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Convertible Notes

12 Months Ended

Dec. 31, 2018

8. CONVERTIBLE NOTES

As of December 31, 2018 and December 31, 2017, the Company had a total of $1,313,133 and $923,875, respectively, of convertible notes payable, which consisted of the following:

	December 31, 2018			December 31, 2017
a) Convertible Notes – with fixed conversion	$	967,000		$	517,500
b) Convertible Notes – with variable conversion		346,133			406,375
Total		1,313,133			923,875
Less: Debt discount		(20,024	)		(142,117	)
Total convertible notes, net of debt discount	$	1,293,109		$	781,758

	a)	Convertible notes payable with principal balance of $517,500 as of December 31, 2017 consist of loans provided to the Company from various investors. These notes carry simple interest at a rate ranging from 0% to 14% per annum and with terms ranging from 1 to 2 years. In lieu of the repayment of the principal and accrued interest, the outstanding amounts are convertible, at the option of the note holder, generally at any time on or prior to maturity and automatically under certain conditions, into the Company’s common shares at $0.015 to $0.001 per share. These notes became due in 2017 and prior, and are currently past due.

		During the period ended December 31, 2018, the Company entered into Convertible Promissory Agreements with accredited investors for an aggregate principal balance of $470,000. The Purchasers may convert their notes after six months into common shares in the Company at a price equal to $0.002 to $0.30. The notes bear interest from 1% to 12% mature at various dates ranging from four to six months. The notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933. On the dates of the agreement, the closing price of the common stock range from $0.0018 to $0.23 per share. As the conversion price embedded in the note agreements was below the trading price of the common stock on the dates of issuance, a beneficial conversion feature (BCF) was recognized at the date of issuance. The Company recognized a debt discount at the date of issuance in the aggregate amount of $181,250 related to the intrinsic value of beneficial conversion feature. During the twelve months ended December 31, 2018, we issued 5,900,000 shares of common stock to convert $40,500 of these outstanding convertible notes and paid down in cash the principal balance on three notes by $2,000.

		Also, during the same period, the Company entered into a Convertible Promissory Agreement with an accredited investor with a principal balance of $25,000. The Purchaser may convert their note after November 30, 2018 into common shares in the Company at a price equal to a 40% discount to market. The note bears interest of 1%. As part of the note agreement, the Company issued 500,000 shares of common stock and warrants to acquire 500,000 shares of common stock at an exercise price of $.04 per share. The Company recognized a debt discount at the date of issuance in the aggregate amount of $12,500 related to the fair value of the intrinsic value of the beneficial conversion feature and the equity instruments issued with the financing. During the year ended December 31, 2018 the Company repaid $3,000 of principal and $22,000 was outstanding as of December 31, 2018. The balance of the valuation discount of notes with a fixed conversion as of December 31, 2017 was $52,712. During the period ended December 31, 2018 the Company recorded a valuation discount of $193,750 upon issuance of convertible notes payable and amortized $246,462 of debt discount leaving no remaining unamortized balance at December 31, 2018. See subsequent events for Amendment to the Notes.

	b)	Convertible notes payable with principal balance of $406,375 were outstanding as of December 31, 2017 and consist of loans provided to the Company from various investors. These notes are non-interest bearing and with terms ranging from 1 to 2 years. In lieu of the repayment of the principal and accrued interest, the outstanding amounts are convertible, at the option of the note holder, generally at any time on or prior to maturity and automatically under certain conditions, into the Company’s common shares at 60% of the lowest trading price in the prior 30 days. During the twelve-month period ended December 31, 2018, we issued 5,216,826 shares of common stock to convert $154,367 of outstanding convertible notes. In addition, we paid down $56,000 under the note agreements.

		During the period ended December 31, 2018, the Company had issued a Convertible Promissory Note as payment for services incurred under an Advisory Agreement with a third party for a principal balance of $55,125 under the same terms as the notes above. Additionally, the same party entered into two other Convertible Promissory Note agreements for services, one for $10,000 at a 40% discount to market with a 10% interest rate, and the other for $85,000 with a 2% discount rate.

		The Company determined that since the conversion floor of these notes had no limit to the conversion price, the Company could no longer determine if it had enough authorized shares to fulfil its conversion obligation. As such, pursuant to current accounting guidelines, the Company determined that the conversion feature of these notes created a derivative with a fair value totaling $96,556 at the date of issuances. The Company recorded $78,396 as a valuation discount to be amortized over the life of the note and the remaining $18,160 as a financing cost.

		The unamortized valuation discount relating to these notes was $89,405 as of December 31, 2017. During the period ended December 31, 2018 the Company recorded a valuation discount of $78,396 upon issuance of convertible notes payable, and recorded amortization of debt discount of $147,777 as interest expense. Unamortized debt discount as of December 31, 2018 related to these notes was $20,024.

Convertible Notes Due to Related Parties

On September 30, 2016, management elected to convert accrued salaries into long-term convertible promissory notes. The balance of such note at December 31, 2016 was $428,997. On December 31, 2017, management elected to transfer additional accrued salaries into long-term convertible promissory notes, due on March 31, 2019, totaling $241,050 and are due 18 months after issuance. The notes bear a 10% annual interest rate. Management shall have the right, but not the obligation to convert up to 50% of the amount advanced and accrued interest into shares, warrants or options of common or preferred stock of the Company at $0.75 per share. As of December 31, 2017, the outstanding balance on the convertible notes was $670,047.

During the period ended June 30, 2018, the Company recognized additional notes with an aggregate amount of $214,499 which represent 50% of the related party notes that matured on March 31, 2018. The notes are due on March 31, 2019. Such amount was recorded as noncash financing cost during the twelve months ended December 31, 2018. As of December 31, 2018, the outstanding balance on the convertible promissory notes was $884,546.

On December 31, 2018 interest of $133,533 is accrued on the above notes and included in accrued expenses to related parties.

Derivative liabilities

Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has issued certain convertible notes whose conversion price is based on a future market price. However, since the number of shares to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option.

As a result, the conversion option is classified as a liability and bifurcated from the debt host and accounted for as a derivative liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

At December 31, 2017, the balance of the derivative liabilities was $261,172. During the period ended December 31, 2018, the Company recorded an additional derivative liability with a fair value of $96,554, recorded a gain on extinguishment of derivative liabilities of $119,099 related to notes that were converted and a change in fair value of $6,468. At December 31, 2018, the balance of the derivative liabilities was $232,162.

At December 31, 2018 and December 31, 2017, the derivative liabilities were valued using a probability weighted Black-Scholes-Merton pricing model with the following assumptions:

	December 31, 2018			December 31, 2017
Conversion feature:
Risk-free interest rate		2.57	%		2.0	%
Expected volatility		504.95	%		165.68	%
Expected life (in years)		.1 to .773 years			.1 to .5 years
Expected dividend yield		-			-
Fair Value:
Conversion feature	$	232,162		$	261,172

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining contractual term of the notes. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.