On November 15, 2012, we entered into a convertible note agreement with a third party with a principal amount of $150,000. The note was originally convertible at the most recent price we offered or sold common stock in an offering registered with the Securities and Exchange Commission. During September 2013, the note was modified to establish a set conversion price of $0.35 per share. On September 12, 2013, the lender converted the amounts outstanding into an aggregate of 428,571 common shares.

On November 15, 2012, we entered into a convertible note agreement with a third party with a principal amount of $50,000. The note bears interest at the rate of 10% and is due on November 15, 2014. The note was originally convertible at the most recent price we offered or sold common stock in an offering registered with the Securities and Exchange Commission. During September 2013, the note was modified to establish a set conversion price of $1.00 per share.

On June 7, 2013, we entered into a convertible note with a third party in the principal amount of $100,000 which bears interest at the rate of 10% per annum. The note had originally had a due date of June 1, 2014 and was convertible at the most recent price we offered or sold common in an offering registered with the Securities and Exchange Commission. On September 7, 2013, the note was amended to allow the amounts outstanding to be converted into our common stock at the price of $1.00 per share. The note is due on June 1, 2014. As of December 31, 2013, the note had $100,000 of principal outstanding.

Because no registered offering of our common stock has occurred, the two notes described above did not have an effective conversion feature before the modification occurred and thus derivative treatment was not determined. Additionally, there was no beneficial conversion feature associated with the notes prior to their modification. We evaluated the modification using the criteria set forth in ASC Topic 470-50, Debt – Modifications and Extinguishments and we determined that the modification was an extinguishment because there was a substantial modification of terms. However, we did not experience a gain or loss on extinguishment because the fair value of the extinguished notes was the same as the fair value of the modified notes. There was no beneficial conversion feature associated with either of the modified notes because the conversion price equaled or exceeded the cash sales prices of common stock ($0.35 per share) that had occurred before the modification.

We evaluated the conversion features embedded in the modified notes payable for derivative accounting in accordance with ASC 815-40, Derivatives and Hedging – Contracts in Entity’s own stock and concluded that the conversion features meet the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable.

On August 26, 2013, we entered into a note agreement with a third party with a principal amount of $200,000. The note bears interest at the rate of 15% per annum and is due on August 26, 2014. Under the terms of the note, the lender received 250,000 common shares and 500,000 common stock purchase warrants. The warrants are exercisable at the price of $0.75 per share at any time prior to August 26, 2015.

We evaluated the warrants for derivative accounting consideration under ASC Topic 815-40, Derivatives and Hedging – Contracts in Entity’s own stock. We concluded that the warrants meet the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable for the warrants. Accordingly, we allocated the proceeds from the transaction to the debt, stock, and warrants based on their relative fair value. We determined the fair value of the warrants using a Black-Sholes option pricing model with the following inputs:

Risk-free interest rate			0.36%
Dividend yield			0%
Volatility factor			297.25%
Expected life (years)			2.00

The volatility was determined by referring to the average historical volatility of a peer group of public companies because we do not have a trading history from which to determine historical volatility.

The fair value of the investment was allocated among the notes, common stock, and warrant as follows:

Relative fair value of warrants	$	73,217
Relative fair value of stock		38,586
Relative fair value of note payable		88,197

Because the effective conversion price exceeded the price for recent sales of common stock, there was no beneficial conversion feature associated with this note.

The relative fair value of the warrants and stock were recorded as a discount to the notes. These discounts, totaling $111,803, will be amortized and charged to interest expense over the life of the note using the effective interest rate method. As of December 31, 2013, $24,626 of the discount had been amortized. The effective interest rate on the notes, including the discount, is $0.75%.