6. Convertible Notes Payable

9 Months Ended

Apr. 30, 2012

Debt Disclosure [Text Block]

6.  Convertible Notes Payable

The Company issued $100,000 in Convertible Notes Payable during October, 2011. These notes accrue interest at 12.0% and are due April 6 ($50,000), and April 12, 2012 ($50,000), respectively.  On February 3, 2012, both parties agreed to a change in the conversion feature.  It was agreed that the notes can only be converted into the Company’s Common Stock on or after the note maturity date. Further, it was agreed that the Company, at its’ discretion, may prepay these notes by paying the outstanding principal plus accrued interest, multiplied by 130%.  At April 30, 2012, these notes were matured and unpaid and if converted would result in the issuance of 2,858,000 additional shares.

The Company evaluated the terms of this note in accordance with ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined that the underlying common stock is indexed to the Company’s common stock. The Company determined that the conversion feature met the definition of a liability and therefore, bifurcated  the conversion feature and account for it as a separate derivative liability. Therefore, the Company will recognize a Derivative liability in the amount of $18,603.

The derivative valuation was calculated using the Black-Scholes Model for the conversion feature.   Assumptions to the calculation were as follows:

Weighted Average:
Dividend rate	0.00%
Risk-free interest rate	1.08%
Expected lives (years)	0.493
Expected price volatility	139.59%
Forfeiture Rate	0.00%