XML 44 R13.htm IDEA: XBRL DOCUMENT

CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

9 Months Ended

Sep. 30, 2014

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, other than five notes that have been remeasured to fair value which are discussed later in Note 8, as of September 30, 2014:

Issue	Maturity	September 30,		Interest			Conversion
Date	Date	2014		Rate			Rate
Convertible notes Payable:
October 30, 2013	October 30, 2014	$	50,000		6.00	%		0.0125

May 15, 2014	November 15, 2014		40,000		6.00	%		0.0070
			90,000
Unamortized discounts			-
Balance		$	90,000

Convertible Notes Payable - continued

Convertible notes payable, in default
October 31, 2012	April 30, 2013	$	8,000		6.00	%	0.0040
July 16, 2012	July 30, 2013		5,000		6.00	%	0.0050
November 20, 2012	May 20, 2013		50,000		6.00	%	0.0050
January 19, 2013	July 30, 2013		5,000		6.00	%	0.0040
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
October 4, 2013	April 4, 2014		50,000		6.00	%	0.0125
March 11, 2014	September 11, 2014		5,005		6.00	%	0.0070
Unamortized discount			-
Balance		$	256,305

Convertible notes payable - related party, in default
January 19, 2013	July 30, 2013	$	15,000		6.00	%	0.0040
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 26, 2013	January 26, 2014		10,000		6.00	%	0.0100
January 17, 2014	July 17, 2014		31,500		6.00	%	0.0060
Unamortized discount			-
Balance		$	122,500

Convertible notes payable - related party
April 22, 2014	October 22, 2014	$	5,005		6.00	%	0.0070
May 27, 2014	November 27, 2014		7,000		6.00	%	0.0070
July 21, 2014	January 25, 2015		17,000		6.00	%	0.0080
			29,005
Unamortized discount			(10,791	)
Balance		$	18,214

Between January 1, 2014 and September 30, 2014, the Company issued six (6) convertible notes payable totaling $290,500. The notes includes interest at 6%. The principal amount of the notes and interest is payable on the maturity date. The notes 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 notes under the guidance of ASC 815 and other applicable guidance. The conversion feature of four of the notes 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 on the financing date(s):

Face value of convertible notes payable	$	105,510

Beneficial conversion feature		(105,067	)

Carrying value	$	443

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 September 30, 2014, the Company recorded interest expense related to the amortization of debt discounts in the amount of approximately $25,231. The Company recognized interest expense totaling $97,844 during the nine months ended September 30, 2014.

Notes Payable

The following table reflects the notes payable as of September 30, 2014 and December 31, 2013:

Issue Date	Maturity Date	September 30, 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 September 30, 2014 and December 31, 2013, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $79,880 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 shares of the Company’s common stock there is typically a highly dilutive effect on current shareholders and very possible 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 was 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 $51,431 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.

During the quarter ended September 30, 2014, the note was converted into 8,666,666 shares of common stock.

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 lowest closing bid price 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 connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $31,321 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.

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 increased 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 September 30, 2014, the $40,000 face value convertible note payable was recorded at its fair value of $96,798

Convertible Note Payable Dated April 24, 2014 at Fair Value

On April 24, 2014, the Company entered into a convertible note payable with a corporation. The convertible note payable, with a face value of $107,000, bears interest at 12.0% per annum and is due on April 24, 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 60% multiplied by the lowest closing bid price for the Company’s common stock during the twenty (20) 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 connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $166,771 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 $166,771 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.

At September 30, 2014, the $107,000 face value convertible note payable was recorded at its fair value of $243,551.

Convertible Note Payable Dated August 21, 2014 at Fair Value

On August 21, 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 August 21, 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 lowest closing bid price 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 connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $33,372 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 $33,372 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.

At September 30, 2014, the $40,000 face value convertible note payable was recorded at its fair value of $122,330.

Convertible Note Payable Dated September 08, 2014 at Fair Value

On September 08, 2014, the Company entered into a convertible note payable with a corporation. The convertible note payable, with a face value of $53,500, bears interest at 12.0% per annum and is due on September 08, 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 60% multiplied by the lowest closing bid price two trading prices for the Company’s common stock during the twenty (20) 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 connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $42,080 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 $42,080 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.

At September 30, 2014, the $53,500 face value convertible note payable was recorded at its fair value of $82,141.

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 September 30, 2014:

Face value of the convertible notes payable	$	240,500
Interest expense to record the convertible notes at
fair value on the date of issuance		242,223
Interest expense to mark to market the convertible notes
on September 30, 2014		62,097
September 30, 2014 fair value	$	544,820