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Convertible Notes Payable and Notes Payable

3 Months Ended

Mar. 31, 2016

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 March 31, 2016:

Issue	Maturity		March 31,				Interest					Conversion
Date	Date		2016				Rate					Rate
Convertible notes payable:
April 20, 2015	April 20, 2016		$	38,000				6.00		%				0.00320
Unamortized discounts				1,720
Balance			$	36,280
Convertible notes payable – related party
January 12, 2016		July 12, 2016			$	5,000			6.00		%		0.00200

Convertible notes payable, in default
October 31, 2012		April 30, 2013			$	8,000			6.00		%		0.0040
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
September 18, 2015		March 18, 2016				25,000			6.00		%		0.0020
Balance					$	411,300

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
July 14, 2015		January 14, 2016				9,000			6.00		%		0.0030
Balance					$	176,500

Notes Payable

The following table reflects the notes payable as of March 31, 2016:

Issue Date	Maturity Date	2016		Interest Rate

Notes payable:
March 15, 2016	June 15, 2016	$	17,000	6.00 %
		$	17,000


Notes payable, in default –related parties:
February 24, 2010	February 24, 2011	$	7,500	6.00 %
October 6, 2015	November 11, 2015		10,000	6.00 %
			17,500

Notes payable, in default:
June 23, 2011	August 23, 2011		25,000	6.00 %
April 27, 2011	April 27, 2012		5,000	6.00 %
			30,000

		$	64,500

At March 31, 2016 and December 31, 2015, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $147,951 and $135,581 respectively, and is 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.

Shareholder Loans

At March 31, 2016 the Company had a loan outstanding to a shareholder in the amount of $2,920 at 0% interest and another loan outstanding to a shareholder in the amount of $260 at 0% interest. The Company also had three loans outstanding to its CEO, a loan in the amount of $29,683 with a 6% annual rate of interest, a loan in the amount of $100 at 0% interest, and a loan in the amount of $4,000 at 6% rate of interest and an option to convert the loan into restricted shares of the Company’s common stock at $0.002.

Convertible Notes Payable at Fair Value

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 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 $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.

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 March 31, 2016, $30,000 of the note was converted into 27,126,099 shares of common stock.

At March 31, 2016, the $14,000 face value convertible note payable was recorded at its fair value of $23,271.

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.

During the quarter ended March 31, 2016, $8,288 of the note was converted into 7,500,000 shares of common stock.

At March 31, 2016, the $30,213 face value convertible note payable was recorded at its fair value of $49,068.

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.

During the quarter ended March 31, 2016, $6,000 of the note was converted into 5,190,125 shares of common stock.

March 31, 2016, the $21,000 face value convertible note payable was recorded at its fair value of $33,049.

Convertible Note Payable Dated December 15, 2015 at Fair Value

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 March 31, 2016, the $27,500 face value convertible note payable was recorded at its fair value of $45,035.

Convertible Note Payable Dated March 24, 2016 at Fair Value

On March 24, 2016 the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $33,000, including a $3,000 of original issue discount, bears interest at 12.0% per annum and is due on March 24, 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 62% multiplied by the lowest closing bid price for the Company’s common stock during the twenty-five (25) 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 $0.0009 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 $102,882 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 March 31, 2016, the $33,000 face value convertible note payable was recorded at its fair value of $135,809

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 may result in a substantial decrease in the price per share of the Company’s common stock. The potential highly dilutive nature of these notes presents a very high degree of risk to the Company and its shareholders.

The following tables summarize the effects on March 31, 2016:

Face value of the convertible notes payable	$	134,002
Interest expense to record the convertible notes at
fair value on the date of issuance		164,295
Interest income to mark to market the convertible notes on March 31, 2016		(12,065)
March 31, 2016 fair value	$	286,232