Convertible Notes Payable and Derivative Liabilities Related Party

3 Months Ended

Jun. 30, 2014

Notes

Convertible Notes Payable and Derivative Liabilities Related Party

NOTE 3 CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES RELATED PARTY

On April 30, 2013 the Company issued two 9.9% convertible notes in the principal of $720,000 and $120,000 (the "Note"), respectively, two related parties.

The notes bear interest at the rate of 9.9% per annum. All interest and principal must be due on April 30, 2014 and is in default. The Note is convertible on or after April 30, 2014 and prior to full payment of principal and interest hereunder, at the Lender option, at a 50% discount to the average closing bid price for the previous three (3) trading days prior to the conversion as Trading Day is defined in the Note. The company may prepay this Debenture at any time without penalty.

The Company has determined that the conversion feature of the Notes represent an embedded derivative since the Notes is convertible into a varible number of shares upon conversion. Accordingly, the Notes are 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 balance sheet with the corresponding amount recorded as a discount to the Notes. Such discount was authorized from the grant date to the maturity date of the Notes. The change in the fair value of the derivative liability is recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. The embedded conversion feature included in the Notes resulted in an initial debt discount of $720,000 and 120,000 respectively based on the initial fair value of the derivative liability of $1,517,737 and 252,956, respectively. The fair value of the embedded derivative liability was calculated at grant date utilizing the following assumptions:

			Assumed	Market
			Conversion	Price on	Volatility	Risk-Free
Grant Date	Fair Value	Term Yrs	Price	Grant Date	Percentage	Rate
4/30/2013	$1,517,737	1	$0.0019	$0.0039	780%	0.11%
4/30/2013	$252,956	1	$0.0019	$0.0039	780%	0.11%

At June 30, 2014, the Company revalued the embedded derivative liability. For the period from the grant date to June 30, 2014, the balance of derivative liability of these two convertible notes were decreased by $532,928 to $1,200,000 and decreased by $88,221 to 700,000 respectively.

The fair value of the embedded derivative liability was calculated at June 30, 2014 utilizing the following assumptions:

		Assumed
		Conversion	Volatility	Risk-Free
Fair Value	Terms Years	Price	Percentage	Rate
$700,000	0.01	$0.0004	827%	0.02%
$1,200,000	0.01	$0.0004	827%	0.02%

The carrying value of the Notes was $700,000 and $1,200,000, respectively, as of June 30, 2014, net of unamortized discount of $0 and $0, respectively. The company recorded amortization of the debt discount in the amount total of $280,000 during the six months ended June 30, 2014. The accrued interest related to this notes for the six months ended June 30, 2014 is $83,153 and $133,859 respectively.