| NOTES PAYABLE AND DERIVATIVE LIABILITY | NOTE 5 – NOTES PAYABLE AND DERIVATIVE
LIABILITY Notes Payable At fiscal year ended December 31, 2017,
the Company had third party notes payable and accrued interest in the amount of $306,445 compared to $338,359 in the prior fiscal
year. The notes included notes to eleven unaffiliated parties at interest rates of between 6% and 10% per year. The notes expire
during the 2015 and 2016 fiscal year and are not secured by collateral of the Company. Several of these notes are in default and
the Company is in communication with the holders to resolve these outstanding issues. The notes are convertible into common stock,
at the election of the holder, at discounts of between 40% and 50%. Two additional notes, totaling $11,250 are convertible into
common stock of the Company at $0.001. Additionally, the Company is carrying $225,200 in notes payable contingent liability representing
three prior notes that are either in dispute or the Company is unable to substantiate. Gain on Discharge of Debt During the fiscal year ended December
31, 2016, the prior CEO, Richard Johnson, converted $273,774 in Accounts Payable to himself, and other payables he was responsible
for, into a note payable. Following this event and Mr. Johnson’s departure, the Company took over control of the note and
subsequently retired the debt in the amount of $273,774, resulting in a gain on discharge of debt on the Statement of Operations. Derivative Liability The Company entered into an agreement
which has been accounted for as a derivative. The Company has recorded a loss contingency associated with this agreement because
it is both probable that a liability had been incurred and the amount of the loss can reasonably be estimated. The
main factors that will affect the fair value of the derivative are the number of the Company’s shares outstanding post acquisition
or post offering and the resulting market capitalization. ASC Topic 815 (“ASC 815”)
requires that all derivative financial instruments be recorded on the balance sheet at fair value. Fair values for exchange traded
securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined
using market based pricing models incorporating readily observable market data and requiring judgment and estimates. The Company issued warrants and has
evaluated the terms and conditions of the conversion features contained in the warrants to determine whether they represent embedded
or freestanding derivative instruments under the provisions of ASC 815. The Company determined that the conversion features contained
in the warrants represent freestanding derivative instruments that meet the requirements for liability classification under ASC
815. As a result, the fair value of the derivative financial instruments in the warrants is reflected in the Company’s balance
sheet as a liability. The fair value of the derivative financial instruments of the warrants was measured at the inception date
of the warrants and each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are
recorded as non-operating, non-cash income or expense at each balance sheet date. The Company valued the conversion features
in its warrants using the Black-Scholes model. The Black-Scholes model values the embedded derivatives based on a risk-free rate
of return of 0.0131%, grant dates at December 31, 2016 and December 31, 2017, the term of the warrant extending 3 years from the
date of a “reverse merger”, conversion of warrant shares is equal to 0.005% of the then outstanding common stock of
the company, the conversion price is $0.001, current stock prices on the measurement date ranging from $0.0011 to $0.0135, and
the computed measure of the Company’s stock volatility, ranging from 381% to 417%. Included in the December 31, 2017 and
2016 financial statements is a derivative liability in the amount of $6,842 and $12,492, respectively, to account for this transaction.
It is revalued quarterly henceforth and adjusted as a gain or loss to the consolidated statements of operations depending on its
value at that time. Included in our Consolidated Statements
of Operations for the years ended December 31, 2016 and 2015 are $5,649 and $(11,810) in change of fair value of derivative in
non-cash charges pertaining to the derivative liability as it pertains to the gain (loss) on derivative liability and debt discount,
respectively. Derivative Liability
December 31, 2017 December 31, 2016
Estimated number of underlying shares 1,101,060 937,515
Estimated market price per share $ 0.00 $ 0.00
Exercise price per share $ 0.00 $ 0.00
Expected volatility 417 % 381 %
Expected dividends 0 % 0 %
Expected term (in years) 3.00 3.00 The following presents the Company’s
fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at December 31, 2017. These items
are included in “derivative liability” on the consolidated balance sheet.
Fair Value Measurements on a Recurring Basis
Level 1 Level 2 Level 3 Total
December 31, 2016
Liabilities:
Derivative liability $ — $ — $ 12,492 $ 12,492
Total liabilities at fair value $ — $ — $ 12,492 $ 12,492
December 31, 2017
Liabilities:
Derivative liability $ — $ — $ 6,842 $ 6,842
Total liabilities at fair value $ — $ — $ 6,842 $ 6,842 The main factors that will affect the
fair value of the derivative are the number of shares outstanding post acquisition or post offering and the resulting market capitalization.
In order to estimate a range for the potential contingent liability, the Company estimated the future number of surviving shares
and resulting market cap from a reverse merger based on a sample of reverse mergers completed by OTCBB companies during 2017 and
2016. The following is a reconciliation of
the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) during the years ended December 31, 2017 and 2016:
2017 2016
Beginning balance, January 1, $ (12,491 ) $ (681 )
Total gains (losses) included in earnings 5,649 (11,810 )
Ending balance, December 31, $ (6,842 ) $ (12,491 ) |
