CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE | NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE Upon inception, the Company evaluates each financial instrument to determine whether it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was superseded by ASC 815, and EITF 05-02, which was superseded by ASC 470. Convertible Notes Payable The following table reflects the convertible notes payable as of December 31, 2016, other than the notes that have been remeasured to fair value which are discussed later in Note 7: Issue Maturity December 31, Interest Conversion Date Date 2016 Rate Rate Convertible notes payable: July 19, 2016 July 19, 2017 4,000 6.00 % 0.0015 August 24, 2016 February 24, 2017 20,000 6.00 % 0.0010 August 31, 2016 August 31, 2017 25,750 6.00 % 0.0010 Unamortized discount (22,423 ) Balance $ 27,327 Convertible notes payable – related parties July 12, 2016 January 12,2017 2,400 6.00 % 0.00060 Unamortized discount (156 ) $ 2,244 Convertible notes payable, in default October 31, 2012 April 30, 2013 $ 8,000 6.00 % 0.0040 November 20, 2012 May 20, 2013 50,000 6.00 % 0.0050 January 19, 2013 July 30, 2013 5,000 6.00 % 0.0040 February 11, 2013 August 11, 2013 9,000 6.00 % 0.0060 September 25, 2013 March 25, 2014 10,000 6.00 % 0.0125 August 28, 2009 November 1, 2009 4,300 10.00 % 0.0150 April 7, 2010 November 7, 2010 70,000 6.00 % 0.0080 November 12, 2010 November 7, 2011 40,000 6.00 % 0.0050 October 4, 2013 April 4, 2014 50,000 6.00 % 0.0125 October 30, 2013 October 30, 2014 50,000 6.00 % 0.0125 May 15, 2014 November 15, 2014 40,000 6.00 % 0.0070 October 13, 2014 April 13, 2015 25,000 6.00 % 0.0050 June 29, 2015 December 29, 2015 25,000 6.00 % 0.0050 September 18, 2015 March 18, 2016 25,000 6.00 % 0.0020 April 20,2015 April 20, 2016 23,652 6.00 % 0.0032 April 14,2016 October 14, 2016 10,000 6.00 % 0.0010 Balance $ 444,952 Convertible notes payable - related party, in default January 19, 2013 July 30, 2013 $ 15,000 6.00 % 0.0040 January 9, 2009 January 9, 2010 10,000 10.00 % 0.0150 January 25, 2010 January 25, 2011 6,000 6.00 % 0.0050 January 18, 2012 July 18, 2012 50,000 8.00 % 0.0040 July 26, 2013 January 26, 2014 10,000 6.00 % 0.0100 January 17, 2014 July 17, 2014 31,500 6.00 % 0.0060 May 27, 2014 November 27, 2014 7,000 6.00 % 0.0070 July 21, 2014 January 25, 2015 17,000 6.00 % 0.0080 October 16, 2014 April 16, 2015 21,000 6.00 % 0.0045 July 14, 2015 January 14, 2016 9,000 6.00 % 0.0030 January 12, 2016 July 12, 2016 5,000 6.00 % 0.00200 May 10, 2016 November 10, 2016 5,000 6.00 % 0.0005 May 10, 2016 November 10, 2016 5,000 6.00 % 0.0005 May 20, 2016 November 20, 2016 5,000 6.00 % 0.0005 Balance $ 196,500 Notes Payable The following table reflects the notes payable as of December 31, 2015 and 2014: Issue Date Maturity Date 2016 2015 Interest Rate Notes payable, in default –related parties: February 24, 2010 February 24, 2011 $ 7,500 $ 7,500 6.00 % October 6, 2015 November 11, 2015 10,000 10,000 6.00 % 17,500 17,500 Notes payable, in default: June 23, 2011 August 23, 2011 25,000 25,000 6.00 % April 27, 2011 April 27, 2012 5,000 5,000 6.00 % 30,000 30,000 $ 47,500 $ 47,500 Convertible Notes Payable Between January 1, 2015 and December 31, 2015, the Company issued four (4) convertible notes payable totaling $109,000. The notes include interest at 6%. Between January 1, 2016 and December 31, 2016, the Company issued 12 convertible notes payable totaling $104,150. The notes include interest at 6%. The principal amount of the notes and interest is payable on the maturity date. The notes and accrued interest are convertible into common stock at fixed conversion prices. The conversion prices and maturity dates of these notes are detailed in the table in the preceding page. The Company has evaluated the terms and conditions of the convertible notes under the guidance of ASC 815 and other applicable guidance. The conversion feature of four of the notes met the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. The note is convertible into a fixed number of shares and there are no down round protection features contained in the contracts. Since the convertible notes achieved the conventional convertible exemption, the Company was required to consider whether the hybrid contracts embody a beneficial conversion feature. The calculation of the effective conversion amount did result in a beneficial conversion feature. The following tables reflect the aggregate allocation as of December 31: 2016 2015 Face value of convertible notes payable $ 49,750 $ 63,000 Beneficial conversion feature (22,423 ) (17,295 ) Carrying value $ 27,327 $ 45,705 The discounts on the convertible notes arose from the allocation of basis to the beneficial conversion feature. The discount is amortized through charges to interest expense over the term of the debt agreement. For the twelve months ended December 31, 2016 and 2015, the Company recorded interest expense related to the amortization of debt discounts in the amount of approximately $80,600 and $116,000, respectively. At December 31, 2016 and 2015, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $154,790 and $135,581, respectively, and included in accounts payable and accrued expenses on the accompanying balance sheets. Note Conversions A lender who had a convertible promissory note outstanding with a remaining principal balance of $38,000 elected to convert a portion of the principal balance of $14,348 of the note plus accrued interest and late fees of $6,652 into 12,750,000 shares of the Company’s common stock. The remaining principal balance of this note was $23,652 at December 31, 2016. A lender elected to convert the entire principal balance of $15,000 of a convertible promissory note into 30,000,000 shares of the Company’s common stock. The remaining principal balance of this note was $0 at December 31, 2016. A lender agreed to accept 7,000,000 shares of common stock to settle the remaining principal balance of $7,000 of a promissory note. As of December 31, 2016 the remaining principal balance of this note was $0 and no accrued interest was due to the lender. Convertible Notes Payable and Notes Payable, in Default The Company does not have additional sources of debt financing to refinance its convertible notes payable and notes payable that are currently in default. If the Company is unable to obtain additional capital, such lenders may file suit, including suit to foreclose on the assets held as collateral for the obligations arising under the secured notes. If any of the lenders file suit to foreclose on the assets held as collateral, then the Company may be forced to significantly scale back or cease its operations which would more than likely result in a complete loss of all capital that has been invested in or borrowed by the Company. The fact that the Company is in default of several promissory notes held by various lenders makes investing in the Company or providing any loans to the Company extremely risky with a very high potential for a complete loss of capital. The convertible notes that have been issued by the Company are convertible at the lender’s option. These convertible notes represent significant potential dilution to the Company’s current shareholders as the convertible price of these notes is generally lower than the current market price of the Company’s shares. As such when these notes are converted into shares of the Company’s common stock there is typically a highly dilutive effect on current shareholders and very possible that such dilution may significantly negatively affect the trading price of the Company’s common stock. Shareholder Loans At December 31, 2016 the Company had three loans outstanding to its CEO totaling $22,683, consisting of a loan with a remaining principal balance of 19,983 with a 6% annual rate of interest, a loan in the amount of $1,200 at 6% rate of interest and an option to convert the loan into restricted shares of the Company’s common stock at $0.002, and a loan in the amount of $1,500 at a rate of 2% interest. Convertible Notes Payable and Notes Payable, in Default Convertible Notes Payable at Fair Value Convertible Note Payable Dated August 28, 2015 at Fair Value On August 28, 2015 the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $44,000, including a $4,000 of original issue discount, bears interest at 12.0% per annum and is due on August 28, 2016. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 62% multiplied by the lowest closing bid price for the Company’s common stock during the twenty (20) trading day period including the day the notice of conversion is received by the Company. If the Company’s market capitalization is less than $1,000,000 on the day immediately prior to the date of the notice of conversion, then the conversion price shall be 25% multiplied by the lowest closing price as of the date notice of conversion is given and if the closing price of the Company’s common stock on the day immediately prior to the date of the notice of conversion is less than $0.00075 then the conversion price shall be 25% multiplied by the lowest closing price as of the date a notice of conversion is given. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price. In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4. In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $76,210 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a $76,210 loss on the derivative financial instrument. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares. During the period ended December 31, 2016, the principal balance and accrued interest was converted into 54,561,311 shares of common stock. Convertible Note Payable Dated September 3, 2015 at Fair Value On September 3, 2015 the Company entered into a convertible note payable with a corporation. The note payable in the amount of $38,500, including a $3,500 original issue discount, and bears interest at 12.0% per annum and is due on September 3, 2017. According to the terms of the note, the Company was eligible to utilize up to $200,000 of credit under the note, with potential proceeds received of $180,000, however at the time the Company elected to borrow only the $38,500. Any additional amount borrowed under this note would require approval of both the Company and the lender. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 65% multiplied by the lowest trade price for the Company’s common stock in the twenty-five (25) trading day period previous to the conversion. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price. In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4. In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $42,308 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a $29,789 loss on the derivative financial instrument. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares. During the period ended December 31, 2016, the principal balance and accrued interest was converted into 86,597,589 shares of common stock. Convertible Note Payable Dated September 8, 2015 at Fair Value On September 8, 2015, the Company entered into a convertible note payable with a corporation. The convertible note payable, with a face value of $27,000, bears interest at 8.0% per annum and is due on September 8, 2016. The note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 65% multiplied by the lowest closing bid price for the Company’s common stock during the fifteen (15) trading day period including the day the notice of conversion is received by the Company. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price. In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4. In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $16,690 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, Company was required to record a $16,690 loss on the derivative financial instrument. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares. During the period ended December 31, 2016, the principal balance and accrued interest was converted into 50,268,153 shares of common stock. Convertible Note Payable Dated December 15, 2015 at Fair Value On December 15, 2015 the Company entered into a convertible note payable with a corporation. The note payable in the amount of $27,500, including a $2,500 original issue discount, and bears interest at 12.0% per annum and is due on September 3, 2017. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 65% multiplied by the lowest trade price for the Company’s common stock in the twenty-five (25) trading day period previous to the conversion. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price. In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4. In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $29,789 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a $29,789 loss on the derivative financial instrument. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares. During the period ended December 31, 2016, the principal balance and accrued interest was converted into 53,181,384 shares of common stock. Convertible Note Payable Dated March 24, 2016 at Fair Value On March 24, 2016 the Company entered into a convertible note payable with a corporation. The note payable, with a face value of $33,000, including a $3,000 of original issue discount, bears interest at 12.0% per annum and is due on March 24, 2017. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 62% multiplied by the lowest closing bid price for the Company’s common stock during the twenty-five (25) trading day period including the day the notice of conversion is received by the Company. If the Company’s market capitalization is less than $1,000,000 on the day immediately prior to the date of the notice of conversion, then the conversion price shall be 25% multiplied by the lowest closing price as of the date notice of conversion is given and if the closing price of the Company’s common stock on the day immediately prior to the date of the notice of conversion is less than $0.0009 then the conversion price shall be 25% multiplied by the lowest closing price as of the date a notice of conversion is given. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price. In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4. In connection with the issuance of the convertible note payable, during the three month period ended March 31, 2016 the Company recognized day-one derivative loss totaling $32,210 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, during the three month period ended March 31, 2016 the Company was required to record a $102,882 loss on the derivative financial instrument and is included in interest expense. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares. During the period ended December 31, 2016, the principal balance and accrued interest was converted into 69,091,471 shares of common stock. |