XML 41 R13.htm IDEA: XBRL DOCUMENT

CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

12 Months Ended

Dec. 31, 2014

CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

NOTE 7 - 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determine whether it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was superseded by ASC 815, and EITF 05-02, which was superseded by ASC 470.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 that have been remeasured to fair value which are discussed later in Note 7, as of December 31, 2014:

Issue	Maturity	December 31,				December 31,		Interest		Conversion
Date	Date	2014				2013		Rate		Rate
Convertible notes Payable:
October 13, 2014	April 13, 2015	$	25,000		$	-		6.00	%	0.0050
January 28,2013	January 28, 2014		-			25,000		6.00	%	0.0050
January 28,2013	January 28, 2014		--			25,000		6.00	%	0.0050
August 8, 2013	February 11, 2014		-			40,000		6.00	%	0.0100
September 18, 2013	March 18, 2013		-			20,000		6.00	%	0.0125
September 25, 2013	March 25, 2014		-			10,000		6.00	%	0.0125
October 21, 2013	April 21, 2014		-			40,000		6.00	%	0.0100
October 4, 2013	May 12, 2013		-			50,000		6.00	%	0.0125
October 30, 2013	October 30, 2014		-			49,990		6.00	%	0.0125
			25,000			259,990
Unamortized discounts			(14,148	)		(120,553	)
Balance		$	10,852		$	139,457

Convertible notes payable, in default
October 31, 2012	April 30, 2013	$	8,000	$	8,000	6.00	%	0.0040
July 16, 2012	July 30, 2013		5,000		5,000	6.00	%	0.0050
November 20, 2012	May 20, 2013		50,000		50,000	6.00	%	0.0050
January 19, 2013	July 30, 2013		5,000		5,000	6.00	%	0.0040
February 11, 2013	August 11, 2013		9,000		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		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, 2011		40,000		40,000	6.00	%	0.0050
October 4, 2013	April 4, 2014		50,000		-	6.00	%	0.0125
October 30, 2013	October 30, 2014		50,000		-	6.00	%	0.0125
May 15, 2014	November 15, 2014		40,000		-	6.00	%	0.0070
			341,300		191,300
Unamortized discount			-		-
Balance		$	341,300	$	191,300

Convertible notes payable - related party, in default
January 7, 2013	June 30, 3013	$	-	$	7,500	6.00	%	0.0040
January 19, 2013	July 30, 2013		15,000		15,000	6.00	%	0.0040
February 7, 2013	August 7, 2013		-		10,000	6.00	%	0.0050
July 9, 2013	December 19, 2013		-		15,000	6.00	%	0.0150

January 9, 2009	January 9, 2010		10,000			10,000	6.00	%	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	%	0.0040
July 26, 2013	January 26, 2014		10,000			-	6.00	%	0.0100
January 17, 2014	July 17, 2014		31,500			-	6.00	%	0.0060
May 27, 2014	November 27, 2014		7,000			-	6.00	%	0.0070
			129,500			113,500
Unamortized discount			-			-
Balance		$	129,500		$	113,500

Convertible notes payable - related party
July 21, 2014	January 25, 2015	$	17,000		$	-	6.00	%	0.0080
October 16, 2014	April 16, 2015		21,000			-	6.00	%	0.0045
July 17, 2013	January 17, 2014		-			30,000	6.00	%	0.0010
July 26, 2013	January 26, 2014		-			10,000	6.00	%	0.0010
November 12, 2013	May 12, 2014		-			11,000	6.00	%	0.0125
			38,000			51,000
Unamortized discount			(15,064	)		(26,889)
Balance		$	22,936		$	24,111

Notes Payable

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

Issue Date	Maturity Date		2014		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

Convertible Notes Payable

Between January 1, 2014 and December 31, 2014, the Company issued eight (8) convertible notes payable totaling $151,500. The notes include 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 above 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 as of December 31:

	2014			2013
Face value of convertible notes payable	$	151,500		$	310,990

Beneficial conversion feature		(29,212	)		(147,422	)

Carrying value	$	122,288		$	163,568

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 twelve months ended December 31, 2014, the Company recorded interest expense related to the amortization of debt discounts in the amount of approximately $232,657.

At December 31, 2014 and 2013, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $91,754 and $59,267, respectively, and included in accounts payable and accrued expenses on the accompanying balance sheets.

Shareholder Loan

At December 31, 2014 the Company had a loan outstanding to a shareholder in the amount of $3,500 at 0% interest. Subsequent to December 31, 2014 the Company repaid the $3,500 loan to the shareholder.

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 total 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, it is 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 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 year ended December 31, 2014, the note was converted into 6,866,666 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 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.

During the year ended December 31, 2014, the note was converted into 11,181,304 shares of common stock.

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 note payable, with a face value of $107,000, including $7,000 of original issue discount, 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.

During the year ended December 31, 2014, the Company repaid $20,000 of the principle and converted $35,000 of the note into 9,956,709 shares of common stock. The Balance of the note at December 31, 2014 was $52,000 with an approximate fair value of $167,000 .

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 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 $34,971 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 $34,971 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 December 31, 2014, the $40,000 face value convertible note payable was recorded at its fair value of $137,614.

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 note payable, with a face value of $53,500, including $3,500 of original issue discount,, bears interest at 12.0% per annum and is due on September 8, 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 December 31, 2014, the $53,500 face value convertible note payable was recorded at its fair value of $174,726.

Convertible Note Payable Dated November 5, 2014 at Fair Value

On November 5, 2014, the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $53,000, bears interest at 8.0% per annum and is due on July 31, 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 65% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five 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.

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 November 5, 2014 the Company encountered the unusual circumstance of a day-one derivative loss of $22,057 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 $22,057 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.

At December 31, 2014 the convertible note payable, at fair value, was recorded at $155,344.

Convertible Note Payable Dated December 17, 2014 at Fair Value

On December 17, 2014, the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $43,000, bears interest at 8.0% per annum and is due on September 19, 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 65% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five 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 December 17, 2014 the Company encountered the unusual circumstance of a day-one derivative loss of $40,980 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 $40,980 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.

At December 31, 2014 the convertible note payable, at fair value, was recorded at $126,503

Convertible Note Payable Dated October 22, 2012

On October 22, 2012, the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $42,500, bears interest at 8.0% per annum and is due on July 24, 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 60% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five 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.

During the year ended December 31, 2013, the Company repaid $30,000 in principal and the remaining $12,500 in principal was converted into 1,136,364 shares of the Company’s common stock.

Convertible Note Payable Dated December 18, 2012

On December 18, 2012, the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $42,500, bears interest at 8.0% per annum and is due on September 20, 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 60% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five 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.

During the year ended December 31, 2013, the full $42,500 in principal and $1,700 in accrued interest was converted into 3,226,278 shares of the Company’s common stock.

The following tables summarize the effects on earnings associated with changes in the fair values of the convertible notes payable, at December 31, 2014 and 2013:

	$	2014	$	2013
Face value of the convertible notes payable		241,000		-
Interest expense to record the convertible notes at
fair value on the date of issuance		389,611		-
Interest expense to mark to market the convertible notes
		131,066		-
Fair value, end of year	$	761,677	$	-