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Convertible Notes Payable and Notes Payable

12 Months Ended

Dec. 31, 2015

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determine whether it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was superseded by ASC 815, and EITF 05-02, which was superseded by ASC 470.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, 2015:

Issue	Maturity	December 31,		Interest			Conversion
Date	Date	2015		Rate			Rate
Convertible notes payable:
April 20, 2015	April 20, 2016	$	38,000		6.00	%		0.00320
September 18, 2015	March 18, 2016		25,000		6.00	%		0.00200
Unamortized discounts			17,295
Balance		$	45,705

Convertible notes payable – related party
July 14, 2015	January 14, 2016	$	9,000	6.00	%	0.00300

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
October 30, 2013	October 30, 2014		50,000	6.00	%	0.0125
May 15, 2014	November 15, 2014		40,000	6.00	%	0.0070
October 13, 2014	April 13, 2015		25,000	6.00	%	0.0050
June 29, 2015	December 29, 2015		25,000	6.00	%	0.0050
Balance		$	391,300

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
May 27, 2014	November 27, 2014		7,000	6.00	%	0.0070
July 21, 2014	January 25, 2015		17,000	6.00	%	0.0080
October 16, 2014	April 16, 2015		21,000	6.00	%	0.0045
Balance		$	167,500

Notes Payable

The following table reflects the notes payable as of December 31, 2015 and 2014:

Issue Date	Maturity Date	2015		2014		Interest Rate
Notes payable, in default –related parties:
February 24, 2010	February 24, 2011	$	7,500	$	7,500		6.00	%
October 6, 2015	November 11, 2015		10,000		--		6.00	%

			17,500		7,500
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

		$	47,500	$	37,500

Convertible Notes Payable

Between January 1, 2015 and December 31, 2015, the Company issued four (4) convertible notes payable totaling $109,000. 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 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 as of December 31:

	2015			2014
Face value of convertible notes payable	$	63,000		$	151,500

Beneficial conversion feature		(17,295	)		(29,212	)

Carrying value	$	45,705		$	122,288

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, 2015 and 2014, the Company recorded interest expense related to the amortization of debt discounts in the amount of approximately $116,000 and $269,000 respectively.

At December 31, 2015 and 2014, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $135,581 and $91,754, respectively, and included in accounts payable and accrued expenses on the accompanying balance sheets.

Shareholder Loan

At December 31, 2015 the Company had a loan outstanding to a shareholder in the amount of $2,920 at 0% interest. The Company also has a loan outstanding to its CEO in the amount of $29,683 with a 6% annual rate of interest and another loan outstanding to its CEO for $100 at 0% interest.

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 Payable at Fair Value

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 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 $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.

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 Company repaid $20,000 of the principle and converted $35,000 of the note into 9,956,709 shares of common stock.

During the twelve month period ended December 31, 2015, the remaining principal balance of $52,000 plus accrued interest was converted into 22,531,030 shares of common stock.

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.

During the twelve month period ended December 31, 2015, the note was converted into 18,601,734 shares of common stock.

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 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.

During the twelve month period ended December 31, 2015, the note was converted into 23,900,625 shares of common stock.

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 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.

During the twelve month period ended December 31, 2015, the Company repaid $12,000 of principal and accrued interest of the note and the remaining balance of the note was converted into 15,980,220 shares of common stock.

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 recognized in interest expense or interest income on the Company’s statement of operations.

During the twelve month period ended December 31, 2015, the note was converted into 18,650,000 shares of common stock.

Convertible Note Payable Dated August 28, 2015 at Fair Value

On August 28, 2015 the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $44,000, including a $4,000 of original issue discount, bears interest at 12.0% per annum and is due on August 28, 2016. 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 62% 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. If the Company’s market capitalization is less than $1,000,000 on the day immediately prior to the date of the notice of conversion, then the conversion price shall be 25% multiplied by the lowest closing price as of the date notice of conversion is given and if the closing price of the Company’s common stock on the day immediately prior to the date of the notice of conversion is less than $0.00075 then the conversion price shall be 25% multiplied by the lowest closing price as of the date a notice of conversion is given. 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 $32,210 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 $32,210 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, 2015, the $44,000 face value convertible note payable was recorded at its fair value of $100,588.

Convertible Note Payable Dated September 3, 2015 at Fair Value

On September 3, 2015 the Company entered into a convertible note payable with a corporation. The note payable in the amount of $38,500, including a $3,500 original issue discount, and bears interest at 12.0% per annum and is due on September 3, 2017. According to the terms of the note, the Company was eligible to utilize up to $200,000 of credit under the note, with potential proceeds received of $180,000, however the Company elected to borrow only the $38,500. Any additional amount borrowed under this note would require approval of both the Company and the lender. 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 lowest trade price for the Company’s common stock in the twenty-five (25) trading day period previous to the conversion. 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 $42,308 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 $29,789 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, 2015, the $38,500 face value convertible note payable was recorded at its fair value of $94,262.

Convertible Note Payable Dated September 8, 2015 at Fair Value

On September 8, 2015, the Company entered into a convertible note payable with a corporation. The convertible note payable, with a face value of $27,000, bears interest at 8.0% per annum and is due on September 8, 2016. 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 65% 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 $16,690 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 $16,690 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.

December 31, 2015, the $27,000 face value convertible note payable was recorded at its fair value of $58,331.

On December 15, 2015 the Company entered into a convertible note payable with a corporation. The note payable in the amount of $27,500, including a $2,500 original issue discount, and bears interest at 12.0% per annum and is due on September 3, 2017. 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 lowest trade price for the Company’s common stock in the twenty-five (25) trading day period previous to the conversion. 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 $29,789 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 $29,789 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, 2015, the $27,500 face value convertible note payable was recorded at its fair value of $57,895.

The conversion of the various promissory notes that are measured at fair value into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holders elect to sell the shares that it has acquired as a result of converting the notes into shares of common stock, then the sales of any such shares may result in a significant decrease in the market price of the Company’s common stock.

Additionally, the holders of these convertible notes at fair value have 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 rates for each of the notes at fair value may increase to rates of 24% per annum or greater.

Furthermore, there are additional events that could cause the lenders 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 lenders receives additional shares of the Company’s common 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.

The following tables summarize the effects on December 31, 2015:

Face value of the convertible notes payable	$	137,000
Interest expense to record the convertible notes at
fair value on the date of issuance		93,479
Interest income to mark to market the convertible notes on December 31, 2015		80,597
December 31, 2015 fair value	$	311,076