Note 7 - Convertible Notes Payable

12 Months Ended

Dec. 31, 2015

Notes

Note 7 - Convertible Notes Payable:

Note 7 – Convertible Notes Payable:

On October 1, 2014, we issued a Convertible Promissory Note (“Note”) to a provider of legal services in the original principal amount of approximately $51,532.  The Note was issued to evidence the Company’s indebtedness for legal services previously rendered. Interest accrues quarterly on the outstanding principal and interest balance of the Note at 6% per annum. The principal plus accrued and unpaid interest is due upon five days’ written demand of the Note holder.  The Note is unsecured.

The Note is convertible at any time into shares of common stock at a conversion price of $0.039, which represented the closing bid price of the common stock on the OTC Bulletin Board on the date of issuance.

The Note contains certain anti-dilution provisions that would reduce the conversion price should the Company issue common stock equivalents at a price less than the Note conversion price.  Accordingly, the conversion features of the Note are considered a discount to the Note.  However, since the Note is payable upon demand by the note holder, the value of the discount is considered interest expense at the time of its inception.  The Note shall be evaluated quarterly, and upon any quarterly valuations in which the value of the discount increases, we recognize a loss due to an increase in the fair value of the derivative liability.  Therefore, we recorded a derivative liability at the Note inception, and adjusted the liability at December 31, 2014.  As a result of these valuations, $29,940 of interest expense was incurred during the quarter ended December 31, 2014 and $580 was recorded as a loss due to change in fair value of derivative.  On December 31, 2015 the fair value of the derivative liability was determined to be $65,940, resulting in a loss on change of derivative liability charge of $35,420 for the year ended December 31, 2015. 

We estimate the fair value of this derivative at each balance sheet date until such time the Note is paid or converted.

We estimated the fair value of the derivative at December 31, 2015 and 2014 using the Black-Scholes option pricing model, which includes assumptions for expected dividends, expected share price volatility, risk-free interest rate, and expected life of the Note.  Our expected volatility assumption is based on our historical weekly closing price of our stock over a period equivalent to the expected remaining life of the Note.

The following table summarizes the assumptions used to value the derivative Note discount at December 31, 2015:

Fair value assumptions – derivative:	December 31, 2015
Risk free interest rate	0.65%
Expected term (years)	1.0
Expected volatility	155%
Expected dividends	0%

The following table summarizes the assumptions used to value the derivative Note discount at December 31, 2014:

	Fair Value at	Fair Value Measurement at December 31, 2015
	December 31, 2015	Level 1	Level 2	Level 3
Derivative conversion option liability	$65,940	$--	$--	$65,940

Fair value assumptions – derivative:	December 31, 2014
Risk free interest rate	0.25%
Expected term (years)	1.0
Expected volatility	162%
Expected dividends	0%

A total of $4,054 and $771 of interest has accrued on the Note at December 31, 2015 and 2014, respectively, and is included in Accrued interest on the accompanying consolidated balance sheets.