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CONVERTIBLE NOTES PAYABLE | 9 Months Ended
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Sep. 30, 2013
Payables and Accruals [Abstract] |
CONVERTIBLE NOTES PAYABLE | Note 5: CONVERTIBLE NOTES PAYABLE The following is a summary of debt instrument transactions that are relevant to the current period:
|  | Face Value |  | Principal Repayment/ Settlement/Re-issued |  | Unamortized Note Discount |  | Balance at September 30, 2013
February 2011 Secured Convertible Notes |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Senior Secured Notes, due February 24, 2014 |  | $ | 1,184,694 |  |  | $ | 203,836 |  |  | $ | 53,676 |  |  | $ | 927,182 |
April 2011 Secured Convertible Notes |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Senior Secured Notes, due April 4, 2014 |  |  | 215,000 |  |  |  | — |  |  |  | 17,481 |  |  |  | 197,519 |
June 2011 Secured Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Senior Secured Notes, due June 6, 2014 |  |  | 30,000 |  |  |  | — |  |  |  | 1,885 |  |  |  | 28,115 |
August 8, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due August 8, 2013 |  |  | 111,430 |  |  |  | 111,430 |  |  |  | — |  |  |  | — |
August 12, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note became due November 12, 2012 |  |  | 27,500 |  |  |  | — |  |  |  | — |  |  |  | 27,500 |
August 20, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due August 20, 2013 |  |  | 20,000 |  |  |  | — |  |  |  | — |  |  |  | 20,000 |
September 18, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due October 1, 2013 |  |  | 82,500 |  |  |  | 58,750 |  |  |  | — |  |  |  | 23,750 |
October 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due October 15, 2013 |  |  | 340,000 |  |  |  | — |  |  |  | 13,972 |  |  |  | 326,028 |
October 9, 2012 Convertible Notes |  |  | 100,000 |  |  |  | 100,000 |  |  |  | — |  |  |  | — |
Note due April 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
November 1, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due April 30, 2013 |  |  | 31,471 |  |  |  | 31,471 |  |  |  | — |  |  |  | — |
November 20, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due November 20, 2013 |  |  | 55,710 |  |  |  | 44,962 |  |  |  | — |  |  |  | 10,748 |
December 14, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due April 18, 2013 |  |  | 189,210 |  |  |  | 189,210 |  |  |  | — |  |  |  | — |
December 18, 2012 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due December 14, 2013 |  |  | 50,000 |  |  |  | — |  |  |  | — |  |  |  | 50,000 |
January 5, 2013 Convertible Notes |  |  | 567,729 |  |  |  | 115,000 |  |  |  | — |  |  |  | 452,729 |
February 27, 2013 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due February 27, 2014 |  |  | 58,500 |  |  |  | — |  |  |  | 22,808 |  |  |  | 35,692 |
April 2, 2013 Convertible Notes |  |  | 80,967 |  |  |  | — |  |  |  | — |  |  |  | 80,967 |
April 18, 2013 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due December 18, 2013 |  |  | 60,000 |  |  |  | — |  |  |  | 9,868 |  |  |  | 50,132 |
May 5, 2013 Convertible Notes |  |  | 45,000 |  |  |  | — |  |  |  | — |  |  |  | 45,000 |
May 14, 2013 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due May 14, 2014 |  |  | 126,000 |  |  |  | — |  |  |  | 78,016 |  |  |  | 47,984 |
June 27, 2013 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due June 27, 2014 |  |  | 37,620 |  |  |  | — |  |  |  | 26,571 |  |  |  | 11,049 |
June 19, 2013 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due June 19, 2014 |  |  | 115,000 |  |  |  | 83,000 |  |  |  | 28,325 |  |  |  | 3,675 |
July 12, 2013 Convertible Note |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Note due July 12, 2014 |  |  | 125,000 |  |  |  | 28,200 |  |  |  | 86,114 |  |  |  | 10,686 |
Total |  | $ | 3,653,331 |  |  | $ | 965,859 |  |  | $ | 338,716 |  |  | $ | 2,348,756 |
The following is a summary of debt instrument transactions that are relevant to the previous year:
| Face Value | Principal Repayment/ Settlement | Unamortized Note Discount | Balance at December 31, 2012
February 2011 Secured Convertible Notes |  |  |  |
Senior Secured Notes, due February 24, 2014 | $ 1,184,694 | $ 203,836 | $ 153,358 | $ 827,500
April 2011 Secured Convertible Notes |  |  |  |
Senior Secured Notes, due April 4, 2014 | 215,000 | - | 43,140 | 171,860
June 2011 Secured Convertible Note |  |  |  |
Senior Secured Notes, due June 6, 2014 | 30,000 | - | 3,953 | 26,047
August 8, 2012 Convertible Note |  |  |  |
Note due August 8, 2013 | 111,430 | - | 67,163 | 44,267
August 12, 2012 Convertible Note |  |  |  |
Note became due November 12, 2012 | 27,500 | - | - | 27,500
August 20, 2012 Convertible Note |  |  |  |
Note due August 20, 2013 | 20,000 | - | 12,712 | 7,288
September 18, 2012 Convertible Note |  |  |  |
Note due October 1, 2013 | 82,500 | - | 59,741 | 22,759
October 2012 Convertible Note |  |  |  |
Note due October 15, 2013 | 340,000 | - | 268,275 | 71,725
November 1, 2012 Convertible Note |  |  |  |
Note due April 30, 2013 | 31,471 | - | 18,200 | 13,271
November 20, 2012 Convertible Note |  |  |  |
Note due November 20, 2013 | 55,710 | - | 49,605 | 6,105
December 14, 2012 Convertible Note |  |  |  |
Note due April 18, 2013 | 189,210 | - | 81,302 | 107,908
December 18, 2012 Convertible Note |  |  |  |
Note due December 14, 2013 | 50,000 | - | - | 50,000
Total | $ 2,337,515 | $ 203,836 | $ 757,449 | $ 1,376,230
February 2011 Secured Convertible Notes On February 24, 2011, the Company entered into a securities purchase agreement with accredited investors to place Senior Secured Convertible Notes (the “February 2011 Notes”) with a maturity date of three years after the issuance thereof in the aggregate principal amount of $1,184,694. In connection with the issuance of the February 2011 Notes, the Company entered into a 2011 Security Agreement with the note holders securing the February 2011 Notes with all of the Company’s assets. One year after the issuance of the February 2011 Notes, the note holders have the option to convert a portion or all of the outstanding balance of the February 2011 Notes including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.15 per share. The February 2011 Notes bear interest at the rate of 10% per annum except in case of default, in which case they bear interest at the rate of 20% per annum. The interest is due on the February 2011 Notes at the end of each three month period, starting three months from their issuance. One year after the issuance of the February 2011 Notes, the Company may elect to prepay a portion of the principal. If the Company makes such an election, the holders may elect to receive such prepayment in cash or in shares of the Company’s common stock, at a conversion rate of $0.15 per share, or in a combination thereof. The Company paid a finders’ fee of $41,500. The finder’s fee was accounted for as deferred financing costs, and is being amortized over the term of the notes. At September 30, 2013, $4,662 of the $25,084 in deferred financing costs relates to the February 2011 Notes which remains unamortized. In connection with the issuance of the February 2011 Notes, the Company issued 2,369,388 warrants, exercisable into common stock at $0.25 with five year terms. The Company may force the exercise of the warrants at any time that the average volume weighted average price of the Company’s common stock over the prior ten trading days is greater than $0.50, the average daily dollar volume of the Company’s common stock sold over those ten trading days is greater than $25,000 and there is an effective registration statement covering the resale of the shares underlying the warrants. The Company allocated the net proceeds to the warrants based on the calculated fair value at the date of issuance. The fair value of the warrants was recorded at $483,355 and recognized as derivative liabilities and the debt was recorded at $701,339. The debt discount is being accreted over the three year term of the February 2011 Notes using the effective interest rate method. During the year ended December 31, 2012, one of the investors settled the principal amount of $203,836 and accrued interest of $16,419 of the February 2011 Notes in exchange for December 14, 2012 Convertible Note (the “December 14, 2012 Note”). For the nine months ended September 30, 2013, accretion of the debt discount of $99,682 was recorded for the February 2011 Notes. April 2011 Secured Convertible Notes On April 4, 2011, the Company entered into a securities purchase agreement with accredited investors to place Senior Secured Convertible Notes (the “April 2011 Notes”) with a maturity date of three years after the issuance thereof in the aggregate principal amount of $215,000. In connection with the issuance of the April 2011 Notes, the Company entered into a 2011 Security Agreement with the note holders securing the April 2011 Notes with a secondary security interest in all of the Company’s assets. One year after the issuance of the April 2011 Notes, the note holders have the option to convert a portion or all of the outstanding balance of the April 2011 Notes including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.15 per share. The April 2011 Notes bear interest at the rate of 10% per annum except in case of default, in which case they bear interest at the rate of 20% per annum. The interest is due on the April 2011 Notes at the end of each three month period, starting three months from their issuance. One year after the issuance of the April 2011 Notes, the Company may elect to prepay a portion of the principal. If the Company makes such an election, the holders may elect to receive such prepayment in cash or in shares of the Company’s common stock, at a conversion rate of $0.15 per share, or in a combination thereof. The Company paid a finders’ fee of $4,550. The finder’s fee was accounted for as deferred financing costs, and is being amortized over the term of the notes. At September 30, 2013, $756 of the $25,084 in deferred financing costs relates to the April 2011 Notes. In connection with the issuance of the April 2011 Notes, the Company issued 430,000 warrants, exercisable into common stock at $0.25 with 2 year terms. The Company may force the exercise of the warrants at any time that the average volume weighted average price of the Company’s common stock over the prior ten trading days is greater than $0.50, the average daily dollar volume of the Company’s common stock sold over those ten trading days is greater than $25,000 and there is an effective registration statement covering the resale of the shares underlying the warrants. The Company allocated the net proceeds to the warrants based on the calculated fair value. The fair value of the warrants was recorded at $130,720 and recognized as derivative liabilities and the debt was recorded at $84,280. The debt discount is being accreted over the three year term of the April 2011 Notes using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $25,658 was recorded for the April 2011 Notes. June 2011 Secured Convertible Note On June 6, 2011, the Company entered into a securities purchase agreement with accredited investors to place Senior Secured Convertible Note (the “June 2011 Note”) with a maturity date of three years after the issuance thereof in the aggregate principal amount of $30,000. In connection with the issuance of the June 2011 Note, the Company entered into a 2011 Security Agreement with the note holder securing the June 2011 Note with a secondary security interest in all of the Company’s assets. One year after the issuance of the June 2011 Note, the note holder has the option to convert a portion or all of the outstanding balance of the June 2011 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.15 per share. The June 2011 Note bears interest at the rate of 10% per annum except in case of default, in which case it bears interest at the rate of 20% per annum. The interest is due on the June 2011 Note at the end of each three month period, starting three months from its issuance. One year after the issuance of the June 2011 Note, the Company may elect to prepay a portion of the principal. If the Company makes such an election, the holders may elect to receive such prepayment in cash or in shares of the Company’s common stock, at a conversion rate of $0.15 per share, or in a combination thereof. In connection with the issuance of the June 2011 Note, the Company issued 60,000 warrants, exercisable into common stock at $0.25 with two year terms. The Company may force the exercise of the warrants at any time that the average volume weighted average price of the Company’s common stock over the prior ten trading days is greater than $0.50, the average daily dollar volume of the Company’s common stock sold over those ten trading days is greater than $25,000 and there is an effective registration statement covering the resale of the shares underlying the warrants. The Company allocated the net proceeds to the warrants based on the calculated fair value. The fair value of the warrants was recorded at $8,280 and recognized as derivative liabilities and the debt was recorded at $21,720. The debt discount is being accreted over the three year term of the June 2011 Note using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $2,067 was recorded for the June 2011 Note. August 8, 2012 Convertible Note On August 8, 2012, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “August 8, 2012 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $111,430. Consideration under the notes consisted of $92,000 in cash proceeds after $8,000 payment of finders’ fee and an original issue discount of $11,430. The note holder has the option to convert a portion or all of the outstanding balance of the August 8, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or 70% of the lowest traded price in the 25 trading days prior to conversion. The August 8, 2012 Note carried no interest if the Company repaid the note within 90 days from issuance. If the Company does not repay the note within 90 days, a one-time interest of 5% shall apply to the principal sum. The company did not repay the note within 90 days of issuance and a one-time interest of 5% was accrued in the year ended December 31, 2012. During the nine months ended September 30, 2013, the investor converted the principal amount of $111,430 and accrued interest of the August 8, 2012 Note into common shares (Note 9). The finder’s fee of $8,000 was accounted for as deferred financing costs, and was amortized over the term of the note and has been fully expensed during the current period on the conversion of the debt. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $155,700 and recognized as a derivative liability and the debt was recorded at $nil. The transaction resulted in an accounting loss on debt financing of $55,700. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.19%, dividend yield of 0% and volatility of 139.77%. The debt discount has been accreted up to the dates of conversion using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $67,163 was recorded for the August 8, 2012 Note. August 12, 2012 Convertible Note On August 12, 2012, the Company entered into a securities purchase agreement with accredited investors to place a Convertible Note (the “August 12, 2012 Note”) with a maturity date of three months after the issuance thereof in the aggregate principal amount of $27,500. Consideration under the notes consisted of $25,000 in cash proceeds after an original issue discount of $2,500. The note holder has the option to convert a portion or all of the outstanding balance of the August 8, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or on similar terms as of any future financings with more favorable terms. The agreement provides for the Company to issue 50,000 shares to the note holder as risk premium. The 50,000 shares were valued at $6,250 and recorded as loss on debt financing and obligation to issue shares. The August 12, 2012 Note bears interest at the rate of 10% per annum. The Company allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $31,100 and recognized as a derivative liability and the debt was recorded at $nil. The transaction resulted in an accounting loss on debt financing of $6,100. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of three months, risk free rate of 0.11%, dividend yield of 0% and volatility of 138.31%. The debt discount was accreted over the three month term of the August 12, 2012 Note using the effective interest rate method. The Company has not repaid the August 12, 2012 Note as of September 30, 2013, which is in default. The note is accruing interest rate of 10% per year. August 20, 2012 Convertible Note On August 20, 2012, the Company entered into a securities purchase agreement with accredited investors to place a Convertible Note (the “August 20, 2012 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $20,000. The note holder has the option to convert a portion or all of the outstanding balance of the August 20, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or 70% of the lowest traded price in the 25 trading days prior to conversion. The August 20, 2012 Note bears interest at the rate of 8% per annum. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $36,100 and recognized as a derivative liability and the debt was recorded at $nil. The transaction resulted in an accounting loss on debt financing of $16,100. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.19%, dividend yield of 0% and volatility of 140.11%. The debt discount was accreted over the one year term of the August 20, 2012 Note using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $12,712 was recorded for the August 20, 2012 Note. The Company has not repaid the August 20, 2012 Note as of September 30, 2013, which is in default. The note is accruing interest rate of 8% per year. September 18, 2012 Convertible Note On September 18, 2012, the Company entered into a securities purchase agreement with accredited investors to place a Convertible Note (the “September 18, 2012 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $82,500. Consideration under the notes consisted of $69,000 in cash proceeds after $6,000 payment of finders’ fee and an original issue discount of $7,500. The note holder has the option to convert a portion or all of the outstanding balance of the September 18, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or 70% of the lowest traded price in the 20 trading days prior to conversion. The September 18, 2012 Note carries no interest other than the amortization of the original issue discount. The finder’s fee of $6,000 was accounted for as deferred financing costs, and was amortized over the term of the note which has been fully amortized. During the nine months ended September 30, 2013, the investor converted the principal amount and accrued interest of $75,000 and accrued interest into common shares (Note 9). The balance remaining on the September 18, 2012 Note as on September 30, 2013 was $23,750. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $76,400 and recognized as a derivative liability and the debt was recorded at $nil. The transaction resulted in an accounting loss on debt financing of $1,400. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.20%, dividend yield of 0% and volatility of 141.43%. The debt discount is being accreted over the one year term using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $20,060 was recorded for the September, 2012 Note. October 2012 Convertible Note On October 15, 2012, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “October 2012 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $340,000. Consideration under the notes consisted of $310,000 in cash proceeds after $10,000 payment of legal fee and an original issue discount of $30,000. The note holder has the option to convert a portion or all of the outstanding balance of the October 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.12 per share or to a new lower issuance price if the Company issues shares (or reduces the conversion or exercise price for outstanding debt or warrants) for less than $0.12. The October 2012 Note carries an interest rate of 8% per year. There are seven installment payments due on the note beginning on the seventh month after its issuance and each month thereafter until maturity. The legal fee of $10,000 was accounted for as deferred financing costs, and is being amortized over the term of the note. At September 30, 2013, $411 of the $25,084 in deferred financing costs relates to the October 2012 Note which remains unamortized, and is presented in current assets on the Company’s Balance Sheet. Provided that there is sufficient volume in the trading of the Company’s common stock and other criteria are met, the Company may elect to make any payment due on an installment date in shares of common stock. If the Company elects to make a payment in shares of common stock, the number of shares that the Company issues will be equal to the amount to be converted divided by the lesser of the conversion price or 70% of the average of the three lowest closing bid prices of the shares of common stock during the prior twenty consecutive trading days. Unless otherwise agreed in writing by both parties, at no time will the holder convert any amount of the debenture into common stock that would result in the holder owning more than 4.99% of the common stock outstanding. As part of the agreement, the Company also issued 3,000,000 warrants to the note holder exercisable at $0.25/share expiring on October 31, 2016. The warrants include price adjustment provisions whereby the exercise price will be adjusted downwards based on future grants, which results in a share issuance at a per share amount less than $0.25 per share, or repricing of any existing warrants to a lower price. During the nine months ended September 30, 2013, the investor converted the 3,000,000 warrants under a cashless exercise provision for 1,898,588 shares of common stock (Note 9). The Company has allocated the net proceeds to the conversion option and equity based on the calculated fair value. The fair value of the conversion option was recorded at $248,000 and recognized as a derivative liability and the equity was recorded at $62,000. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.19%, dividend yield of 0% and volatility of 139.16%. The debt discount is being accreted over the one year term of the October 2012 Note using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $254,301 was recorded for the October 2012 Note. October 9, 2012 Convertible Note On October 9, 2012, the Company converted accounts payable of $100,000 into convertible notes (the “October 9, 2012 Note”). The note holder has the option to convert a portion or all of the outstanding balance of the October 9, 2012 Note into shares of the Company’s common stock at a conversion rate of $0.11 per share. The note has no terms of repayment and no interest charges. Only under certain events of default the note will incur an interest rate of 20% per year. During the nine months ended September 30, 2013, the note was amended and assigned to a third party with price adjustment features ratified by the Company and converted into 5,368,956 shares of the Company. The Company recorded $135,527 as loss on settlement of debt (Note 9). November 1, 2012 Convertible Note During the year ended December 31, 2012, the Company converted a promissory note of $100,000 (Note 7) with an accredited investor into three convertible notes totaling $105,000. The three convertible notes were assigned to a third party. In November and December 2012, the holder converted $73,737 of principal and interest into 1,262,727 shares. The Company recorded $66,801 as loss on settlement of debt (Note 9). The third Convertible Note (the “November 1, 2012 Note”) was issued with a maturity date of six months in the aggregate principal amount of $31,471. The note holder has the option to convert a portion or all of the outstanding balance of the November 1, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or 65% of the lowest bid price in the 20 trading days prior to conversion. The November 1, 2012 Note bears interest at the rate of 10% per annum starting on November 15, 2012. If the Company is in default under certain events, the November 1, 2012 Note shall incur interest at the rate of 20% per annum retroactively. The Company had allocated the balance of the November 1, 2012 Note to the conversion option and debt based on the calculated fair value. The fair value of the conversion option was recorded at $27,300 and recognized as a derivative liability and the debt was recorded at $4,171. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of 0.49 year, risk free rate of 0.09%, dividend yield of 0% and volatility of 127.26%. The debt discount was accreted over the 0.49 year term of the November 1, 2012 Note using the effective interest rate method. During the nine months ended September 30, 2013, the investor converted the November 1, 2012 Note and accrued interest into 512,822 common shares (Note 9). For the nine months ended September 30, 2013, accretion of the debt discount of $7,921 was recorded for the November 1, 2012 Note. November 20, 2012 Convertible Note On November 20, 2012, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “November 20, 2012 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $55,710. Consideration under the notes consisted of $50,000 in cash proceeds after $4,000 payment of finder’s fee and an original issue discount of $5,710. The note holder has the option to convert a portion or all of the outstanding balance of the November 20, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or 70% of the lowest traded price in the 25 trading days prior to conversion. The November 20, 2012 Note carried no interest if the Company repaid the note within 90 days from issuance. If the Company does not repay the note within 90 days, a one-time interest of 5% shall apply to the principal sum. The company did not repay the note within 90 days of issuance and a one-time interest of 5% in the current period. The finder’s fee of $4,000 was accounted for as deferred financing costs, and is being amortized over the term of the note. At September 30, 2013, $559 of the $25,084 in deferred financing costs relates to the November 20, 2012 Note. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $69,000 and recognized as a derivative liability and the debt was recorded at $nil. The transaction resulted in an accounting loss on debt financing of $19,000. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.16%, dividend yield of 0% and volatility of 134.71%. The debt discount is being accreted over the one year term of the November 20, 2012 Note using the effective interest rate method. During the nine months ended September 30, 2013, the investor converted the principal amount of $44,962 and accrued interest of the November 20, 2012 Note into 5,600,000 common shares (Note 9). For the nine months ended September 30, 2013, accretion of the debt discount of $39,513 was recorded for the November 20, 2012 Note. December 14, 2012 Convertible Note On December 14, 2012, the Company converted part of the February 2011 Notes in the amount of $220,255 into a convertible note (the “December 14, 2012 Note”) with a maturity date of four months after the issuance thereof in the aggregate principal amount of $252,280. Consideration under the notes consisted of $220,255 from February 2011 Notes, $10,000 payment of legal fee and an original issue discount of $22,025. The December 14, 2012 Note is repayable in four equal installments with accrued interest, starting on January 18, 2013 and subsequently, the same day on each of the following calendar months. The Company can elect to pay the installments in cash or shares of Company’s common stock. The December 14, 2012 Note bears interest at the rate of 8% per annum. In the event of default under certain conditions, the interest will accrue at the rate of 18% per annum. The note holder has the option to convert a portion or all of the outstanding balance of the December 14, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of 70% of the three lowest closing bid prices in the 20 trading days prior to conversion. In December 2012, the December 14, 2012 Note was assigned to a third party and the Company paid the first installment of $65,032 consisting of principal and interest in 1,078,477 shares. The fair value of the shares was determined to be $96,523 based on the quoted market price of $0.09 per share. The Company recorded $31,491 as loss on settlement of debt (Note 9). The Company has allocated the balance of $189,210 of the December 14, 2012 Note to the conversion option and debt based on the calculated fair value. The fair value of the conversion option was recorded at $94,100 and recognized as a derivative liability and the debt was recorded at $95,110. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of 0.35 year, risk free rate of 0.06%, dividend yield of 0% and volatility of 100.88%. The debt discount was being accreted over the 0.45 year term of the December 14, 2012 Note using the effective interest rate method. During the nine months ended September 30, 2013, the investor converted the remaining balance of the note of $189,210 and accrued interest on the December 14, 2012 Note into common shares (Note 9). December 18, 2012 Convertible Note On December 18, 2012, the Company entered into a securities purchase agreement with accredited investors to place convertible notes (the “December 18, 2012 Notes”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $50,000. The note holders have the option to convert a portion or all of the outstanding balance of the December 18, 2012 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.10 per share. The December 18, 2012 Notes carry an interest rate of 9%, due and payable on the maturity date. January 5, 2013 Convertible Notes On January 5, 2013, the Company exchanged amounts due to related parties into convertible notes (the “January 5, 2013 Notes”) with no terms of repayment and no interest charges in the aggregate principal amount of $567,729. The related parties have the option to convert a portion or all of the outstanding balance of the January 5, 2013 Notes into shares of the Company’s common stock at a conversion rate of $0.12 per share. In July, 2013, one of the related parties assigned $115,000 of the convertible note to a third party with amendments to adjustment of conversion price ratified by the Company. As of September 30, 2013, $452,729 of the January 5, 2013 Notes is outstanding. February 27, 2013 Convertible Note On February 27, 2013, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “February 27, 2013 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $58,500. Consideration under the notes consisted of $46,000 in cash proceeds after $4,000 payment of finders’ fee and an original issue discount of $8,500. The note holder has the option to convert a portion or all of the outstanding balance including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or 70% of the lowest traded price in the 25 trading days prior to conversion. The February 27, 2013 Note carries no interest if the Company repays the note within 90 days from issuance. If the Company does not repay the note within 90 days, a one-time interest of 5% shall apply to the principal sum. The company did not repay the note within 90 days of issuance and a one-time interest of 5% was accrued in the current period. The finder’s fee of $4,000 was accounted for as deferred financing costs, and is being amortized over the term of the note. At September 30, 2013, $1,644 of the $25,084 in deferred financing costs relates to the February 27, 2013 Note. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $44,700 and recognized as a derivative liability and the debt was recorded at $5,300. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.17%, dividend yield of 0% and volatility of 123.76%. The debt discount is being accreted over the one year term of the February 27, 2013 Note using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $32,692 was recorded for the February 27, 2013 Note. April 2, 2013 Convertible Note On April 2, 2013, the Company exchanged accounts payable into convertible notes (the “April 2, 2013 Note”) in the aggregate principal amount of $80,967. The note holder has the option to convert a portion or all of the outstanding balance of the April 2, 2013 Note into shares of the Company’s common stock at a conversion rate of $0.07 per share. The note will incur an interest rate of 8% per year unless the Company defaults under certain conditions, in which case, the note will incur an interest rate of 20% per year. April 18, 2013 Convertible Note On April 18, 2013, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “April 18, 2013 Note”) with a maturity date of eight months after the issuance thereof in the aggregate principal amount of $60,000. Consideration under the notes consisted of $50,000 in cash proceeds after $5,000 payment of transaction costs and an original issue discount of $5,000. The note holder has the option to convert a portion or all of the outstanding balance of the April 18, 2013 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.12 per share or 70% of the average of the lowest closing bidding price in the 20 trading days prior to conversion. The April 18, 2013 Note carries an interest rate of 8% per year unless the note is in default under certain conditions, in which case, the interest rate would be 18% per year. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $27,800 and recognized as a derivative liability and the debt was recorded at $27,200. The fair value of the conversion option was calculated using the Black Scholes option pricing model under the following assumptions: estimated life of eight months, risk free rate of 0.10%, dividend yield of 0% and volatility of 115.82%. The debt discount is being accreted over the eight month term of the April 18, 2013 Note using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $22,932 was recorded for the April 18, 2013 Note. May 5, 2013 Convertible Note On May 5, 2013, the Company exchanged accounts payable into convertible notes (the “May 5, 2013 Note”) in the aggregate principal amount of $45,000. The note holder has the option to convert a portion or all of the outstanding balance of the May 5, 2013 Note into shares of the Company’s common stock at a conversion rate of $0.07 per share. The note will incur an interest rate of 8% per year unless the Company defaults under certain conditions, in which case, the note will incur an interest rate of 20% per year. May 14, 2013 Convertible Note On May 14, 2013, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “May 14, 2013 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $126,000. The Company also issued 2,000,000 warrants to the note holder, exercisable at $0.06 per share with a four year term. Consideration under the notes consisted of $110,000 in cash proceeds after $5,000 payment of finders’ fee and an original issue discount of $11,000. The note holder has the option to convert a portion or all of the outstanding balance including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.072 per share or 70% of the average of the lowest closing bid prices in the 20 trading days prior to conversion. The May 14, 2013 Note carries an interest rate of 8% per year unless the note is in default, in which case, the note will incur an interest rate of 18% per year. The finder’s fee of $5,000 was accounted for as deferred financing costs, and is being amortized over the term of the note. At September 30, 2013 , $3,096 of the $25,084 in deferred financing costs relates to the May 14, 2013 Note. The Company has allocated the net proceeds to the conversion option and warrants based on the calculated fair values. The fair value of the conversion option was recorded at $115,000 and fair value of the warrants was recorded as $96,000 recognized as a derivative liabilities and the debt was recorded at $nil. The transaction resulted in an accounting loss on debt financing of $96,000. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.15%, dividend yield of 0% and volatility of 149.87%. The debt discount is being accreted over the one year term of the May 14, 2013 Note using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $47,984 was recorded for the May 14, 2013 Note. June 27, 2013 Convertible Note On June 27, 2013, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “June 27, 2013 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $37,620. Consideration under the notes consisted of $30,000 in cash proceeds after $3,000 payment of finder’s fee and an original issue discount of $4,620. The note holder has the option to convert a portion or all of the outstanding balance of the June 27, 2013 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.09 per share or 70% of the lowest traded price in the 25 trading days prior to conversion. The June 27, 2013 Note carries no interest if the Company repays the note within 90 days from issuance. If the Company does not repay the note within 90 days, a one-time interest of 5% shall apply to the principal sum. The company did not repay the note within 90 days of issuance and a one-time interest of 5% was accrued in the current period. The finder’s fee of $3,000 was accounted for as deferred financing costs, and is being amortized over the term of the note. At September 30, 2013, $2,244 of the $25,084 in deferred financing costs relates to the June 27, 2013 Note which remains unamortized. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $30,200 and recognized as a derivative liability and the debt was recorded at $2,800. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.15%, dividend yield of 0% and volatility of 156.41%. The debt discount is being accreted over the one year term of the June 27, 2013 Note using the effective interest rate method. For the nine months ended September 30, 2013, accretion of the debt discount of $9,349 was recorded for the June 27, 2013 Note. June 19, 2013 Convertible Note In June, 2013, one of the related parties assigned $115,000 of its convertible note to a third party with amendments ratified by the Company (the “June 19, 2013 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $115,000. The note holder has the option to convert a portion or all of the outstanding balance of the June 19, 2013 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.04 per share or 60% of the lowest traded price in the 20 trading days prior to conversion. The June 19, 2013 Note carries an interest rate of 10% per year unless the note is in default under certain conditions, in which case, the interest rate would be 20% per year. The Company has allocated the net proceeds to the conversion option based on the calculated fair value. The fair value of the conversion option was recorded at $31,600 and recognized as a derivative liability and the debt was recorded at $83,400. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.15%, dividend yield of 0% and volatility of 156.46%. The debt discount is being accreted over the one year term of the June 19, 2013 Note using the effective interest rate method. During the nine months ended September 30, 2013, the third party converted the principal amount of $83,000 and accrued interest of the June 19, 2013 Note into 10,818,783 common shares (Note 9). For the nine months ended September 30, 2013, accretion of the debt discount of $8,778 was recorded for the June 19, 2013 Note. July 12, 2013 Convertible Note In July, 2013, the Company entered into a securities purchase agreement with an accredited investor to place a Convertible Note (the “July 12, 2013 Note”) with a maturity date of one year after the issuance thereof in the aggregate principal amount of $125,000. The Company also issued 4,166,667 warrants to the note holder, exercisable at $0.03 per share with a five year term. Consideration under the notes consisted of $110,000 in cash proceeds after $15,000 payment of finders’ fee and an original issue discount of $11,000. The note holder has the option to convert a portion or all of the outstanding balance of the July 12, 2013 Note including any accrued interest into shares of the Company’s common stock at a conversion rate of $0.03 per share or 70% of the average of the lowest closing bid prices in the 20 trading days prior to conversion. The July 12, 2013 Note carries an interest rate of 8% per year unless the note is in default, in which case, the note will incur an interest rate of 18% per year. The finder’s fee of $15,000 was accounted for as deferred financing costs, and is being amortized over the term of the note. At September 30, 2013 , $11,712 of the $25,084 in deferred financing costs relates to the July 12, 2013 Note which remains unamortized, and is presented in current assets on the Company’s Balance Sheet. The Company has allocated the net proceeds to the conversion option and warrants based on the calculated fair values. The fair value of the conversion option was recorded at $114,000 and fair value of the warrants was recorded as $104,000 recognized as a derivative liabilities and the debt was recorded at $nil. The transaction resulted in an accounting loss on debt financing of $104,000. The fair value of the conversion option was calculated using the Binomial option pricing model under the following assumptions: estimated life of one year, risk free rate of 0.15%, dividend yield of 0% and volatility of 161.97%. The debt discount is being accreted over the one year term of the July 12, 2013 Note using the effective interest rate method. During the nine months ended September 30, 2013, the investor converted the principal amount and accrued interest of $28,200 of the July 12, 2013 Note into 5,000,000 common shares (Note 9). For the nine months ended September 30, 2013, accretion of the debt discount of $26,929 was recorded for the July 12, 2013 Note.

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