CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

3 Months Ended

Mar. 31, 2013

Debt Disclosure [Abstract]

CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

NOTE 8 - 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it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was ultimately superseded by ASC 470.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 March 31, 2013 and December 31, 2012:

Issue Date	Maturity Date		March 31, 2013			December 31, 2012		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			15,000		6.00		%	0.005
July 16, 2012	July 16, 2013		5,000			5,000		6.00		%	0.005
October 31, 2012	April 30, 2013		8,000			8,000		6.00		%	0.004
November 20, 2012	May 20, 2013		43,845			36,003		6.00		%	0.005
December 20, 2012	June 20, 2013		20,000			20,000		6.00		%	0.004
January 11, 2013	July 11, 2013		6,343			--		6.00		%	0.004
January 19, 2013	July 30, 2013		679			--		6.00		%	0.004
January 28, 2013	January 28, 2014		380			--		6.00		%	0.005
January 28, 2013	January 28, 2014		380			--		6.00		%	0.005
February 11, 2013	August 11, 2013		194			--		6.00		%	0.006
				99,821			91,503
Convertible notes payable– related parties :
January 7, 2013	June 30, 2013	$	5,031		$	--		6.00		%	0.004
January 19, 2013	July 30, 2013		2,036			--		6.00		%	0.004
February 7, 2013	August 7, 2013		464			--		6.00		%	0.005
March 6, 2013	September 6, 2013		495			--		6.00		%	0.015
				8,026			--
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 12, 2011			40,000			40,000		6.00	%	$	0.0080
February 17, 2012	February 17, 2013		7,500			--		6.00		%	0.004
November 9, 2011	December 31, 2012			35,000			35,000	6.00		%	0.004
				156,800			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			50,000		8.00	%	$	0.004
				66,000			66,000
			$	330,647		$	306,803

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.

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 three months ended March 31, 2013, the Company recorded interest expense related to the amortization of debt discount in the amount of $7,842. The carrying value of the convertible note at March 31, 2013 and December 31, 2012 was $43,845 and $36,003, respectively.

Between January 7, 2013 and March 6, 2013, the Company issued an aggregate $134,500 6% convertible notes. The principal amount of the notes and interest is payable on the maturity date. The note and accrued interest are convertible into common stock at fixed conversion prices. The conversion prices and maturity dates of these notes are detailed in the table in the preceding page.

The Company has evaluated the terms and conditions of the convertible note 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.

The following tables reflect the aggregate allocation of the purchase on the financing date(s):

	$134,500
Convertible Note	Face Value
Proceeds	$	134,500
Paid-in capital (beneficial conversion feature)		(126,000	)
Carrying value	$	8,500

Notes Payable

The discounts on the convertible notes arose from the allocation of basis to the beneficial conversion feature. The discount is amortized through charges to interest expense over the term of the debt agreement. For the three months ended March 31, 2013, the Company recorded interest expense related to the amortization of debt discounts in the amount of $7,502. The aggregate carrying value of these convertible notes at March 31, 2013 was $59,848.

The following table reflects the notes payable as of March 31, 2013 and December 31, 2012:

Issue Date	Maturity Date	March 31, 2013		December 31, 2012		Interest Rate
Notes payable, in default –related parties:
February 24, 2010	February 24, 2011	$	7,500	$	7,500		6.00	%
Notes payable, in default:
June 23, 2011	August 23, 2011		25,000		25,000		6.00	%
April 27, 2011	April 27, 2012		5,000		5,000		6.00	%
			30,000		30,000
		$	37,500	$	37,500

At March 31, 2013 and December 31, 2012, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $32,139 and $45,898, respectively, and included in accounts payable and accrued liabilities on the accompanying balance sheets.

Convertible Notes Payable and Notes Payable, in Default

At March 31, 2013, the Company had convertible notes payable, convertible notes payable at fair value and notes with a face value of $547,800 of which $252,800 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.

Convertible Note Payable Dated October 6, 2011 at Fair Value

On October 6, 2011, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $42,500, bears interest at 8.0% per annum and is due on July 11, 2012.  The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price.  The Variable Conversion Price is defined as 58% multiplied by the average of the lowest three trading prices for the Company’s common stock during the ten trading day period ending one trading day prior to the date the convertible note payable is sent by the holder to the Company.  The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.  The holder has the option to redeem the convertible note payable for cash in the event of defaults or certain other contingent events (the “Default Put”).

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification.  Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.

The Company   elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.

In connection with the issuance of the convertible note payable on October 6, 2011, the Company encountered the unusual circumstance of a day-one derivative loss related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement.  Therefore, the Company was required to record a loss on the derivative financial instrument.  In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques.  These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations.

The holder of this convertible note has substantial rights and protections regarding dilution if certain events, including a default were to occur. There are a number of events that could trigger a default, including but not limited to failure to pay principal or interest, failure to issue shares under the conversion feature, breach of covenants, breach of representations and warranties, appointment of a receiver or trustee, judgments, bankruptcy, delisting of common stock, failure to comply with the exchange act, liquidation, cessation of operations, failure to maintain assets, material financial statement restatement, reverse split of borrowers stock, etc. In the event of that any of these events were to occur then the lender would be entitled to receive significant amounts of additional shares of the Company’s stock above the amounts for conversion and such occurrence would be highly dilutive to the Company’s shareholders.

Furthermore, there are additional events that could cause the lender to be due additional shares of common stock above and beyond the shares due from a conversion. Some of these events include, but are not limited to a merger or consolidation of the Company, dividend distribution or spin off, dilutive issuances of the Company’s stock, etc. If the lender receives additional shares of the Company’s commons stock due to any of the foregoing events or for other reasons, then this may have an extremely dilutive effect on the shareholders of the Company. Such dilution would likely result in a significant drop in the per share price of the Company’s common stock. The potential dilutive nature of this note presents a very high degree of risk to the Company and its shareholders.

During the year ended December 31, 2012, the holder converted the note in full into 15,524,573 shares of the Company’s common stock.

Convertible Note Payable Dated January 31, 2012 at Fair Value

On January 31, 2012, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $32,500, bears interest at 8.0% per annum and is due on November 2, 2012.  The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price.  The Variable Conversion Price is defined as 58% multiplied by the average of the lowest three trading prices for the Company’s common stock during the ten trading day period ending one trading day prior to the date the convertible note payable is sent by the holder to the Company.  The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.  The holder has the option to redeem the convertible note payable for cash in the event of defaults or certain other contingent events (the “Default Put”).

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification.  Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.

The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.

In connection with the issuance of the convertible note payable on January 31, 2012, the Company encountered the unusual circumstance of a day-one derivative loss related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement.  Therefore, the Company was required to record a loss on the derivative financial instrument.  In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques.  These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations.

The holder of this convertible note has the right to convert the balance of the note into shares of the Company’s common stock at a substantial discount to the current market price of the shares. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.

Additionally, the holder of this convertible note has substantial rights and protections regarding dilution if certain events, including a default were to occur. There are a number of events that could trigger a default, including but not limited to failure to pay principal or interest, failure to issue shares under the conversion feature, breach of covenants, breach of representations and warranties, appointment of a receiver or trustee, judgments, bankruptcy, delisting of common stock, failure to comply with the exchange act, liquidation, cessation of operations, failure to maintain assets, material financial statement restatement, reverse split of borrowers stock, etc. In the event of that any of these events were to occur then the lender would be entitled to receive significant amounts of additional shares of the Company’s stock above the amounts for conversion and such occurrence would be highly dilutive to the Company’s shareholders.

Furthermore, there are additional events that could cause the lender to be owed additional shares of common stock above and beyond the shares due from a conversion. Some of these events include, but are not limited to a merger or consolidation of the Company, dividend distribution or spin off, dilutive issuances of the Company’s stock, etc. If the lender receives additional shares of the Company’s commons stock due to any of the foregoing events or for other reasons, then this may have an extremely dilutive effect on the shareholders of the Company. Such dilution would likely result in a significant drop in the per share price of the Company’s common stock. The potential dilutive nature of this note presents a very high degree of risk to the Company and its shareholders.

During the year ended December 31, 2012, the holder converted the note in full into 11,655,173 shares of the Company’s common stock.

Convertible Note Payable Dated May 7, 2012 at Fair Value

On May 7, 2012, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $32,500, bears interest at 8.0% per annum and is due on February 11, 2013.  The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price.  The Variable Conversion Price is defined as 58% multiplied by the average of the lowest three trading prices for the Company’s common stock during the ten trading day period ending one trading day prior to the date the convertible note payable is sent by the holder to the Company.  The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.  The holder has the option to redeem the convertible note payable for cash in the event of defaults or certain other contingent events (the “Default Put”).

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification.  Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.