6. Convertible Notes Payable

3 Months Ended

Oct. 31, 2012

Debt Disclosure [Text Block]

6.  Convertible Notes Payable

The Company issued $25,000 in a Convertible Note Payable on August 1, 2012.  This note accrues interest at 10.0% and is due March 2, 2013.  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 average of the three lowest trading prices during the last ten trading days.  If these shares were converted into the Common Stock at October 31, 2012 it would represent an additional 192,309 shares.

The Company issued $75,000 in a Convertible Note Payable on September 19, 2012.  This note accrues interest at 6.0% and is due September 19, 2013.  This note together with the accrued interest may be converted into the Company’s Common Stock at a variable conversion price of 30% discount on any of the five trading days preceding the date of the conversion.  If these shares were converted into the Common Stock at October 31, 2012 it would represent an additional 576,923 shares.

The Company issued $37,500 in a Convertible Note Payable on September 25, 2012.  This note accrues interest at 10.0% and is due April 26, 2013.  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 average of the three lowest trading prices during the last ten trading days.  If these shares were converted into the Common Stock at October 31, 2012 it would represent an additional 384,615 shares .

The Company issued $50,000 in a Convertible Note Payable on October 5, 2012, This note accrues interest at 10.0% and is due May 6, 2013.  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 October 31, 2012 it would represent an additional 346,154 shares.

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

Convertible note, dated May 19, 2012, maturing November 19, 2012, 12% interest rate, debt discount of $25,000 amortized to interest, unamortized $2,581, 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 $5,400, 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 $707, debt discount of $39,907 amortized to interest, unamortized $4,702, 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 $3,273, debt discount of $52,792 amortized to interest, unamortized $34,568, 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 $7,249, convertible at $.16 per share.		168,000
Convertible note, dated August 1, 2012, maturing March 2, 2013, 10% interest rate, deferred financing cost of $2,500 ratably charged to interest, unamortized $1,250, debt discount of $25,000 amortized to interest, unamortized $12,500, convertible at 50% discount to market		25,000
Convertible note, dated September 19, 2012, maturing September 19, 2013, 8% interest rate, deferred financing cost of $12,250 ratably charged to interest, unamortized $4,203, debt discount of $75,000 amortized to interest, unamortized $66,369, convertible at 30% discount to market		75,000
Convertible note, dated September 25, 2012, maturing April 26, 2013, 10% interest rate, deferred financing cost of $3,750 ratably charged to interest, unamortized $3,600, convertible at 30% discount to market		37,500
Convertible note, dated October 5, 2012, maturing May 6, 2013, 10% interest rate, deferred financing cost of $4,000 ratably charged to interest, unamortized $3,278, convertible at 50% discount to market		50,000
Total Debt Outstanding		516,500
Deferred loan costs		(25,708	)
Debt discounts		(167,773	)
Total Debt	$	323,019
Less: long-term portion		-
Current portion of debt	$	323,019

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 beneficial conversion resulting from the contract, which was recorded as a debt discount and 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 the period end, resulting in a derivative liability in the amount of $298,463 as of October 31, 2012.  The corresponding change in derivatives, from origination to period end resulted in a change and recognition of expenses (income) in the amount of $(21,152) and 2,941 for the three months and inception through the period ended October 31, 2012, respectively.

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)	0.563
Expected price volatility	161.0	%
Forfeiture Rate	0.00	%