CONVERTIBLE PROMISSORY NOTES PAYABLE

12 Months Ended

Dec. 31, 2014

Convertible Promissory Note Payable [Abstract]

Convertible Promissory Note Payable [Text Block]

NOTE 5 – CONVERTIBLE PROMISSORY NOTES PAYABLE

$100,000 Convertible Note Payable

On September 30, 2013, the Company issued and sold to two accredited investors for $100,000 four units of securities, each unit consisting of a $25,000 convertible promissory note and warrants to purchase 50,000 shares of the Company's common stock until December 31, 2019. The notes bear interest of 10% per annum and are due on the earlier of the close of $100,000 financing or May 31, 2014. The note payable can be converted into common shares of the Company at $0.125 per share. The conversion price of the warrants is $0.15 per share and expire on December 31, 2019. During the period ended March 31, 2014, $25,000 of the note was repaid. The Company recorded a debt discount of $53,701 related to the issuance of the convertible note. As of December 31, 2014, the entire debt discount has been amortized to interest expense. In May 2014, the conversion feature of the note was amended to the lower of $0.11 or 60% of the lowest closing price in the 20 days before the conversion date and the term of the note was extended to September 30, 2014. For accounting purposes, the modifications to the original loan terms were treated as an extinguishment of debt, which resulted in a loss on extinguishment of debt in the amount of $97,898 which was recorded on the statement of operations as an increase to additional paid in capital. In addition, on May 5, 2014 a derivative liability of $53,702 was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($.08), expected dividend yield of 0%, expected volatility of 77.67%, risk free interest rate of 0.12% and an expected term of .40 years. As of December 31, 2014, the derivative liability was $0 because as noted in the next paragraph the convertible note payable was fully paid or converted.

During the year ended December 31, 2014, $75,000 of the debt was converted into 2,279,066 shares of common stock of the Company.

The total debt discount was comprised of the debt discount related to the warrants, the convertible note, and stock and cash given in exchange for issuing the convertible notes. The fair value of the debt discount related to the warrants granted was $12,007 and was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on date of grant ($0.11), expected dividend yield of 0%, expected volatility of 76.15%, risk-free interest rate of 1.43%, and an expected term of 6.25 years. The fair value of the debt discount related to the convertible note was $20,694 and was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.11), expected dividend yield of 0%, expected volatility of 87.67%, risk-free interest rate of 0.07%, and an expected term of .67 years. The fair value of the stock and cash given in consideration for issuing the convertible notes was $11,000 and $10,000, respectively. The convertible notes called for the payment of one-half of the stock and cash upon issuing the convertible notes and the remainder upon the repayment of the notes. As of December 31, 2014, $5,500 in stock and $5,000 in cash had been satisfied and the remainder due is reflected in accounts payable.

$244,000 Convertible Note Payable

On January 7, 2014, the Company issued to a family trust a Senior Secured Convertible promissory note in the principal amount of $244,000 (the "Note") and warrants to purchase an aggregate of 488,000 shares of the Company's common stock, par value $.001 per share at an exercise price of $.125 per share through December 26, 2018 (the "Warrants"). The Company received gross proceeds of $244,000 for the sale of such securities. The outstanding principal of the Note bears interest at the rate of 12% per annum. All principal on the Note is payable on March 31, 2015 (the "Maturity Date"), which as of the date of this filing is past due and in technical default. However, not demands for payment have been made.. Interest is payable on September 30, 2014 and on the Maturity Date. The Note is convertible at the option of the holder into common stock of the Company at a conversion rate of one share for each $0.10 of principal and interest converted. A debt discount related to the value of the warrants in the amount of $10,252 was recorded and is being amortized over the life of the note.  During the year ended December 31, 2014, $9,227 of the discount was amortized to interest expense. As of December 31, 2014, the unamortized debt discount was $1,025.

$27,500 Convertible Note Payable

On January 24, 2014, the Company issued and sold a convertible promissory note in the amount of $27,500, bearing interest of 10% per annum and due on December 31, 2014.  The note payable is convertible into common shares of the Company at the lower of $0.07 per share or 60% of the lowest volume weighted average share price in the 20 days before the conversion date. On issuance, a debt discount of $2,500 was recorded and is being amortized over the term of the note payable. A derivative liability was recorded related to the conversion feature of the note in the amount of $29,084 and was re-valued at December 31, 2014, totaling $0 as entire amount was converted to common stock. As the value of the derivative liability exceeded the face value of the promissory note, a derivative expense in the amount of $4,084 was recorded. During the year ended December 31, 2014, $22,500 of the entire discount was amortized to interest expense.

During the year ended December 31, 2014, all $27,500 and accrued interest of the convertible promissory note was converted into 1,028,139 shares of the Company's common stock.

The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of valuation ranging from ($0.05-$0.10), expected dividend yield of 0%, expected volatility from 112% - 93.50%, risk-free interest rate of 0.07-0.12%, and an expected term of 0.25-0.9167 years.

$222,500 Convertible Note Payable

On February 21, 2014, the Company issued and sold a convertible promissory note in the amount of $222,500, bearing interest at 10% per annum and due on December 21, 2014. The note payable is convertible into common shares of the Company at the lower of $0.11 per share or 75% of the lowest traced price in the 20 days before the conversion date, which adjusts to 65% if the average during the 20 day period is less than $0.05. A derivative liability was recorded related to the conversion feature of the note in the amount of $82,329. The total debt discount recorded in connection with the derivative liability and OID was $104,829. On December 31, 2014, the derivative liability was revalued at $142,501. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.05-$0.10), expected dividend yield of 0%, expected volatility from 192% - 117%, risk-free interest rate of 0.12%, and an expected term of 0.01-0.83 years.During the year ended December 31, 2014, $104,829 of the discount was amortized to interest expense.

During the year ended December 31, 2014, $115,000 of the principal of the convertible promissory note was converted into 6,168,370 shares of the Company's common stock, leaving $107,000 in principal outstanding as of December 31, 2014. The note is currently past due and in technical default. However, no formal demands have been made. 

$63,000 Convertible Note Payable

On March 31, 2014, the Company issued and sold a convertible promissory note in the amount of $63,000, bearing interest at 10% per annum and due on March 31, 2015.  The note payable is convertible into common shares of the Company at the lower of $0.11 per share or 60% of the lowest closing share price in the 20 days before the conversion date. On issuance, a debt discount of $3,000 was recorded which is being amortized over the term of the note payable. A derivative liability was recorded related to the conversion feature of the note in the amount of $65,148 on March 31, 2014 and was revalued on December 31, 2014 for $0 as the note had been converted. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.05-$0.10), expected dividend yield of 0%, expected volatility from 112% - 93.50%, risk-free interest rate of 0.07-0.12%, and an expected term of 0.50 - 1.0. Since the total debt discount on the date of issuance of $68,148 exceeded the face value of the note a derivative expense of $5,148 was recorded. During the year ended December 31, 2014, $63,000 of the discount was amortized to interest expense.

During the year ended December 31, 2014, all $63,000 of the convertible promissory note and accrued interest was converted into 3,707,058 shares of the Company's common stock.

$84,000 Convertible Note Payable

On April 30, 2014, the Company issued and sold a convertible promissory note in the amount of $84,000 and warrants to purchase an aggregate of 400,000 shares of the Company's common stock, par value $.001 per share at an exercise price of $0.11 per share through April 30, 2017. The outstanding principal of the note bears interest at 10% per annum and is due on April 30, 2015. The note is convertible into common shares of the Company at the lesser of $0.11 or 60% of the lowest closing share price in the 20 days before the conversion date. On issuance, an original issue discount of $4,000 was recorded and is being amortized over the term of the note payable.

The total debt discount of $84,000 was comprised of the original issue discount, debt discount related to the warrants and derivative liability calculated on the convertible note. The fair value of the debt discount related to the warrants granted was $13,151 and was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on date of grant ($0.09), expected dividend yield of 0%, expected volatility of 75%, risk-free interest rate of .12%, and an expected term of 3.00 years. The fair value of the debt discount relating to derivative liability on the date of issuance of $72,092 and was revalued at December 31, 2014 at $43,109. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.05-$0.10), expected dividend yield of 0%, expected volatility from 192% - 75%, risk-free interest rate of 0.07-0.12%, and an expected term of 0.33 - 1.0 years.  During the year ended December 31, 2014, $56,000 of the discount was amortized to interest expense. As of December 31, 2014, the balance of the unamortized debt discount was $28,000.

During the year ended December 31, 2014, $57,000 of the convertible promissory note was converted into 6,511,846 shares of the Company's common stock, leaving $27,000 outstanding.

$378,000 Convertible Note Payable

On June 27, 2014, the Company issued and sold a convertible promissory note in the amount of $378,000 and warrants to purchase an aggregate of 2,000,000 shares of the Company's common stock, par value $.001 per share at an exercise price of $0.11 per share through June 30, 2017. The outstanding principal bears interest of 10% per annum and is due on June 27, 2015.  The note payable is convertible into common shares of the Company at the lesser of $0.11 or 60% of the lowest trade share price in the 20 days before the conversion date. On issuance, a debt discount of $28,000 was recorded which is being amortized over the term of the note payable. 

The total debt discount was comprised of the debt discount related to the warrants and the derivative liability calculated on the convertible note. The fair value of the debt discount related to the warrants granted was $65,481 and was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on date of grant ($0.08), expected dividend yield of 0%, expected volatility of 76%, risk-free interest rate of 0.12%, and an expected term of 3.00 years. The fair value of the debt discount related to the derivative liability was $505,206 and was calculated using the Black-Scholes option pricing model. The issuance of the convertible note resulted in an additional derivative expense in the amount of $220,688 as the total value of the debt discounts exceeded the face value of the promissory notes and a debt discount of $378,000 was recorded. On December 31, 2014, the derivative liability was revalued at $663,931. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.05-$0.10), expected dividend yield of 0%, expected volatility ranging from 192% - 85.45%, risk-free interest rate of 0.12%, and an expected term ranging from 0.5 - 1.00 year. During the year ended December 31, 2014, $189,000 of the discount was amortized to interest expense. As of December 31, 2014, the unamortized balance of the debt discount was $189,000.

During the year ended December 31, 2014, $9,000 of the convertible promissory note was converted into 3,333,333 shares of the Company's common stock, leaving $369,000 in principal outstanding.

$222,500 Convertible Note Payable

On August 14, 2014, the Company issued a convertible promissory note in the amount of $222,500, on which proceeds of $100,000 were received, bearing interest at 10% per annum and due on June 14, 2015. On issuance, a debt discount related to the OID of $12,500 was recorded which is being amortized over the term of the note payable. The note payable is convertible into common shares of the Company at the lower of $0.11 per share or 75% of the lowest traded price in the 20 days before the conversion date, which adjusts to 65% if the average of the three lowest daily volume weighted average trading prices during the 20 day period is less than $0.05. A derivative liability was recorded related to the conversion feature of the note in the amount of $145,109. The total debt discount recorded in connection with the derivative liability, OID and costs was $112,500 resulting in additional derivative expense of $45,109. On December 31, 2014, the derivative liability was revalued at $179,490. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.06 - $0.05), expected dividend yield of 0%, expected volatility of 119% - 114%, risk-free interest rate of 0.12%, and an expected term of 0.45 - 0.83 year. During the year ended December 31, 2014, $63,125 of the discount was amortized to interest expense. As of December 31, 2014, the unamortized debt discount was $61,875.

On October 3, 2014, the Company received the remaining $100,000 under the $222,500 convertible promissory note due June 14, 2015. Upon receipt, a debt discount of $12,500 related to the OID and expenses was recorded and is being amortized over the term of the note payable. A derivative liability was recorded related to the conversion feature of the note in the amount of $123,353. The total debt discount recorded in connection with the derivative liability, OID and costs were $112,500 resulting in additional derivative expense of $10,853. On December 31, 2014, the derivative liability was revalued at $179,490. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.04), expected dividend yield of 0%, expected volatility of 119% - 114%, risk-free interest rate of 0.12%, and an expected term of 0.45 - 0.83 year. During the year ended December 31, 2014, $42,187 of the discount was amortized to interest expense. As of December 31, 2014, the unamortized debt discount was $70,313. 

$27,500 Convertible Note Payable

On October 22, 2014, the Company issued a convertible promissory note in the amount of $27,500, on which proceeds of $25,000 were received, bearing interest at 10% per annum and due on December 31, 2015. On issuance, a debt discount related to the OID of $2,500 was recorded which is being amortized over the term of the note payable. The note payable is convertible into common shares of the Company at 60% of the lowest traded price in the 20 days before the conversion date. A derivative liability was recorded related to the conversion feature of the note in the amount of $57,049. The total debt discount recorded in connection with the derivative liability and OID was $27,500 resulting in additional derivative expense of $29,549. On December 31, 2014, the derivative liability was revalued at $52,050. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.04), expected dividend yield of 0%, expected volatility of 159%, risk-free interest rate of 0.12%, and an expected term of 1.00 - 1.20 year. During the year ended December 31, 2014, $3,929 of the discount was amortized to interest expense. As of December 31, 2014, the unamortized debt discount was $23,571.

$50,000 Convertible Note Payable

On November 3, 2014, the Company issued a convertible promissory note in the amount of $50,000, on which proceeds of $41,500 were received, bearing interest at 12% per annum and due on May 3, 2015. On issuance, a debt discount of $8,500 related to the OID and fees paid was recorded which is being amortized over the term of the note payable. The note payable is convertible into common shares of the Company at 55% of the three lowest traded price in the 20 days before the conversion date. A derivative liability was recorded related to the conversion feature of the note in the amount of $64,679. The total debt discount recorded in connection with the derivative liability and OID was $50,000 resulting in additional derivative expense of $14,679. On December 31, 2014, the derivative liability was revalued at $95,825. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.03), expected dividend yield of 0%, expected volatility of 192%, risk-free interest rate of 0.12%, and an expected term of 0.50 - 0.34 year. During the year ended December 31, 2014, $16,667 of the discount was amortized to interest expense. As of December 31, 2014, the unamortized debt discount was $33,333.

$71,660 Convertible Note Payable

On November 7, 2014, the Company issued a convertible promissory note in the amount of $71,660, on which proceeds of $61,250 were received, bearing interest at 10% per annum and due on December 31, 2015. On issuance, a debt discount of $10,410 related to the OID and fees paid was recorded which is being amortized over the term of the note payable. The note payable is convertible into common shares of the Company at 55% of the two lowest traded price in the 20 days before the conversion date. A derivative liability was recorded related to the conversion feature of the note in the amount of $165,354. The total debt discount recorded in connection with the derivative liability and OID was $71,660 resulting in additional derivative expense of $93,694. On December 31, 2014, the derivative liability was revalued at $149,896. The derivative liability was valued and revalued using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.04), expected dividend yield of 0%, expected volatility of 159 - 169%, risk-free interest rate of 0.12%, and an expected term of 0.85 - 1.00 year. During the year ended December 31, 2014, $11,943 of the discount was amortized to interest expense. As of December 31, 2014, the unamortized debt discount was $59,717.

Future Potential Dilution

Most of the Company's convertible notes payable contain adjustable conversion term with significant discounts to market. The following is a summary of estimated shares issuable under each convertible note agreement at December 31, 2014:

		Year Ended
		December 31, 2014
$	222,500		38,461,538
$	84,000		10,000,000
$	378,000		143,023,256
$	225,500		80,500,894
$	27,500		10,658,915
$	50,000		21,141,649
$	71,660		30,300,211
			334,086,463

If the holders of convertible notes converted the Company would be in excess of their authorized shares.