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Convertible Promissory Notes, Net

6 Months Ended

Jun. 30, 2015

13. Convertible Promissory Notes, Net

Convertible promissory notes consists of the following:

	June 30, 2015			December 31, 2014
				(Unaudited)
Iliad Note (1):
Secured convertible promissory- note – Iliad	$	380,000		$	380,000
Total		380,000			380,000
Less:
OID of $20,000, net of amortization of $20,000 and $11,310 as of June 30, 2015 and December 31, 2014, respectively		-			(8,690	)

Conversions into 99,520,802 shares of common stock		(100,062	)		-

Loan discount of $202,500, net of amortization of $164,914 and $82,645 as of June 30, 2015 and December 31, 2014, respectively		(37,586	)		(119,855	)
Secured convertible promissory note – Iliad	$	242.352		$	251,455

Redwood Note (2):
Secured convertible promissory note – Redwood	$	75,000		$	75,000
Total		75,000			75,000
Less:
Conversion into 44,988,900 shares of common stock		(43,738	)		-
Assignment to Apollo Capital Corporation		(31,262	)		-
		-			-
Total		-			75,000
Loan discount of $75,000, net of amortization of $75,000 and $0 as of June 30, 2015 and December 31, 2014, respectively		-			-
Secured convertible promissory note - Redwood (note in default)	$	-		$	75,000

LG Capital Funding. LLC (3):
10% convertible redeemable note - LG Capital	$	40,000		$	40,000
Total		40,000			40,000
Loan discount of $40,000, net of amortization of $40,000 and $30,027 as of June 30, 2015 and December 31, 2014 respectively		-			(9,973	)
10% convertible redeemable note - LG Capital	$	40,000		$	30,027

8% convertible redeemable note - LG Capital	$	36,750		$	36,750
Total		36,750			36,750
Loan discount of $36,750, net of amortization of $36,750 and $17,116 as of June 30, 2015 and December 31, 2014, respectively		-			(19,634	)
Conversion into 51,082,166 shares of stock		(36,750	)		-
8% convertible redeemable note - LG Capital	$	-		$	17,116

WHC Capital, LLC (4):
10% convertible redeemable note - WHC Capital	$	32,000		$	32,000
		-			-
Total		32,000			32,000
Loan discount of $32,000, net of amortization of $32,000 and $23,759 as of June 30, 2015 and December 31, 2014, respectively		-			(8,241	)
Conversion into 37,034,976 shares of stock		(32,000	)		-
10% convertible redeemable note - WHC Capital	$	-		$	23,759

Summit Trading Ltd. (5):
10% convertible redeemable note – Summit	$	59,835		$	59,835
Total		59,835			59,835
Loan discount of $56,804, net of amortization of $49,645 and $21,478 as of June 30, 2015 and December 31, 2014, respectively		(7,159	)		(35,327	)
Conversion of demand note into a convertible note		36,530			-
Conversion of accounts payable into a convertible note		35,814			-
Transfer to Apollo Capital Corp		(59,835	)		-
Conversion into 45,260,256 shares of common stock		(22,270	)		-
10% convertible redeemable note – Summit	$	42,915		$	24,508

Apollo Capital Corporation (6)
Notes purchased from GE Park, LLC		176,200			-
Notes purchased from Summit		62,827			-
Notes purchased from Redwood		31,262			-
Conversion into 321,234,184 shares of common stock		(207,463	)		-
10% convertible redeemable note - Apollo Capital Group	$	62,826		$	-

Convertible promissory notes, net	$	388,093		$	421,865

1. Iliad Note

On December 2, 2013 (“Issuance Date”) the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Iliad Research and Trading, L.P. (“Iliad”). Pursuant to the Purchase Agreement, the Company issued to Iliad a Secured Convertible Promissory Note (the “Note”) in the original principal amount of $667,500 (the “Purchase Price”) which Note bears interest at 8% per annum and is compounded daily. All outstanding principal and accrued interest on the Note is due and payable on the maturity date, which date is 23 months from Issuance Date of the Note (the “Maturity Date”). Net cash expected will be $607,500, net of original issue discount of $60,000.

The initial cash purchase price of $202,500 (which amount is net of the pro-rata portion of original issue discount of $20,000 and certain transactional expenses of $5,000) was received by the Company on the issuance date and (ii) the balance of $400,000 shall be received no later than the Maturity Date, as evidenced by four separate $100,000 promissory notes issued by Iliad to the Company.

Beginning six months after the Issuance Date and continuing for each installment date thereafter, the Company is required to make monthly principal payments under the Note of $37,083, plus any accrued and unpaid interest as of the installment date. Any installment payment may be either cash or shares of Common Stock, at the election of the Registrant.

The Company also issued Iliad five year warrants to purchase 2,132,426 shares at a conversion price of $0.12 per share of the Company’s common stock on December 2, 2013. These options were valued at $23,625 using the Black-Scholes option pricing model with the following values: risk free interest rate of 1.5%, volatility of 26.01538% and strike price of $0.12 and was amortized to interest expense during the year ended December 31, 2014.

At any time after 180 days from the Issuance Date, the Note is convertible into shares of the Company’s common stock, at the option of the Note holder, at a conversion price of $0.12 per share, subject to adjustment downward under certain circumstances defined in the Note. At December 31, 2013, the Company has reserved 16.67 million shares of authorized but unissued common stock in accordance with the terms of the Note. The Company has agreed to reserve these shares until all of the Company’s obligations under the Note are paid and performed in full and the warrants are exercised in full or otherwise expired. The Company may prepay part or all of the Note at any time, provided that any prepayment is subject to a 25% penalty on the amount prepaid.

The Note is subject to various default provisions, including as a result of a failure to make an installment payment by the due date, a failure to deliver shares when required under the Note, or a breach of covenants in the Note and Purchase Agreement, among others. Upon an event of default, the Note accrues interest at the default rate of 1.83% per month (or 22% per annum), compounding daily. The Company is in default on this loan as of June 2, 2014 as a result of failing to make the required installment payments, as well as a result of the Company’s failure to timely file its annual reports with the SEC. Accordingly, the total principal due to Iliad of $227,500 is classified as a current liability.

Default on Iliad Note

On October 1, 2014, Iliad presented the Company with an Event of Default Redemption Notice and is electing to redeem the full outstanding balance of the Note. Note 12 outlines the applicable penalties and additional interest due to the default. On October 29, 2014, the Company and Iliad entered into a forbearance agreement, pursuant to which Iliad agreed, subject to the terms of the forbearance agreement, to refrain and forbear, until December 10, 2014, from exercising and enforcing remedies against the Company with respect to the Note defaults, including the enforcement of the interest rate increase to 22% per annum. Pursuant to an oral agreement between the Company and Iliad on December 12, 2014, the date was extended to December 31, 2014, subject to the terms of the forbearance agreement. As a result, during the year ended December 31, 2014, the Company recorded $152,500 as forbearance liability and charged to the expenses. For the six months ended June 30, 2015, the Company converted $108,752 of principal and accrued interest into 99,520,802 shares of common stock. As of June 30, 2015, the outstanding loan balance on this including forbearance liability was $279,938.

The Company has identified the embedded derivatives related to the above described debenture. These embedded derivatives included certain conversion features and reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date.

On June 3, 2014 (180 days from Issuance Date), the Company determined the aggregate fair value of $443,169 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 224.54%, (3) weighted average risk-free interest rate of 0.41%, (4) expected life of 1.42 years, and (5) estimated fair value of the Company’s common stock of $0.0394 per share. The determined fair value of the debt derivatives of $443,169 was charged as a debt discount up to the net proceeds of the note with the remainder of $240,669 charged to current period operations as non-cash interest expense.

The charge of the amortization of debt discounts and costs for the three months ended June 30, 2015 was $27,362 and $6,084, respectively, and was accounted for as interest expense.

The charge of the amortization of debt discounts and costs for the six Months ended June 30, 2015 was $82,269 and $9,549, respectively, and was accounted for as interest expense.

For the six months ended June 30, 2015, the Company converted $108,752 of principal and accrued interest into 99,520,802 shares of common stock.

2. Redwood Note

On March 3, 2014, the Company entered into a Securities Purchase Agreement with Redwood Management, LLC. (“Redwood”), for the sale of a 10% convertible debenture in the principal amount of $75,000 (the “Note”). The financing closed on March 3, 2014. The total net proceeds the Company received from this Offering was $75,000.

All interest and principal due on September 3, 2014 has not been paid. The Note bears interest at the rate of 10% guaranteed interest regardless of how long the debenture is outstanding. The debenture is convertible into common stock, at Redwood’s option, at a 50% discount to the lowest trading price of the common stock during the 20 trading day period prior to conversion.

At the inception of the Redwood debenture, the Company determined the aggregate fair value of $109,741 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 184.71%, (3) weighted average risk-free interest rate of 0.08%, (4) expected life of 0.50 years, and (5) estimated fair value of the Company’s common stock of $0.065 per share. The determined fair value of the debt derivatives of $109,741 was charged as a debt discount up to the net proceeds of the note with the remainder of $34,741 charged to current period operations as non-cash interest expense.

For the six months ended June 30, 2015, the Company converted $43,738 of principal and accrued interest into 44,988,900 shares of common stock.

On March 9, 2015, the remaining balance of $23,762 of principal and $7,500 in accrued interest was assigned to Apollo Capital Corp. A loss of $26,577 resulted from the debt modification. Subsequently, during the three months ended June 30, 2015 the Company converted $31,262 of principal into 72,091,670 shares of common stock. The remaining balance as of June 30, 2015 is $0 and the determined fair value of the debt derivatives of $145,688 was reclassified into equity during the period ended June 30, 2015.

The charge of the amortization of debt discounts and costs for the three months ended June 30, 2015 and 2014 was $-0- and $37,092, respectively, which was accounted for as interest expense

The charge of the amortization of debt discounts and costs for the six months ended June 30, 2015 and 2014 was $-0- and $48,505, respectively, which was accounted for as interest expense.

3. LG Capital Funding, LLC Notes

On April 1, 2014, the Company entered into a Securities Purchase Agreement with LG Capital Funding, LLC. (“LG Capital”), for the sale of a 10% convertible note in the principal amount of $40,000 (the “Note”). The financing closed on April 1, 2014. The total net proceeds the Company received from this Offering was $40,000.

The Note bears interest at the rate of 10% per annum. All interest and principal must be repaid on April 1, 2015, further as of date this was not repaid hence the note was in default. The debenture is convertible into common stock, at LG Capital’s option, at a 58% discount to the average two lowest trading prices of the common stock during the 20 trading day period prior to conversion.

On July 14, 2014, the Company entered into a Securities Purchase Agreement with LG Capital Funding, LLC. (“LG Capital”), for the sale of an 8% convertible note in the principal amount of $36,750 (the “Note”). The financing closed on July 14, 2014. The total net proceeds the Company received from this Offering was $36,750.

The Note bears interest at the rate of 8% per annum. All interest and principal must be repaid on July 14, 2015. The note is convertible into common stock, at LG Capital’s option, at a 50% discount to the average two lowest trading prices of the common stock during the 20 trading day period prior to conversion. Subsequent to the year ended December 31, 2014, the LG Capital converted $36,750 during the quarter ended June 30, 2015.

The Company has identified the embedded derivatives related to the above described note. These embedded derivatives included certain conversion features and reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date.

At the inception of the LG Capital notes, the Company determined the aggregate fair value of $152,414 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 205.52% to 237.91%, (3) weighted average risk-free interest rate of 0.11% to 0.13%, (4) expected life of 1.00 year, and (5) estimated fair value of the Company’s common stock of $0.0378 to $0.0471 per share. The determined fair value of the debt derivatives of $152,414 was charged as a debt discount up to the net proceeds of the note with the remainder of $75,664 charged to current period operations as non-cash interest expense.

The charge of the amortization of debt discounts and costs for the three months ended June 30, 2015 and 2014, was $0 and $9,863, respectively, accounted for as interest expense.

The charge of the amortization of debt discounts and costs for the six months ended June 30, 2015 and 2014, was $29,607 and $9,863, respectively, accounted for as interest expense.

For the six months ended June 30, 2015, the Company converted the note issued on July 14, 2014 for $36,750 of principal into 51,082,166 shares of common stock. The remaining balance is $0 and the determined fair value of the debt derivatives of $66,758 was reclassified into equity during the period ended June 30, 2015.

4. WHC Capital, LLC

On April 4, 2014, the Company entered into a Securities Purchase Agreement with WHC Capital, LLC. (“WHC Capital”), for the sale of a 12%convertible note in the principal amount of $32,000 (the “Note”). The financing closed on April 4, 2014. The total net proceeds the Company received from this Offering was $32,000.

The Note bears interest at the rate of 12% per annum. All interest and principal must be repaid on April 4, 2015. The debenture is convertible into common stock, at WHC Capital’s option, at a 58% discount to the lowest trading price of the common stock during the 10 trading day period prior to conversion.

At the inception of the WHC Capital note, the Company determined the aggregate fair value of $56,273 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 205.08%, (3) weighted average risk-free interest rate of 0.11%, (4) expected life of 1.00 year, and (5) estimated fair value of the Company’s common stock of $0.06 per share. The determined fair value of the debt derivatives of $56,273 was charged as a debt discount up to the net proceeds of the note with the remainder of $24,273 charged to current period operations as non-cash interest expense.

The charge of the amortization of debt discounts and costs for the three months ended June 30, 2015 and 2014 was $0 and $7,627, accounted for as interest expense.

The charge of the amortization of debt discounts and costs for the six months ended June 30, 2015 and 2014 was $9,529 and $7,627, accounted for as interest expense.

For the six months ended June 30, 2015, the Company converted $35,211 of principal and accrued interest into 37,034,976 shares of common stock. The remaining balance is $0 and the determined fair value of the debt derivatives of $38,937 was reclassified into equity during the period ended June 30, 2015.

5. Summit Trading Ltd.

In addition, the terms of Summit’s convertible note in the amount of $59,835 were modified; the note is now convertible 45% of the lowest stock price 20 days prior to conversion. This note was assigned to Apollo Capital Corp. (“Apollo”) on March 19, 2015. A loss of $57,860 resulted from the debt modification.

On August 15, 2014, the Company entered into a Securities Purchase Agreement with Summit Trading, Ltd. (“Summit”), for the sale of an 10% convertible note in the principal amount of $59,835 (the “Note”). The financing closed on August 15, 2014. The total net proceeds the Company received from this Offering was $59,835.

The Note bears interest at the rate of 10% per annum. All interest and principal must be repaid on August 15, 2015. The debenture is convertible into common stock, at Summit’s option, at a 20% discount to the average volume weighted stock price during the 7 trading day period prior to conversion.

At the inception of the Summit note, the Company determined the aggregate fair value of $56,804 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 242.32%, (3) weighted average risk-free interest rate of 0.09%, (4) expected life of 1.00 year, and (5) estimated fair value of the Company’s common stock of $0.02 per share. The determined fair value of the debt derivatives of $56,804 was charged as a debt discount of the note.

The charge of the amortization of debt discounts and costs for three month ended June 30, 2015 and 2014 was $14,162 and $ 0, respectively, accounted for as interest expense.

The charge of the amortization of debt discounts and costs for six month ended June 30, 2015 and 2014 was $28,168 and $ 0, respectively, accounted for as interest expense.

On January 2, 2015 and January 5, 2015, the Company issued demand notes to Summit in the amounts of $13,844 and $21,970, respectively. These notes bear interest of 4% per annum on any unpaid principal and are payable on demand.

As mentioned above in Note 11, On May 29, 2014, the Company issued a demand note to Summit Trading Ltd. (“Summit”) in the amount of $8,500. A second note in the amount of $18,030 was issued to Summit on September 15, 2014, and a third note in the amount of $10,000 was issued to Summit on November 6, 2014. These notes bear interest of 4% per annum on any unpaid principal and are payable on demand. Interest expense was $2,505 and $3,030 for the three and six months ended June 30, 2015.

On February 27, 2015, the terms of the Summit demand notes were modified. All outstanding notes totaling $72,344 became convertible notes that are convertible at 60% of the lowest trading price utilizing a three day look-back period. A loss of $79,038 resulted from the debt modification.

For the six months ended June 30, 2015, the Company converted $22,270 of principal into 45,260,256 shares of common stock, the related derivative liability of notes conversion $27,030 reclassified into additional paid in capital and the remaining balance is $42,915 as of June 30, 2015.

6. Apollo Capital Corp

On October 22, 2013, GE Park, LLC loaned the Company $95,000 to be used for working capital purposes. These notes bear interest at 4% per annum and are due on demand. On November 22, 2014, this promissory loan was modified into convertible note and subsequently transferred to Apollo Capital Corp (See Note 12). During the six months ended June 30, 2015, the Company converted $95,000 of principal into 136,053,867 shares of common stock. The remaining balance as of June 30, 2015 is $0 and the determined fair value of the debt derivatives of $139,813 was re classed into equity during the period ended June 30, 2015.

On February 12, 2015, the terms a GE Park demand note totaling $47,600 was modified. This note became convertible at 50% of the lowest traded price utilizing a 10 day look-back period (see Note-12). The determined fair value of the debt derivatives of $94,917 was charged as a loss on debt modification for the six months ended June 30, 2015. The note was fully converted into 79,193,262 shares during the six months ended June 30, 2015 (See Note 12). The remaining balance as of June 30, 2015 is $0 and the determined fair value of the debt derivatives of $94,917 was re classed into equity during the period ended June 30, 2015.

On February 20, 2015, the terms of two GE Park demand notes totaling $33,600 were modified. These notes became convertible at 50% of the lowest traded price utilizing a 10 day look-back period (see Note-13). The determined fair value of the debt derivatives of $75,378 was charged as a loss on debt modification for the six months ended June 30, 2015. The note amounted to $21,600 was converted into 33,895,385 shares during the six months ended June 30, 2015 (See Note 12). The remaining balance as of June 30, 2015 is $12,000.

In addition, the terms of Summit’s convertible note in the amount of $59,835 and accrued interest of $2,992 were modified; the note is now convertible 45% of the lowest stock price 20 days prior to conversion. This note was assigned to Apollo Capital Corp. (“Apollo”) on March 19, 2015. A loss of $57,860 resulted from the debt modification.

On March 9, 2015, the remaining balance of $23,762 of principal and $7,500 in accrued interest was assigned to Apollo Capital Corp from Redwood Management, LLC. A loss of $26,577 resulted from the debt modification. Subsequently, during the six months ended June 30, 2015 the Company converted $31,262 of principal into 72,091,670 shares of common stock. The remaining balance as of June 30, 2015 is $0 and the determined fair value of the debt derivatives of $145,688 was re classed into equity during the period ended June 30, 2015.