CONVERTIBLE PROMISSORY NOTES PAYABLE

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

CONVERTIBLE PROMISSORY NOTES PAYABLE

NOTE 8 - CONVERTIBLE PROMISSORY NOTES PAYABLE

(a)   During the three months ended March 31, 2012, the Company issued two convertible promissory notes for gross proceeds of $126,000.  The Company issued the lender for each loan, a convertible promissory note bearing interest rates of 8% per annum with maturity dates of October 23, 2012 and December 19, 2012. The loans and accrued interest are to be paid on the maturity dates.  Each loan is evidenced by the promissory note the Company issued to the lender which contains conversion clauses that allow the lenders the option to convert the loan amount plus all accrued and unpaid interest due under the note into common stock. Each of the two notes contains variable conversion prices of 58% multiplied by the market price (representing discount rate of 42%).  

The Company accounted for the issuance of the convertible promissory notes in accordance with ASC 815 ”Derivatives and Hedging”.   Accordingly, the warrants and the embedded conversion option of the convertible note are recorded as derivative liabilities at their fair market value and are marked to market through earnings at the end of each reporting period.  The gross proceeds from the sale of these note $126,000 are recorded net of a discount of $114,000.  The debt discount relates to the beneficial conversion feature embedded in the conversion option. The debt discount is charged to interest expense ratably over the term of the convertible note.