CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

3 Months Ended

Mar. 31, 2014

Debt Disclosure [Abstract]

CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

NOTE 8 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

The Company evaluates each financial instrument to determine whether it meets the definition of “conventional convertible” debt under ASC 815-40.  The note payable conversion feature of the outstanding convertible debt 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. 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.

 Convertible Notes Payable

The following table reflects the convertible notes payable as of March 31, 2014:

	Issue	Maturity	March 31,	Interest	Conversion
	Date	Date	2014	Rate	Rate
Convertible notes Payable:
	January 28, 2013	January 28, 2014	$                       -	6.00%	0.0050
	January 28, 2013	January 28, 2014	-	6.00%	0.0050
	October 21, 2013	April 21, 2014	40,000	6.00%	0.0100
	October 4, 2013	April 4, 2014	50,000	6.00%	0.0125
	October 30, 2013	October 30, 2014	50,000	6.00%	0.0060
	March 11, 2014	September 11, 2014	5,005	6.00%	0.0070
			145,005
	Unamortized discounts		(34,294)
	Balance		$           110,711
Convertible notes payable, in default
	October 31, 2012	April 30, 2013	$               8,000	6.00%	0.0040
	July 16, 2012	July 16, 2013	5,000	6.00%	Variable
	November 20, 2012	May 20, 2013	50,000	6.00%	0.0050
	January 19, 2013	July 30, 2013	5,000	6.00%	0.0040
	January 28, 2013	January 28, 2014	25,000	6.00%	0.0050
	January 28, 2013	January 28, 2014	25,000	6.00%	0.0050
	February 11, 2013	August 11, 2013	9,000	6.00%	0.0060
	September 25, 2013	March 25, 2014	10,000	6.00%	0.0125
	August 28, 2009	November 1, 2009	4,300	10.00%	0.0150
	April 7, 2010	November 7, 2010	70,000	6.00%	0.0080
	November 12, 2010	November 7, 2011	40,000	6.00%	0.0050
			251,300
	Unamortized discount		-
	Balance		$           251,300
Convertible notes payable - related party, in default
	January 7, 2013	June 30, 2013	7,500	6.00%	0.0040
	January 19, 2013	July 30, 2013	15,000	6.00%	0.0040
	February 7, 2013	August 7, 2013	10,000	6.00%	0.0050
	July 9, 2013	January 19, 2013	15,000	6.00%	0.0150
	January 9, 2009	January 9, 2010	10,000	10.00%	0.0150
	January 25, 2010	January 25, 2011	6,000	6.00%	0.0050
	January 18, 2012	July 18, 2012	50,000	8.00%	0.0040
	July 17, 2013	January 17, 2014	30,000	6.00%	0.0100
	July 26, 2013	January 26, 2014	10,000	6.00%	0.0100
			153,500
	Unamortized discount		-
	Balance		$           153,500
Convertible notes payable - related party
	November 12, 2013	May 12, 2014	11,000	6.00%	0.0125
	January 17, 2014	July 17, 2014	31,500	6.00%	0.0060
			42,500
	Unamortized discount		(20,531)
	Balance		$             21,969

Between January 1, 2014 and March 31, 2014, the Company issued two (2) convertible notes payable totaling $36,505. Each note includes interest at 6%. 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):

Face value of convertible notes payable	$	36,505
Beneficial conversion feature		(23,130	)
Carrying value	$	13,375

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, 2014, the Company recorded interest expense related to the amortization of debt discounts in the amount of approximately $129,000. The aggregate carrying value of these convertible notes at March 31, 2014 was approximately $48,000.

Notes Payable

The following table reflects the notes payable as of March 31, 2014 and December 31, 2013:

Issue Date	Maturity Date	March  31, 2014		December 31, 2013		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, 2014 and December 31, 2013, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $68,459 and $59,267, respectively, and included in accounts payable and accrued liabilities on the accompanying balance sheets.

Convertible Notes Payable and Notes Payable, 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.

Convertible Notes at Fair Value

Convertible Note Payable Dated January 16, 2014 at Fair Value

On January 16, 2014, the Company entered into a convertible note payable with a corporation.   The convertible note payable, with a face value of $50,000, bears interest at 6.0% per annum and is due on July 16, 2014. 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 50% multiplied by the lowest closing price during the last twenty (20) trading days prior to closing, but not less than $0.002 per share.

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 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, the Company recognized a day-one derivative loss totaling 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 of $51,431 on the derivative financial instrument and is included in interest expense. 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 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.

At March 31, 2014, the $50,000 face value convertible note payable was recorded at its fair value of $100,600.

Convertible Note Payable Dated March 17, 2014 at Fair Value

On March 17, 2014, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $40,000, bears interest at 8.0% per annum and is due on March 17, 2015. 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 57% multiplied by the average of the lowest bid price  two trading prices for the Company’s common stock during the fifteen (15) trading day period including the day the notice of conversion is received by 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.

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 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, the Company recognized day-one derivative loss totaling $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 $31,321 loss on the derivative financial instrument and is included in interest expense. 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 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 default the interest rate is increase to 24% per annum.

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.

At March 31, 2014, the $40,000 face value convertible note payable was recorded at its fair value of $72,340.

The following tables summarize the effects on earnings associated with changes in the fair values of the convertible notes payable, at fair value for the three months ended March 31, 2014:

Face value of the convertible notes payable	$	90,000
Interest expense to record the convertible notes at
fair value on the date of issuance		82,752
Interest expense to mark to market the convertible notes to
on Mach 31, 2014		188
March 31, 2014 fair value	$	172,940