5.	CONVERTIBLE DEBENTURE

During the year ended June 30, 2012, the Company entered into a convertible debenture purchase agreement with Asher Enterprises Inc. The agreement involved five separate tranches of convertible debentures. Each tranche is due approximately nine months after this respective issuance. The five debentures were issued as follows:

●

August 9, 2011 received $53,000 (settled);

●

September 15, 2011 received $50,000 (settled);

●

October 15, 2011 received $35,000 (settled);

●

April 18, 2012 received $53,500; and

●

May 23, 2012 received $78,500.

The convertible debentures pay interest of 8% per annum and can be converted into common stock at the option of the holder at any time after 180 days following the date of issuance. Each debenture has a variable conversion price equal to 58% of the market price. Market price is defined as the average of the lowest three trading prices for the Company's common stock during the ten trading day period ending one trading day prior to the date of conversion notice with a limitation of 4.99% of the issued and outstanding common stock at the time of conversion.

The convertible debenture may be repaid by the Company as follows:

●

Outstanding principal multiplied by 135% together with accrued interest and unpaid interest thereon if prepaid within a period of 90 days beginning on the date of the note;

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Outstanding principal multiplied by 145% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 91 days from the date of the note and ending on the date that is 150 days following the date of the note; and

●

Outstanding principal multiplied by 150% together with accrued interest and unpaid interest thereon if prepaid at any time during the period beginning 151 days from the date of the note and ending on the date that is 180 days following the date of the note.

After the expiration of the 180 days following the date of the note, the Company will have no right of prepayment.

The liability component of the convertible debentures were measured at the present value with the embedded conversion feature being treated as a derivative liability with fair value measured at each reporting period.

During the year ended June 30, 2012, $138,000 of the debenture was settled by issuing 629,158 of the common stock of the Company. $236,926 representing the fair value of the derivative liability and the amortized cost of convertible debenture settled was included as additional paid in capital. For the year ended June 30, 2012, a fair value loss on the derivative liability of $89,326 was recognized in the consolidated statement of operations.

The Company incurred $15,500 in transactions costs in connection with the issuance of the convertible debenture, which has been recorded as a reduction of the carrying value of convertible debenture.

As at June 30, 2012, 301,261 (2011 – nil) shares of common stock of the Company would be required to settle the remaining tranches of convertible debt.

The fair value of the derivative financial liability is calculated using the Black-Scholes valuation method at the consolidated balance sheet date.

The following assumptions were used in determining the weighted average fair value of the derivative financial liability at inception:

	2012			2011

Expected life (years)		0.76		nil
Interest rate		0.71	%	nil
Volatility		62.80	%	nil
Dividend yield		N/A			N/A
Estimated forfeitures		N/A			N/A

The following assumptions were used in determining the weighted average fair value of the derivative financial liability on settlement:

	2012			2011

Expected life (years)		0.20		nil
Interest rate		0.66	%	nil
Volatility		72.76	%	nil
Dividend yield		N/A		N/A
Estimated forfeitures		N/A		N/A

The following assumptions were used in determining the weighted average fair value of the derivative financial liability at June 30, 2012:

	2012			2011

Expected life (years)		0.62		nil
Interest rate		0.94	%	nil
Volatility		70.20	%	nil
Dividend yield		N/A		N/A
Estimated forfeitures		N/A		N/A

The carrying value of the convertible debenture is as follows:

	2012			2011

Fair value at inception of the loan	$	158,500		$	0
Interest accrued		55,174			0
Settlement (issuance of common shares)		(120,318	)		0

Carrying amount of convertible debenture	$	93,356		$	0

The net value of the derivative financial liability is as follows:

	2012			2011

Fair value at inception of the convertible debt	$	111,501		$	0
Loss on fair value of derivative liability		89,326			0
Settlement (issuance of common shares)		(116,109	)		0

Carrying amount of derivative liability	$	84,718		$	0