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Note 6 - Notes Payable

6 Months Ended

Jun. 30, 2014

NOTE 6 – NOTES PAYABLE

Our notes payable consisted of the following at:

	June 30, 2014	December 31, 2013
Convertible notes payable to SV, non-interest bearing, payable September 30, 2012, currently in default	$ 500,000	$ 500,000
Convertible note payable to SV, non-interest bearing, payable September 30, 2012, currently in default	413,223	413,223
Note payable to Pinnacle, non-interest bearing, payable in scheduled monthly payments ranging from $15,000 to $30,000 through August 2012, currently in default	190,000	190,000
Convertible note payable to Pinnacle, non-interest bearing, payable October 31, 2013, currently in default	250,000	250,000
Note payable to an equipment supplier, extinguished in 2014	-	175,457
Convertible notes payable to an institutional investor, net of discount, repaid in 2014	-	32,444

	$ 1,353,223	$ 1,561,124

Convertible Notes Payable to Institutional Investor

On June 4, 2013, August 22, 2013, November 5, 2013, and November 15, 2013, we entered into convertible promissory notes payable to an institutional investor (“investor”) for $42,500, $32,500, $15,575, and $11,000, respectively, (“Convertible Notes”), which bore interest at an annual rate of 8% and were to mature on March 6, 2014, May 27, 2014, August 7, 2014, and August 19, 2014, respectively. The investor had the right, after the first 180 days of the notes, to convert the Convertible Notes and accrued interest in whole or in part into shares of our common stock at a price per share equal to 58% (representing a discount rate of 42%) of the average of the lowest three trading prices for our common stock during the ten trading day period ending one trading day prior to the date of the conversion notice.

At any time for the period beginning on the date of the Convertible Notes and ending on the date which is 30 days following the date of the Convertible Notes, we had the option to prepay the Convertible Notes upon payment of an amount equal to the outstanding principal multiplied by 110%, together with accrued and unpaid interest. The amount of the prepayment increased every subsequent 30 days to 115%, 120%, 125%, 130% and 135% of the outstanding principal together with accrued and unpaid interest. After the expiration of 180 days following the date of the Convertible Notes, we had no right of prepayment.

At the inception of the June 4, 2013 Convertible Note of $42,500, we recorded debt issuance costs of $3,000 and a debt discount and a derivative liability of $42,093 related to the conversion feature. In December 2013, we paid $14,815 principal and, in December 2013 and January 2014, the investor converted $27,685 principal and $1,700 accrued interest into shares of our common stock, extinguishing the obligation in full.

At the inception of the August 22, 2013 Convertible Note, we recorded debt issuance costs of $3,000, a debt discount of $32,500 and a derivative liability of $55,894 related to the conversion feature. In February 2014, we extinguished the obligation in full by payment of $32,500 principal and $1,268 in accrued interest.

At the inception of the November 5, 2013 Convertible Note, we recorded debt issuance costs of $1,500, a debt discount of $15,575 and a derivative liability of $35,765 related to the conversion feature. In February 2014, we extinguished the obligation in full by payment of $15,575 principal and $369 in accrued interest.

At the inception of the November 15, 2013 Convertible Note, we recorded debt issuance costs of $1,500, a debt discount of $11,000 and a derivative liability of $17,238 related to the conversion feature. In February 2014, we extinguished the obligation in full by payment of $11,000 principal and $236 in accrued interest.

Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the Convertible Notes and totaled $12,626 for the six months ended June 30, 2014.

During the six months ended June 30, 2014, we had the following activity in the accounts related to the Convertible Notes:

	Derivative Liability	Debt Discount	Loss on Derivative Liability	Gain on Extinguishment of Debt	Interest Expense

Balance at December 31, 2013	$ 136,765	$ (42,316)	$ -	$ -	$ -
Adjustment to derivative liability	445,881	-	(445,881)	-	-
Amortization of debt discount to interest expense	-	12,626	-	-	(12,626)
Repayment of debt	(582,646)	29,690	-	503,065	-

Balance at June 30, 2014	$ -	$ -	$ (445,881)	$ 503,065	$ (12,626)

In estimating the fair value of the derivative and calculating the adjustment to the derivative liability during the six months ended June 30, 2014, we used the Black-Scholes pricing model with the following range of assumptions:



Risk-free interest rate	0.08 –0.025%
Expected life in years	0.48 - 0.12
Dividend yield	0%
Expected volatility	274.75 – 376.38%

Other Notes Payable

The two convertible notes payable to Sala-Valc S.A.C., a Peruvian corporation (“SV”), resulted from an Amendment to Mining Asset Purchase and Strategic Alliance Agreement related to mineral properties in Peru.

The two notes payable to Pinnacle Minerals Corporation (“Pinnacle”) resulted from an Amendment to Membership Interest Purchase Agreement whereby we purchased Pinnacle’s membership interest in Molyco, LLC, which owns or controls portions of mineral properties in Peru. Pinnacle has initiated legal action related to these unpaid obligations (see Note 13).

The parties involved in the mineral property projects in Peru were not able to finalize the transfer agreements to be filed with Peruvian governmental authorities to affect the transfer to us of the mineral properties in Peru. We have therefore discontinued our efforts in Peru, and the ultimate disposition of the convertible notes payable to SV and the notes payable to Pinnacle is dependent on our resolution of our dispute with SV and of the legal actions discussed in Note 13. We are currently unable to predict the ultimate outcome of these matters.