CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

3 Months Ended

Jun. 30, 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it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was ultimately superseded by ASC 470.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 June 30, 2013 and December 31, 2012:

Issue Date	Maturity Date		June 30, 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		6.00		%	0.005
July 16, 2012	July16, 2013		5,000			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
January 11, 2013	July 11, 2013		12,095			--		6.00		%	0.004
January 19, 2013	July 30, 2013		3,035			--		6.00		%	0.004
January 28, 2013	January 28, 2014		1,334			--		6.00		%	0.005
January 28, 2013	January 28, 2014		1,334			--		6.00		%	0.005
February 11, 2013	August 11, 2013		1,940			--		6.00		%	0.006
				24,738			91,503
Convertible notes payable– related parties :
January 19, 2013	July 30, 2013		9,105			--		6.00		%	0.004
February 7, 2013	August 7, 2013		4,642			--		6.00		%	0.005
March 6, 2013	September 6, 2013		4,955			--		6.00		%	0.015
				18,702			--
Convertible notes payable, in default :
August 28, 2009	November 1, 2009			4,300			4,300		10.00	%		0.015
April 7, 2010	November 7, 2010			70,000			70,000		6.00	%		0.008
November 12, 2010	November 7, 2010			40,000			40,000		6.00	%		0.008
April 5, 2012	April 5, 2013			5,000			--		6.00	%		0.005
October 31, 2012	April 30, 2013		8,000			--		6.00		%	0.004
November 9, 2011	December 31, 2012			50,000			35,000	6.00		%	0.004
				177,300			149,300

Convertible notes payable – related parties, in default:
January 7, 2013	June 30, 2013	$	7,500		$	--		6.00		%	0.004
January 9, 2009	January 9, 2010			10,000			10,000		10.00	%		0.015
January 25, 2010	January 25, 2011			6,000			6,000		6.00	%		0.005
January 18, 2012	July 18, 2012			50,000			50,000		8.00	%		0.004
				73,500			66,000
			$	294,240		$	306,803

On November 20, 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 six months ended June 30, 2013, the Company recorded interest expense related to the amortization of debt discount in the amount of $13,997. The carrying value of the convertible note at June 30, 2013 and December 31, 2012 was $50,000 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 six months ended June 30, 2013, the Company recorded interest expense related to the amortization of debt discounts in the amount of $37,439. The aggregate carrying value of these convertible notes at June 30, 2013 was $45,939.

The following table reflects the notes payable as of June 30, 2013 and December 31, 2012:

Issue Date	Maturity Date	June 30, 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 June 30, 2013 and December 31, 2012, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $26,163 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 June 30, 2013, the Company had convertible notes payable, convertible notes payable at fair value and notes payable of $450,228 of which $288,300 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 of several promissory notes 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.