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Note 7 - Convertible Notes Payable

9 Months Ended

Sep. 30, 2013

NOTE 7 – CONVERTIBLE NOTES PAYABLE

Convertible notes and related derivative liabilities

On February 5, 2013, the Company and Hanover Holding I, LLC (“Hanover”) entered into a Securities Purchase Agreement, providing for the issuance of the 12% Convertible Promissory Note in the principal amount of $27,000. The 12% convertible promissory note and all accrued interest were due on October 5, 2013. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the note is paid. Hanover is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of Common Stock equal to a price which is a 70% discount from the average of the two (2) lowest Daily VWAPs in the 10 days prior to the day that Hanover requests conversion, unless otherwise modified by mutual agreement between the Parties (the "Conversion Price"). The Note has a Flex Floor at $0.0225 (the “Original Floor”). If the stock goes below the Original Floor, the stock has 10 business days during which the stock must close above the Original Floor for three consecutive trading days in order to maintain the Original Floor. If the stock is unable to meet these requirements after these 10 business days, a New Floor is set equivalent to 50% of the lowest trading price in the same 10 business days (the "New Floor").If the stock price dips below the New Floor, the stock will once again have l0 business days during which the stock must close above the New Floor for three consecutive trading days in order to maintain the New Floor. The stock will have to continue to maintain a price above the New Floor. If the price is unable to close above the New Floor for three consecutive trading days in 10 business days after the price has dipped, the Flex Floor will be eliminated. If the Company’s common stock is chilled for deposit at DTC and/or becomes chilled at any point while this Agreement remains outstanding, an additional 8% discount will be attributed to the Conversion Price defined hereof. The Company determined that the conversion feature of the 12% convertible promissory note represents an embedded derivative since the note is convertible into a variable number of shares. Accordingly, the 12% convertible note was not considered to be conventional debt and the embedded conversion feature was required to be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, on February 5, 2013, the fair value of this derivative instrument of $35,502 was recorded as a liability on the accompanying unaudited condensed consolidated balance sheets. Any gains and losses recorded from changes in the fair value of the liability for derivative contracts was recorded as a component of other income/(expense) in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). On September 17, 2013, the principal amount of $10,000 of this note was converted into 1,970,444 shares of the Company’s common stock at the cost basis of $0.005075 per share. During the fourth quarter of fiscal 2013, the rest of outstanding principal amount and all accrued and unpaid interest of the note were converted into 4,016,261 shares of the Company’s common stock at the cost basis of $0.004759 per share.

On February 6, 2013, CD International Enterprises, Inc. (the “CDII”) assigned certain loans and interest it is owed by the Company amounting to $50,952 to Magna Group LLC (“Magna”). In connection with this assignment, the Company and Magna entered into a Securities Purchase Agreement, providing for the issuance of the 6% Convertible Promissory Note (the “Magna Note”) in the principal amount of $50,952. The 6% convertible promissory note and all accrued interest were due on February 6, 2014. Magna is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of Common Stock equal to a price which is a 30% discount from the average of the two (2) lowest Daily VWAPs in the 10 days prior to the day that Magna requests conversion, unless otherwise modified by mutual agreement between the Parties (the "Conversion Price"). Magna will have a one-time Conversion Price to be used upon the first conversion of the Note that is equal to a price which is a 30% discount from the lowest Daily VWAP in the 10 days prior to the day that Magna requests conversion. The Note has a Flex Floor at $0.0225 (the “Original Floor”). If the stock goes below the Original Floor, the stock has 10 business days during which the stock must close above the Original Floor for three consecutive trading days in order to maintain the Original Floor. If the stock is unable to meet these requirements after these 10 business days, a New Floor is set equivalent to 50% of the lowest trading price in the same 10 business days (the "New Floor"). If the stock price dips below the New Floor, the stock will once again have l0 business days during which the stock must close above the New Floor for three consecutive trading days in order to maintain the New Floor. The stock will have to continue to maintain a price above the New Floor. If the price is unable to close above the New Floor for three consecutive trading days in 10 business days after the price has dipped, the Flex Floor will be eliminated. If the Company’s common stock is chilled for deposit at DTC and/or becomes chilled at any point while this Agreement remains outstanding, an additional 8% discount will be attributed to the Conversion Price defined hereof. In February 2013, the entire outstanding principal amount and all accrued and unpaid interest was converted into 1,047,852 and 1,373,035 shares of Company’s common stock at the cost basis of $0.02863 per share and $0.01526 per share, respectively. The Company determined that the conversion feature of the convertible debentures represents an embedded derivative since the debentures are convertible into a variable number of shares. Accordingly, the 6% convertible note was not considered to be conventional debt and the embedded conversion feature was required to be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, on February 6, 2013, the fair value of this derivative instrument of $78,542 was recorded as a liability on the accompanying unaudited condensed consolidated balance sheets. Any gains and losses recorded from changes in the fair value of the liability for derivative contracts was recorded as a component of other income/ (expense) in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

On August 8, 2013, the Company and LG Capital Funding LLC (“LG”) entered into a note purchase agreement, providing for the issuance of an 8% convertible note in the principal amounts of $51,500. In connection with the convertible promissory note, the Company paid a fee of $5,500 and received net cash proceed of $46,000. The principal amount and accrued interest of note are due on April 8, 2014. Any amount of principal or interest on the note which is not paid when due shall bear interest at the rate of 22% per annum from the due date thereof until the note is paid. LG is entitled, at its option, at any time after the issuance of the note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to a price which is 57% of the average of three lowest trading price in the 10 consecutive trading days prior to the day that LG requests conversion. The Note has a Flex Floor at $0.001 (the “Original Floor”). If the stock goes below the Original Floor, the stock has 10 business days during which the stock must close above the Original Floor for three consecutive trading days in order to maintain the Original Floor. If the stock is unable to meet these requirements after these 10 business days, a New Floor is set equivalent to 50% of the lowest trading price in the same 10 business days (the "New Floor"). If the stock price dips below the New Floor, the stock will once again have l0 business days during which the stock must close above the New Floor for three consecutive trading days in order to maintain the New Floor. The stock will have to continue to maintain a price above the New Floor. If the price is unable to close above the New Floor for three consecutive trading days in 10 business days after the price has dipped, the Flex Floor will be eliminated. The Company determined that the conversion feature of the 8% convertible promissory note represents an embedded derivative since the note is convertible into a variable number of shares. Accordingly, the 8% convertible note was not considered to be conventional debt and the embedded conversion feature was required to be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, on August 8, 2013, the fair value of this derivative instrument of $82,209 was recorded as a liability on the accompanying unaudited condensed consolidated balance sheets. Any gains and losses recorded from changes in the fair value of the liability for derivative contracts was recorded as a component of other income/(expense) in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

The fair value of the derivative liabilities were estimated using the Black-Scholes-Merton option pricing model with the following assumptions:

Dividend rate		0
Term (in years)		0.04 to 1 year
Volatility		318% to 389%
Risk-free interest rate		0.01% to 0.14%

At September 30, 2013, and on the initial measurements of the derivative liabilities, and on the conversion dates of these convertible notes, the Company valued the derivative liabilities resulting in a loss in fair value of derivative liabilities of $11,658 for the nine months ended September 30, 2013. For the nine months ended September 30, 2013, amortization of debt discounts related to these convertible notes amounted to $89,374, which has been included in interest expense on the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

Other convertible notes

On April 8, 2013, the Company issued a 4% convertible note of the Company in the aggregate principal amount of $82,143 to its consultant CDII in connection with the exchange for working capital advances due to CDII in 2012 and prior to this convertible note. Pursuant to this convertible note, CDII was entitled, at its option, at any time after the issuance of this note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to a price which is 80% of the lowest VWAP in the 10 consecutive trading days prior to the day that CDII requests conversion. On May 21, 2013, this note was fully converted into 3,422,617 shares of the Company’s common stock at a conversion price is $0.024 per share.

On April 18, 2013, CDII assigned certain notes payable and the related accrued interest due to CDII amounting to $77,700 to Magna and Magna and the Company entered into an Assignment and Modification Agreement in connection with the issuance of a 6% convertible note of the Company to Magna in the aggregate principal amount of $77,700. The principal amount and its interest were due on January 18, 2014. Magna is entitled, at its option, at any time after the issuance of this note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of Common Stock equal to a price which is 70% of the lowest VWAP in the 10 consecutive trading days prior to the day that Magna requests conversion. In May and June 2013, this Note was fully converted into 7,629,231 shares of the Company’s common stock at an average conversion price is $0.01018 per share.

On May 24, 2013, the Company, CDII and CFO Oncall, Inc (“CFO Oncall”) entered into an assignment agreement, in which CDII assigned to CFO Oncall a note payable originally dated December 19, 2009 of $20,000 and accrued interest of $1,906 for an aggregate amount of $21,906 to CFO Oncall, and the Company issued a 4% Convertible Promissory Note in the principal amount of $21,906 to CFO Oncall. CFO Oncall was entitled, at its option, at any time after the issuance of this note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to $0.0114. On June 25, 2013, this note has been fully converted into 1,921,590 shares of the Company’s common stock. The convertible note was considered to have an embedded beneficial conversion feature (“BCF”) because the effective conversion price was less than the fair value of the Company’s common stock. The value of the beneficial conversion feature was $21,906 and was recorded as interest expense on the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

On May 29, 2013, the Company, CDII and Magna entered into an assignment agreement, in which CDII sold a series of notes owed to it by the Company to Magna with the aggregate principal amount of $108,000 and accrued interest of $10,030, and the Company issued a 6% convertible promissory note in the principal amount of $118,030 to Magna. The principal amount and its interest were due on January 29, 2014. Magna is entitled, at its option, at any time after the issuance of this note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to a price which is 70% of the lowest 2 daily VWAPs in the 10 consecutive trading days prior to the day that Magna requests conversion. On June 26, 2013, $45,000 of this note was converted into 4,952,449 shares of the Company’s common stock at a conversion price of $0.009 per share. On July 12, 2013, $15,000 of this note was converted into 2,031,144 shares of the Company’s common stock at a conversion price of $0.007385 per share. On July 30, 2013, $15,000 of this note was converted into 2,747,253 shares of the Company’s common stock at a conversion price of $0.00546 per share. On August 8, 2013, $15,000 of this note was converted into 2,747,253 shares of the Company’s common stock at a conversion price of $0.00546 per share. On August 14, 2013, $18,000 of this note was converted into 3,361,345 shares of the Company’s common stock at a conversion price of $0.005355 per share. On August 27, 2013, the remaining balance of principal of $10,030 and accrued and unpaid interest of $582 was converted into 1,919,025 shares of the Company’s common stock at a conversion price of $0.00553 per share.

On June 12, 2013, the Company, CDII and Iconic Holdings, LLC (“Iconic”) entered into a series of agreements, in which Iconic purchased from CDII a $30,000 note that the Company owed to CDII dated October 2, 2011 and interest payable of $3,300, and the Company issued a 10% Convertible Promissory Note in the principal amount of $33,000 to Iconic. The 10% convertible promissory note and all accrued interest are due on June 12, 2014. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the lower rate of twenty percent (20%) per annum or the highest rate permitted by law from the due date thereof until the note is paid. Iconic is entitled, at its option, at any time after the issuance of this note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of Common Stock equal to a price which is 70% of the lowest trading price in the 10 consecutive trading days prior to the day that Iconic requests conversion. On July 16, 2013, $7,517 of this note was converted into 1,167,244 shares of the Company’s common stock at a conversion price of $0.00644 per share. On July 31, 2013, $23,907 of this note was converted into 4,553,711 shares of the Company’s common stock at a conversion price of $0.00525 per share. At September 30, 2013, principal amount due under this convertible note was $1,576.

On June 12, 2013, the Company, CDII and Iconic entered into a series of agreements, in which Iconic purchased from CDII a $50,000 note dated December 2, 2011 that the Company owed to CDII and interest payable of $2,976, and the Company issued a 10% Convertible Promissory Note in the principal amount of $52,976 to Iconic. The 10% convertible promissory note and all accrued interest were due on June 12, 2014. Any amount of principal or interest on this note which is not paid when due shall bear interest at the lower rate of twenty percent (20%) per annum or the highest rate permitted by law from the due date thereof until the note is paid. Iconic is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of Common Stock equal to a price which is 70% of the lowest trading price in the 10 consecutive trading days prior to the day that Iconic requests conversion. On June 30, 2013, $32,073 of this note was converted into 3,963,786 shares of the Company’s common stock at a conversion price of $0.008 per share. On July 8, 2013, $12,320 of this note was converted into 2,000,000 shares of the Company’s common stock at a conversion price of $0.00616 per share. On July 16, 2013, the remaining balance of $8,583 was fully converted into 1,332,756 shares of the Company’s common stock at a conversion price of $0.00644 per share.

On June 12, 2013, the Company and Iconic entered into two note purchase agreements, providing for the issuance of two 10% convertible note with the principal amount of $17,500 and $27,500 respectively, for an aggregate principal amount of $45,000. In connection with these convertible promissory notes, the Company paid a fee of $6,500 and received net cash proceeds of $38,500. The $6,500 fee paid was reflected as a debt discount to be amortized over the life of the loan. The principal amount and accrued interest of both notes are due on June 12, 2014. Any amount of principal or interest on the notes which is not paid when due shall bear interest at the lower rate of twenty percent (20%) per annum or the highest rate permitted by law from the due date thereof until the notes are paid. Iconic is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to a price which is 60% of the lowest trading price in the 10 consecutive trading days prior to the day that Iconic requests conversion. At September 30, 2013, principal amount due under this convertible note amounted to $45,000.

On August 27, 2013, the Company and JSJ Investments Inc. (“JSJ”) entered into a note purchase agreement, providing for the issuance of a convertible note in the principal amounts of $25,000. The principal amount of the note is due on February 27, 2014. Any amount of principal on the note which is not paid when due shall bear interest at the rate of 10% per annum from the due date thereof until the note is paid. JSJ is entitled, at its option, at any time after the issuance of the note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to a price which is 55% (45% discount) of the average of the three lowest trades on the previous 10 trading days to the date of conversion, with a maximum conversion price equal to that price would be obtained if the conversion were to be made on the date that this note was executed, and shares will not be converted under a price of $0.0005. At September 30, 2013, principal amount due under this convertible note was $25,000.

Pursuant to ASB Topic 470-20-525 (Debt with conversion and other options), since these other convertible promissory notes had fixed conversion percentages ranging from 55% to 80% of the stock price, the Company determined it had a fixed maximum amounts that can be settled for the debt. Accordingly, during the nine months ended September 30, 2013, the Company accrued a put premium amount aggregating $196,267 in this period since the notes are convertible for the conversion premium and recorded a debt discount of $196,267 which is amortized over the life of the respective note. Upon conversion of certain other convertible notes to common stock during the nine months ended September 30, 2013, the Company reduced the put premium by $142,380 and reclassified the same amount to additional paid-in capital. For the nine months ended September 30, 2013, in connection with the amortization of the debt discount, the Company recorded interest expense of $163,458.

At September 30, 2013 and December 31, 2012, convertible promissory notes consisted of the following:

	September 30, 2013	December 31, 2012
Principal amount	$ 140,076	$ 0
Put premium	53,887	0
	193,963	0
Less: unamortized debt discount	(79,387)	0
Convertible note payable, net	$ 114,576	$ 0