CONVERTIBLE DEBT

3 Months Ended

Jun. 30, 2013

Investments, Debt and Equity Securities [Abstract]

CONVERTIBLE DEBT

NOTE 6 – CONVERTIBLE DEBT

In December 2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due (the “Guaranty Note”) to a Company that is affiliated with a former officer of the Company. Terms of the note included an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note had the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. The beneficial conversion feature included in the Guaranty Note resulted in an initial debt discount and derivative liability of $36,765.

During the year ended December 31, 2012, the company made payments of $18,000, reducing the balance of the Guaranty Note to $32,000 as of December 31, 2012. As of December 31, 2012 the Company revalued the remaining conversion feature of the Guaranty Note at $13,209. On March 31, 2013 the Company and the noteholder elected to convert the remaining $32,000 balance of the note and accrued and unpaid interest of $6,060 into 3,699,280 shares of common stock. The fair value of derivative liability on the date of conversion totaling $13,209 was reclassed to additional paid in capital.

On November 28, 2012 the Company entered into a $23,500 convertible note agreement (the 2012 Note) with Asher Enterprises, Inc. (“Asher”). We received net proceeds of $20,000 from the 2012 Note after debt issuance costs of $2,500 paid for lender legal fees. These debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $1,370 and $2,203 has been expensed as debt issuance costs (included in interest expense) for the three and six months ended June 30, 2013.

The Company determined that the conversion feature of the 2012 Note represents an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the Note is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount will be amortized from the date of issuance to the maturity dates of the Note. The change in the fair value of the liability for derivative contracts will be recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in the 2012 Note resulted in an initial debt discount of $23,500 and an initial loss on the valuation of derivative liabilities of $1,826 for a derivative liability initial balance of $25,326.

As of December 31, 2012, the Company revalued the embedded conversion feature of the November 2012 Note. For the period from November 28, 2012 through December 31, 2012, the Company increased the derivative liability of $25,326 by $55 resulting in a derivative liability balance of $25,381. As of March 31, 2013 the Company revalued the embedded conversion feature of the November 2012 Note and for the period from December 31, 2012 to March 31, 2013, the Company decreased the derivative liability of the 2012 Note by $11 resulting in a derivative liability balance of $25,370. During the quarter ended June 30, 2013, the Company issued 1,210,273 shares of common stock in satisfaction of the convertible note and $940 of accrued and unpaid interest. The shares were issued at approximately $0.02 per share. The fair value of derivative liability on the date of conversion totaling $25,382 was reclassed to additional paid in capital.

On January 2, 2013, February 11, 2013 and April 10, 2013, the Company entered convertible note agreements (the 2013 Notes) with Asher for $37,500, $27,500 and $27,500, respectively. We received net proceeds of $85,000 from the 2013 Notes after debt issuance costs of $7,500 paid for lender legal fees. These debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $2,333 and $3,620 has been expensed as debt issuance costs (included in interest expense) for the three and six months ended June 30, 2013. The beneficial conversion feature included in the 2013 Notes resulted in an initial debt discount of $92,500 and an initial loss on the valuation of derivative liabilities of $17,210 for a derivative liability initial balance of $109,710.

The fair value of the embedded conversion features of the 2013 Notes was calculated at each issue date utilizing the following assumptions:

Issuance Date	Fair Value		Term		Assumed Conversion Price		Market Price on Grant Date		Expected Volatility Percentage			Risk free Interest Rate
1/3/13	$	40,476		9 months	$	0.009	$	0.0179		158	%		0.12	%
2/11/13		29,761		9 months	$	0.0439	$	0.0884		172	%		0.11	%
4/10/13		39,473		9 months	$	0.0311	$	0.045		171	%		0.15	%

9

As of June 30, 2013 the Company revalued the embedded conversion feature of the 2013 Notes. From their dates of issuance, the Company increased the derivative liability of the 2013 Notes by $13,082 resulting in a derivative liability of $122,792. The fair value of the 2013 Notes was calculated at June 30, 2013 utilizing the following assumptions:

Note Issuance Date	Fair Value		Term		Assumed Conversion  Price		Expected Volatility Percentage			Risk free Interest Rate
1/3/13	$	50,335		3 months	$	0.0217		155	%		0.02	%
2/11/13		36,912		4 months		0.0217		155	%		0.06	%
4/18/13		35,545		6 months		0.0217		155	%		0.11	%

The inputs used to estimate the fair value of the derivative liabilities are considered to be level 2 inputs within the fair value hierarchy.

A summary of the derivative liability balance as of December 31, 2012 and June 30, 2013 is as follows:

Fair Value	Derivative Liability Balance 12/31/12		Initial Derivative Liability			Redeemed Convertible Notes			Fair value change- six months ended 6/30/13		Derivative Liability Balance 6/30/13
Guaranty Note	$	13,209		—		$	(13,209	)		—		—
2012 Note		25,381		—			(25,381	)		—		—
2013 Notes		—		109,710						13,082		122,792
Total	$	38,590	$	109,710	*	$	(38,590	)	$	13,082	$	122,792

*Comprised of $92,500, the discount on the face value of the convertible note and the initial derivative liability expense of $17,210 which is included in the derivative liability expense of $30,293 on the condensed statement of operations for the six months ended June 30, 2013, included herein.

On May 20, 2013, the Company entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of an 8% convertible note in the principal amount of up to $667,500 (which includes Typenex legal expenses in the amount of $7,500 and a $60,000 original issue discount) (the “Company Note”) for $600,000, consisting of $100,000 paid in cash at closing (May 21, 2013) and five secured promissory notes, aggregating $500,000, bearing interest at the rate of 8% per annum. The first note was funded on June 13, 2013 and the four remaining notes each maturing sixty (60) days following the occurrence of the Maturity Date (the “Investor Notes”). The Investor Notes may be prepaid, without penalty, all or portion of the outstanding balance along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay Typenex any amounts on the unfunded portion of the Note.

The Note bears interest at the rate of 8% per annum. All interest and principal must be repaid on June 16, 2014. The Note is convertible into common stock, at Typenex’s option, at a price of $0.055 per share. In the event the Company elects to prepay all or any portion of the Note, the Company is required to pay to Typenex an amount in cash equal to 125% multiplied by the sum of all principal, interest and any other amounts owing.

Typenex has agreed to restrict its ability to convert the Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. The Note is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. The Note also provides for penalties and rescission rights if we do not deliver shares of our common stock upon conversion within the required timeframes.

The Company claims an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act) for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated there under since, among other things, the transaction did not involve a public offering, Typenex is an accredited investor and had access to information about the Company and their investment, Typenex took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.