-Q and were ready for issue.

 

Notes Payable

 

The following table reflects the notes payable as of June 30, 2012 and December 31, 2011:

 

Issue Date

   Maturity Date   June 30, 2012     December 31, 2011     Interest Rate  
Notes payable, in default –related parties:                        
February 24, 2010   February 24, 2011    $ 7,500      $ 7,500       6.00 %
                             
Notes payable :                        
April 27, 2011   April 27, 2012     --       5,000       6.00 %
                             
                             
Notes payable, in default:                  
February 23, 2011   March 23, 2011     --       20,000       7.00 %
June 23, 2011   August 23, 2011     25,000       25,000       6.00 %
April 27, 2011   August 23, 2011     5,000       --       6.00 %
          30,000       45,000          
                             
                             
        $ 37,500     $ 57,500          

 

 

The Company entered into a loan agreement with a shareholder under which the shareholder agreed to provide the Company with an emergency short term loan in the amount of $10,000. The shareholder agreed to provide the loan to the Company with at 0% rate of interest and the Company agreed to pay the shareholder 300,000 restricted shares of its common stock as an equity kicker in exchange for providing the emergency no interest rate loan. The Company repaid the entire loan balance prior June 30, 2012.

 

At June 30, 2012 and December 31, 2011, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $26,862 and $11,769, respectively, and included in accounts payable and accrued liabilities on the accompanying balance sheets.

 

Convertible Notes Payable and Notes Payable, in Default

 

At June 30, 2012, the Company had convertible notes payable, convertible notes payable at fair value and notes payable with a face value of $386,171, of which $167,800 were in default.  

 

The Company does not have additional sources of debt financing to refinance its convertible notes payable and notes payable that are currently in default. If the Company is unable to obtain additional capital, such lenders may file suit, including suit to foreclose on the assets held as collateral for the obligations arising under the secured notes. If any of the lenders file suit to foreclose on the assets held as collateral, then the Company may be forced to significantly scale back or cease its operations which would more than likely result in a complete loss of all capital that has been invested in or borrowed by the Company. The fact that the Company is in default regarding several loans held by various lenders makes investing in the Company or providing any loans to the Company extremely risky with a very high potential for a complete loss of capital.

 

The convertible notes that have been issued by the Company are convertible at the lender’s option. These convertible notes represent significant potential dilution to the Company’s current shareholders as the convertible price of these notes is generally lower than the current market price of the Company’s shares. As such when these notes are converted into equity there is typically a highly dilutive effect on current shareholders and very high probability that such dilution may significantly negatively affect the trading price of the Company’s common stock.

 

Furthermore, management intends to have discussions or has already had discussions with several of the promissory note holders who do not currently have convertible notes regarding converting their notes into equity. Any such amended agreements to convert promissory notes into equity would more than likely have a highly dilutive effect on current shareholders and there is a very high probability that such dilution may significantly negatively affect the trading price of the Company’s common stock. Some of these note holders have already amended their non-convertible notes to be convertible and converted the notes into equity. Based on conversations with other note holders, the Company believes that additional note holders will amend their notes to contain a convertibility clause and eventually convert the notes into equity.