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NOTES AND LOANS PAYABLE
 3 Months Ended
Mar. 31, 2012
Notes to Financial Statements  
NOTES AND LOANS PAYABLE

NOTE 5: NOTES AND LOANS PAYABLE

 

Convertible Notes Payable

 

On November 21, 2011, we sold a $75,000 convertible promissory note bearing interest at 10% per annum and maturing on December 31, 2016. The note is convertible at any time, contains various default provisions and the conversion price is initially $0.05 per share. After June 30, 2012, the conversion price will at the end of each month adjust to the lower of the current conversion price or 110% of that month’s volume weighted average price as reported by Bloomberg subject to being no lower than $0.005 per shares. Accordingly, a derivative instrument will be established at that time. The purchaser of the Note also received 375,000 warrants to acquire common shares. The warrants expire on December 31, 2017 and have an initial exercise price which is $0.05 per share and can adjust lower in the same manner as the accompanying convertible note, thereby becoming a derivative instrument at that time.

 

These warrants and note were valued at $89,999 using the Black-Scholes pricing model with the following assumptions: expected volatility 327%; expected dividend -0-; expected term 6.12 years; and risk free rate .25%.

 

The Company recorded a deferred debt discount in the amount of $75,000 and finance charge of $14,999. The deferred debt discount was recorded as a reduction of the carrying amount of the convertible debt and an addition to paid-in capital. The finance charges were recognized in the current period. Amortization of the debt discount was $3,556 for the quarter ended March 31, 2012.

 

In February 20, 2012 we sold a $100,000 convertible promissory note bearing interest at10% per annum and maturing December 31, 2015. The note is convertible at any time and the conversion price is initially $0.05 per share. After August 30, 2012, the conversion price will at the end of each month adjust to the lower of the current conversion price or 110% of that month’s volume weighted average price as reported by Bloomberg subject to being no lower than $0.005 per shares. The purchaser of the Note also received 600,000 warrants to acquire common shares. The warrants expire on December 31, 2017 and have an initial exercise price which is $0.05 per share and can adjust lower in the same manner as the accompanying convertible note, thereby becoming a derivative instrument at that time.

 

These warrants and note were valued at $123,995 using the Black-Scholes pricing model with the following assumptions: expected volatility 309%; expected dividend -0-; expected term 5.87 years; and risk free rate .25%.

 

The Company recorded a deferred debt discount in the amount of $100,000 and finance charge of $23,995. The deferred debt discount was recorded as a reduction of the carrying amount of the convertible debt and an addition to paid-in capital. The finance charges were recognized in the current period. Amortization of the debt discount was $2,716 for the quarter ended March 31, 2012.

 

Loans Payable- Officer

 

Loans payable to the Company’s CEO bear interest at 5% per annum and are payable on demand. Included in loans payable at March 31, 2012 is accrued interest of $3,903.