6. Convertible Notes Payable

12 Months Ended

Jul. 31, 2012

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%. These notes together with the accrued interest were converted into 3,332,843 additional shares during May , 2012.

The Company issued $25,000 in a Convertible Note Payable during February, 2012. This note accrues interest at 12.0% and is due July 30, 2012. This note together with the accrued interest may be converted into the Company’s Common Stock at a variable conversion price of 50% discount of the low traded price of the Company’s Common Stock for the previous ten trading days. If these shares were converted into the Common Stock at July 31, 2012 it would represent an additional 353,357 Shares .

The Company issued $50,000 in Convertible Notes Payable during May, 2012. These notes accrue interest at 12.0% and are due November 19 ($25,000), and November 29, 2012 ($25,000), respectively. These notes together with the accrued interest may be converted into the Company’s Common Stock at a variable conversion price of 50% discount of the average of the three lowest trading prices during the last ten trading days. If these shares were converted into the Common Stock at July 31, 2012 it would represent an additional 706,714 Shares .

The Company issued $56,000 in a Convertible Note Payable during May, 2012. This note accrues interest at 10.0% and is due December 15, 2012. This note together with the accrued interest may be converted into the Company’s Common Stock at a variable conversion price of 30% discount of the low traded price of the Company’s Common Stock for the previous twenty trading days. If these shares were converted into the Common Stock at July 31, 2012 it would represent an additional 606,061 Shares .

The Company issued $55,000 in a Convertible Note Payable during June, 2012, including $5,000 of original issue discount. This note does not accrue interest during the first 90 days. However, if the note is unpaid 90 days then a one-time interest charge of 5.0% will be applied to the loan due June 26, 2013. This note together with the accrued interest may converted into the Company’s Common Stock at a price representing 65% of the lowest trade price on the previous 25 trading days to the conversion. If these shares were converted into the Common Stock at July 31, 2012 it would represent an additional 582,751 Shares .

The Company issued $168,000 in a Convertible Note Payable during July, 2012. This note accrues interest at 8% and is due January 26, 2013. This note together with the accrued interest may be converted into the Company’s Common Stock only after 180 days at a conversion price of $0.16 per share. If these shares were converted into the Common Stock at July 31, 2012 it would represent an additional 1,050,000 shares.

In summary, the following debt is outstanding and consists of:

Convertible note, dated February 2012, maturing August 2012, 12% interest rate, deferred financing cost of $2,500, debt discount of $25,000 fully amortized to interest, convertible at 50% discount to market	$	25,000
Convertible note, dated May 19, 2012, maturing November 19, 2012, 12% interest rate, debt discount of $25,000 amortized to interest, unamortized $15,082, convertible at 50% discount to market		25,000
Convertible note, dated May 30, 2012, maturing December 15, 2012, 12% interest rate, debt discount of $25,000 amortized to interest, unamortized $16,440, convertible at 50% discount to market		25,000
Convertible note, dated May 19, 2012, maturing November 19, 2012, 10% interest rate, deferred financing cost of $6,000 ratably charged to interest, unamortized $4,131, debt discount of $39,907 amortized to interest, unamortized $27,474, convertible at 30% discount to market		56,000
Convertible note, dated June 27, 2012, maturing June 27, 2013, 5% interest rate, deferred financing cost of $5,000 ratably charged to interest, unamortized $4,534, debt discount of $52,792 amortized to interest, unamortized $47,874, convertible at 35% discount to market		55,000
Convertible note, dated July 26, 2012, maturing January 26, 2013, 8% interest rate, deferred financing cost of $15,000 ratably charged to interest, unamortized $4,131, convertible at $.16 per share.		168,000
	$	354,000
Deferred loan costs		(23,257	)
Debt discounts		(106,870	)
Total Debt	$	223,873
Less: long-term portion		-
Current portion of debt	$	223,873

The Company evaluated the terms of these notes 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. The Company has recognized a derivative liability in the amount of $181,094, of which $167,699 was recognized as a beneficial conversion debt discount, which is being amortized over the life of the loan to interest expense. A charge to the statement of operations was made to provide for the remaining portion of the recognized derivative liability at origination. The Company has re-measured the derivative at year end, resulting in a liability of $191,792 as of July 31, 2012. The corresponding change in derivatives, from origination to period end resulted in a change and recognition of expenses in the amount of $24,093 for the year ended July 31, 2012.

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	.08	%
Expected lives (years)	0.592
Expected price volatility	160.34	%
Forfeiture Rate	0.00	%

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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