CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

12 Months Ended

Dec. 31, 2012

Debt Disclosure [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determine whether it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was superseded by ASC 815, and EITF 05-02, which was superseded by ASC 470.

Convertible Notes Payable

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

Issue Date	Maturity Date		December 31, 2012			December 31, 2011		Interest Rate			Conversion Rate
Convertible notes payable:
February 17, 2012	February 17, 2013	$	7,500		$	--		6.00		%	0.004
April 5, 2012	April 5, 2013		15,000			--		6.00		%	0.005
July 16, 2012	July16, 2013		5,000			--		6.00		%	0.005
October 31, 2012	April 30, 2013		8,000			--		6.00		%	0.004
November 20, 2012	May 20, 2013		36,003			--		6.00		%	0.005
December 20, 2012	June 20, 2013		20,000			--		6.00		%	0.004
				91,503			--
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
November 9, 2011	December 31, 2012			35,000			35,000	6.00		%	0.004
				149,300			149,300
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
January 18, 2012	July 18, 2012			50,000			--		8.00	%	$	0.004
				66,000			16,000
			$	306,803		$	165,300

The convertible notes payable classified as “in default” are in default as of the date this annual report on Form 10-K was ready for issue.

On November 13, 2012, the Company issued a $50,000 6% convertible note with a term to May 20, 2013 (the “Maturity Date”). The principal amount of the note and interest is payable on the maturity date. The note and accrued interest is convertible into common stock at a fixed conversion price of $0.005 per share. Within seventy five (75) days of the inception date of the note, the Company is required to issue warrants to the holder to purchase up to 4,000,000 share of the Company’s common stock at an exercise price of $0.005 per share. The warrants will have a ten year term.

The Company has evaluated the terms and conditions of the convertible note and embedded warrant under the guidance of ASC 815 and other applicable guidance. The conversion feature met the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. The note is convertible into a fixed number of shares and there are no down round protection features contained in the contracts. Since the convertible notes achieved the conventional convertible exemption, the Company was required to consider whether the hybrid contracts embody a beneficial conversion feature. The calculation of the effective conversion amount did result in a beneficial conversion feature. Additionally, the warrants did not contain any terms or feature that would preclude equity classification.

The following tables reflect the allocation of the purchase on the financing date:

	$ 50,000
Convertible Note	Face Value
Proceeds	$	50,000
Paid-in capital (beneficial conversion feature)		(2,000	)
Paid-in capital (warrants)		(14,286	)
Carrying value	$	(33,714	)

The discount on the convertible note arose from the allocation of basis to the beneficial conversion feature and the embedded warrants. The discount is amortized through charges to interest expense over the term of the debt agreement. For the year ended December 31, 2012, the Company recorded interest expense related to the amortization of debt discount in the amount of $2,289. The carrying value of the convertible note at December 31, 2012 was $36,003.

Notes Payable

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

Issue Date	Maturity Date	December 31, 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

Between July 13, 2011 and October 17, 2011, several promissory notes were modified to add a conversion option. These notes were converted into common stock immediately following the modifications. The following table details the promissory notes that were modified and subsequently converted:

Issue Date	Modification and Conversion Date	Face Value plus Accrued Interest		Shares Issued Upon Conversion		Extinguishment Loss
Notes payable:
May 10, 2011	July 13, 2011	$	5,050		631,555	$	5,054
April 28, 2011	July 14, 2011		50,592		10,118,368		101,184
May 19, 2011	July 19, 2011		5,049		631,150		2,525
May 25, 2011	July 26, 2011		5,049		631,150		2,525
June 6, 2011	August 12, 2011		5,055		1,010,988		5,055
February 22, 2010	August 13, 2011		20,600		6,200,000		47,600
May 26, 2011	September 6, 2011		20,224		4,044,744		46,515
June 17, 2011	October 14, 2011		5,089		1,017,876		5,089
June 16, 2011	October 17, 2011		15,218		3,043,540		15,218
		$	131,926		27,329,371	$	230,765

The following table details the convertible promissory notes that were converted between July 26, 2011 and August 26, 2011:

Issue Date	Modification and Conversion Date	Face Value plus Accrued Interest		Shares Issued Upon Conversion		Extinguishment Loss
Convertible notes payable:
December 16, 2009	July 26, 2011	$	9,540		1,908,000	$	13,355
February 15, 2011	August 16, 2011		22,267		2,945,370		10,132
November 30, 2009	August 26, 2011		11,071		2,767,670		30,444
Various	August 26, 2011		4,900		1,200,000		13,100
		$	47,778		8,821,040	$	67,031

The Company entered into a verbal promissory note agreement with a related party shareholder under which the related party shareholder agreed to provide the Company with an emergency short term loan in the amount of $2,500. The related party shareholder agreed to provide the loan to the Company at 0% rate of interest and the Company agreed to pay the related party shareholder 200,000 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 in 2012.

A related party shareholder provided the Company with emergency short term loan proceeds totaling $5,000. The Company repaid the related party shareholder the entire $5,000 balance in 2012. The Company did not pay any interest or fees to the related party shareholder for providing the short term loan.

At December 31, 2012 and 2011, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $45,898 and $11,769, respectively, and are included in accounts payable and accrued liabilities on the accompanying balance sheets. 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 amending their notes to make them convertible into shares of the Company’s common stock. Any such agreements to convert promissory notes into shares of the Company’s common stock would more than likely have a highly dilutive effect on current shareholders and such dilution may significantly depress the trading price of the Company’s common stock.

Convertible Notes Payable and Notes Payable, in Default

At December 31, 2012, the Company had convertible notes payable, notes payable and stockholder loans of $344,303, of which $252,800 were in default.  The convertible notes payable and notes payable in default at December 31, 2012 are reflected in the tables shown above.

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, including foreclosure on the Company’s main salvage vessel, 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 convertible notes that have been issued by the Company are convertible at the lender’s option. These convertible notes represent 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. When these notes are converted into equity, there is typically a highly dilutive effect on current shareholders.