NOTE 5 – CONVERTIBLE PROMISSORY NOTES 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 at 10% per annum and are due on the earlier of the close of a $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 June 30, 2014, $53,701 of the debt discount has been amortized during the life of the note. 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 being recorded on the statement of operations and 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 expected term of .40 years. The derivative liability was recalculated at June 30, 2014 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 72.23%, risk free interest rate of 0.12% and expected term of .25 years resulting in a gain on change of derivative liability of $29,201.

During the period ended June 30, 2014, $55,000 of the debt was converted into 1,391,559 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 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 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 June 30, 2014, $5,500 in stock and $5,000 in cash had been satisfied and the remainder due is reflected in accounts 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”). 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 $.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. As of June 30, 2014, the unamortized debt discount was $6,151.

On January 24, 2014, the Company issued and sold a convertible promissory note in the amount of $27,500, bearing interest at 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 re-valued at each of March 31 and June 30, 2014, which totaled $17,252 and $27,008, respectively. 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. As of June 30, 2014, the unamortized balance of the debt discount is $18,895.

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 ($0.08-$0.10), expected dividend yield of 0%, expected volatility of 93.50%, risk-free interest rate of 0.07-0.12%, and expected term of .50-.9167 years.

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 $0.11 per share. On issuance, a debt discount of $22,500 was recorded which is being amortized over the term of the note payable. As of June 30, 2014, the unamortized balance of the debt discount is $12,875.

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 June 30, 2014 for $83,201. 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 ($0.08-$0.10), expected dividend yield of 0%, expected volatility of 93.50%, risk-free interest rate of 0.07-0.12%, and expected term of .75-1.00 year. As the total debt discount on the date of issuance of $68,148 exceeded the face value of the note so a derivative expense of $5,148 was recorded. As of June 30, 2014, the unamortized debt discount was $34,255.

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 which is being amortized over the term of the note payable.

The total debt discount of $ 89,243 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 expected term of 3.00 years. The fair value of the debt discount related to the convertible note was $72,092 and was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.09), expected dividend yield of 0%, expected volatility of 88.7%, risk-free interest rate of 0.12%, and expected term of 1.00 years. The derivative liability was revalued as of June 30, 2014 using the Black-Scholes option pricing model with the following assumptions: our stock price on June 30 ($0.08), expected dividend yield of 0%, expected volatility of 87.74%, risk-free interest rate of .12%, and expected term of .83 years, The derivative liability totaled $110,710 which resulted in a change to the derivative liability of $38,618. As of June 30, 2014, the balance of the unamortized debt discount was $70,000.

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 at 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 .12%, and expected term of 3.00 years. The fair value of the debt discount related to the convertible note was $505,206 and was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on the date of grant ($0.08), expected dividend yield of 0%, expected volatility of 85.45%, risk-free interest rate of 0.12%, and expected term of 1.00 years. 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. As of June 30, 2014, the unamortized balance of the debt discount was $378,000.