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5. NOTES AND LOANS PAYABLE
 9 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
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 share. Accordingly, a derivative instrument will be established at that time. The purchaser of the promissory note also received 375,000 warrants to acquire common shares. The warrants expire on December 31, 2017, have an initial exercise price of $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 promissory 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: 0.25%.

 

The Company recorded a deferred debt discount in the amount of $75,000 and a 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 $7,316 for the six months ended June 30, 2012.  In July 2012 the note was converted into 1,500,000 shares of common stock.  In connection with this conversion, the Company recognized amortization of debt discount of $66,082.

 

On February 20, 2012, we sold a $100,000 convertible promissory note bearing interest at10% per annum and maturing on December 31, 2015. The promissory 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 share. The purchaser of the promissory note also received 600,000 warrants to acquire common shares. The warrants expire on December 31, 2017, have an initial exercise price of $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 promissory 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: 0.25%.

 

The Company recorded a deferred debt discount in the amount of $100,000 and a 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 $9,290 for the six months ended June 30, 2012.  In July 2012 the note was repaid in cash.  In connection with this repayment, the Company recognized amortization of debt discount of $90,709 and issued 65,947 shares of common stock valued at $3,944 as additional finance charges.

 

Loans Payable- Related Party

 

Loans payable to the Company’s Chief Executive Officer bear interest at 5% per annum and are payable on demand. Included in loans payable at September 30, 2012 is accrued interest of $4,543 for the nine months ended September 30, 2012.  In October 2012 the Company issued 1,440,000 shares of common stock in payment of loan indebtedness of $144,000 (see Note 10).