Convertible Notes

9 Months Ended

Sep. 30, 2017

Debt Disclosure [Abstract]

Convertible Notes

Note 7. Convertible Notes

On December 5, 2012 and March 27, 2013, the Company sold, through a private placement to accredited investors, three year 12% convertible notes (“Series B Notes”) in the aggregate principal amount of $1,865,000, and $365,000, respectively. The Notes pay interest at a rate of 12% per annum, payable to the holder at 1% per month, and are convertible into common shares of the Company at $0.10 per share. In addition, each purchaser of the Notes received shares dependent on the dollar amount of Notes purchased. The total number of shares of common stock issued was 5,315,000 shares.

On December 1, 2015, the holders of $1,840,000 Series B Notes have agreed to extend the maturity date of the debt outstanding to July 1, 2017 from its original maturity date of December 31, 2015. As part of the extension the Company issued warrants to entitle the holders to purchase up to 1,840,000 shares of common stock at an exercise price of $0.07 per share at any time from December 1, 2015 to July 1, 2018. The Company has valued the warrants at $0.0058 per issued share, and recorded a total discount of $10,672 that was amortized over the 18-month extension period. The notes principal balance was due July 1, 2017 and it is currently overdue.

On May 12, 2017 $60,237 of the notes that were issued on December 5, 2012 was sold to a third-party investor. As part of the sale, the Company has agreed to reduce the conversion price from $0.10 per share to $0.025 per share. Convertible debt is accounted for under ASC 470, Debt – Debt with Conversion and Other Options. The Company record a beneficial conversion feature (BCF) related to the issuance of convertible debt that have conversion features at fixed or adjustable rates that are in-the-money when issued and records the fair value of warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to paid-in-capital. As part of the sale, the Company has recorded $60,237 in additional paid in capital against a reduction to the carrying amount of the convertible note. The reduction is to be amortized to the maturity date of July 1, 2018. As of September 30, 2017, $60,000 of the principal balance was converted into 4,140,000 shares of common stock.

On March 31, 2016, the holders of $50,000 Series B Notes have agreed to extend the maturity date of the debt outstanding to September 1, 2017 from its original maturity date of March 31, 2016. As part of the extension, the Company issued warrants to entitle the holders to purchase up to 50,000 shares of common stock at an exercise price of $0.07 per share at any time from March 31, 2016 to September 30, 2018. The Company has valued the warrants at $0.00278 per issued share, and recorded a total discount of $139 to be amortized over the 18-month extension period. . The notes principal balance was due September 1, 2017 and it is currently overdue.

On March 31, 2016, the holder of $25,000 Series B Notes has agreed to extend the maturity date of the debt outstanding to September 1, 2019 from its original maturity date of March 31, 2016. As part of the extension the Company issued warrants to entitle the holders to purchase up to 25,000 shares of common stock at an exercise price of $0.07 per share at any time from March 31, 2016 to September 30, 2019. The Company has valued the warrants at $0.00583 per issued share, and recorded a total discount of $146 to be amortized over the 30-month extension period.

On May 22, 2014, the Company sold, through private placement to accredited investors, three year 12% convertible notes (“Series C Notes”) in the aggregate principal amount of $95,000. The Notes bear interest at a rate of 12% per annum, payable to the holder at1% per month, with the principal amount due on May 31, 2017. The Notes are convertible into shares of the Company’s common stock at an initial conversion rate of $0.15 per share. In addition, each holder of Series C Notes received shares dependent on the dollar amount of Notes purchased. On August 25, 2014, October 31, 2014 and February 17, 2015, the Company sold an additional $75,000, $50,000 and $20,000, respectively of Series C Notes. The total number of shares of common stock issued was 240,000 shares. The notes principal balance was due May 31, 2017 and it is currently overdue.

On March 26, 2014, the Company issued a $300,000 convertible note to a non-affiliate. The note pays interest at a rate of 12% per annum, payable to the holder at 1% per month. In addition to interest payments, the Company is making monthly payments of $5,000 towards the principal balance beginning June 1, 2014 until the note due date of February 28, 2018. The note is convertible into common shares of the Company at $0.15 per share. In addition, the purchaser of the note received 300,000 shares as part of the note agreement. As of September 30, 2017, principal balance of the note was $125,000.

In accordance with ASC 470, Debt with conversion and other options, on issuance of the shares, the Company recognized additional paid-in capital and a discount against the notes for a total of $282,470. Amortization of the discount for the nine months ended September 30, 2017 and 2016 was $5,193 and $4,952, respectively.

In accordance with ASC 480, Distinguishing Liabilities from Equity, the Company determined that the warrants issued on extension of series B notes as discussed above are a freestanding instrument based on the following:

• The debt can be transferred without the transfer of the warrants.

•   The warrants can be transferred without the transfer of the debt.

•    The warrants can be exercised while debt still outstanding.

In accordance with ASC 470, if the warrants issued on extension of series B notes are classified as equity, then the proceeds should be allocated based on the relative fair values of the base instrument. The warrants were valued at $0.00583 per issued share, and recorded a total discount of $10,672 to be amortized over to 18 month extension period. Amortization of the discount for the nine months ended September 30, 2017 and 2016 was $3,545 and $0, respectively.

On July 7, 2017 the Company issued a $153,000 convertible note to a non-affiliate. The note pays interest at a rate of 12% per annum, payable at maturity. The note holder has the right at any time following the initial 180 days of note issuance, to convert all or any part of the outstanding and unpaid principal amount of this note to shares of common stock. The conversion price shall equal the variable conversion price of 65% multiplied by the market price. The market price shall mean the average of the lowest three (3) VWAP’s for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date. “VWAP” shall mean the daily dollar volume-weighted average sale price for the common stock on the principal market on any particular trading day. Conversion is subject to limitation of 4.99% beneficial ownership of the outstanding shares of common stock. The note maturity is January 5, 2019. Prepayment on the note within one hundred twenty-one (121) day from the issue date and ending one hundred eighty (180) days following the issue day is subject to 120% Prepayment amount, as such $30,600 has been recorded and added to the note carrying value as of September 30, 2017, the note is presented with the total amount of $183,600.

A detailed summary of the convertible notes is as follows:

Issuance Date	Maturity Date	APR		Conversion Rate		Monthly Payment		September 30, 2017 Face Value Balance		December 31, 2016 Face Value Balance
3-Dec-12	1-Jul-17	12.00	%	$	0.10	$	250	$	25,000	$	25,000
27-Mar-13	1-Jul-17	12.00			0.10		750		75,000		75,000
3-Dec-12	1-Jul-17	12.00			0.10		250		50,000		50,000
3-Dec-12	1-Jul-17	12.00			0.10		340		34,000		50,000
3-Dec-12	1-Jul-17	12.00			0.10		250		25,000		25,000
3-Dec-12	1-Jul-17	12.00			0.10		250		25,000		25,000
3-Dec-12	1-Jul-17	12.00			0.10		250		25,000		25,000
3-Dec-12	1-Jul-17	12.00			0.10		15,000		1,500,000		1,500,000
3-Dec-12	1-Jul-17	12.00			0.10		500		50,000		50,000
3-Dec-12	1-Jul-17	12.00			0.10		150		15,000		15,000
3-Dec-12	1-Jul-18	12.00			0.010		-		237		75,000
3-Dec-12	31-Mar-16	12.00			0.10		-		-		-
27-Mar-13	30-Sep-17	12.00			0.10		250		25,000		25,000
27-Mar-13	30-Sep-17	12.00			0.10		250		25,000		25,000
27-Mar-13	30-Sep-19	12.00			0.10		250		25,000		25,000
22-May-14	31-May-17	12.00			0.15		500		50,000		50,000
22-May-14	31-May-17	12.00			0.15		225		22,500		22,500
22-May-14	31-May-17	12.00			0.15		225		22,500		22,500
25-Aug-14	31-Jul-17	12.00			0.15		500		50,000		50,000
25-Aug-14	31-Jul-17	12.00			0.15		250		25,000		25,000
31-Oct-14	31-Oct-17	12.00			0.15		500		50,000		50,000
17-Feb-15	17-Feb-18	12.00			0.15		200		20,000		20,000
26-Mar-14	28-Feb-18	12.00			0.15		6,251		125,082		145,000
7-Jul-17	5-Jan-19	12.00			Variable		-		183,600		-
Total Face Value								$	2,447,919	$	2,375,000
Unamortized Discount									(327)		(8,937)
Total								$	2,447,592	$	2,366,063

Following are maturities of the long –term debt as of September 30, 2017:

	Principal Payments
2017	$	2,139,000
2018		100,319
2019		208,600
Total	$	2,447,919