Note 5- Convertible Debt

3 Months Ended

Mar. 31, 2013

Notes

Note 5- Convertible Debt

NOTE 5 – CONVERTIBLE DEBT

July 2012 Convertible Debentures-In July 2012, the Company issued convertible debentures (“Notes”) with an aggregate face value of $215,300 Canadian Dollars ($213,642 as of March 31, 2013).  The notes mature in July 2014, bear interest at an annual rate of 10%, and are convertible at the option of the holders into Units, each consisting of a) one share of common stock and b) one warrant to purchase one share of common stock at 0.40 Canadian Dollars per share (“Unit”).  The number of units issuable upon conversion of the notes is determined by dividing the then outstanding principal and accrued but unpaid interest by a) 0.35 Canadian Dollars if a Liquidity Event, as defined in the debenture agreements, occurs within six months of the closing of the offering of the notes, or b) 0.32 Canadian Dollars if a Liquidity Event does not occur within six months of the closing of the offering of the notes. 

The Company recorded a beneficial conversion feature based on the intrinsic value of the conversion feature equal to the excess of the fair value of one Unit over the conversion rate of 0.32 Canadian Dollars.  The fair value of one Unit was estimated based on the most recent sale of common stock in a private placement immediately preceding the issuance of the Notes and, for the warrant contained in one Unit, using a Black Scholes valuation model and the following assumptions: volatility – 50.50%, risk free rate - 0.22%, dividend rate – 0.00%.  The Company recorded a discount against the debt for the beneficial conversion feature totaling $84,788, which is being amortized into interest expense through the maturity dates of the Notes.  For the three months ended March 31, 2013, the Company recorded amortization of the discount of $10,599.  As of March 31, 2013 the net carrying value of the Notes totaled $157,117, net of unamortized discount of $56,525.  For the three months ended March 31, 2013 interest expense on the Notes of $5,341 was recorded.

In connection with the issuance of the July 2012 Notes, the Company paid transactions fees to brokers consisting of cash of $85,237, and warrants to purchase 43,497 shares over a two-year period for an exercise price of 0.40 Canadian Dollars.  The Company estimated the fair value of the warrants using a Black Scholes valuation model and the following assumptions: volatility – 50.49%, risk free rate - 0.22%, dividend rate – 0.00%.  The Company allocated a portion of the fair value of the consideration totaling $52,869, to debt issuance costs, which was capitalized and is being amortized into interest expense over the two-year terms of the notes.  The remaining portion of the fair value of the transactions costs, totaling$36,126 was allocated to equity, treated as equity issuance costs, and recorded against additional paid in capital.  Amortization of debt issuance costs on the Notes of $6,609 was recorded for the three months ended March 31, 2013. 

September 2012 Convertible Debentures- In September 2012, the Company issued convertible debentures (“Notes”) with an aggregate face value of $330,900.  The notes mature in September 2014, bear interest at an annual rate of 10%, and are convertible at the option of the holders into Units, each consisting of a) one share of common stock and b) one warrant to purchase one share of common stock at $0.40 per share (“Unit”).  The number of units issuable upon conversion of the notes is determined by dividing the then outstanding principal and accrued but unpaid interest by a) $0.35 if a Liquidity Event, as defined in the debenture agreements, occurs within six months of the closing of the offering of the notes, or b) $0.32 if a Liquidity Event does not occur within six months of the closing of the offering of the notes. 

The Company recorded a beneficial conversion feature based on the intrinsic value of the conversion feature equal to the excess of the fair value of one Unit over the conversion rate of $0.32.  The fair value of one Unit was estimated based on the most recent sale of common stock in a private placement immediately preceding the issuance of the Notes and, for the warrant contained in one Unit, using a Black Scholes valuation model and the following assumptions: volatility – 50.50%, risk free rate - 0.22%, dividend rate – 0.00%.  The Company recorded a discount against the debt for the beneficial conversion feature totaling $115,712, which is being amortized into interest expense through the maturity dates of the Notes.  For the three months ended March 31, 2013, the Company recorded amortization of the discount of $14,464.  As of March 31, 2013, the net carrying value of the Notes totaled $248,937, net of unamortized discount of $81,963.    For the three months ended March 31, 2013 interest expense on the Notes of $8,273 was recorded.

In connection with the issuance of the September 2012 Notes, the Company paid cash transactions fees to brokers totaling $30,456.  The Company allocated a portion of the transaction fees totaling $19,806, to debt issuance costs, which was capitalized and is being amortized into interest expense over the two-year terms of the notes.  The remaining portion of the fair value of the transactions costs, totaling $10,650 was allocated to equity, treated as equity issuance costs, and recorded against additional paid in capital.  Amortization of debt issuance costs on the Notes of $2,476 was recorded for the three months ended March 31, 2013. 

October and November 2012 Convertible Debentures-In October and November 2012, the Company issued convertible debentures (“Notes”) with an aggregate face value of $624,372 of which $313,440 represented a conversion of notes payable- related parties to the Founders. The notes mature in October and November 2014, bear interest at an annual rate of 10%, and are convertible at the option of the holders into Units, each consisting of a) one share of common stock and b) one warrant to purchase one share of common stock at $0.40 per share (“Unit”).  The number of units issuable upon conversion of the notes is determined by dividing the then outstanding principal and accrued but unpaid interest by a) $0.35 if a Liquidity Event, as defined in the debenture agreements, occurs within six months of the closing of the offering of the notes, or b) $0.32 if a Liquidity Event does not occur within six months of the closing of the offering of the notes.  The Company recorded a beneficial conversion feature based on the intrinsic value of the conversion feature equal to the excess of the fair value of one Unit over the conversion rate of $0.32.  The fair value of one Unit was estimated based on the most recent sale

of common stock in a private placement immediately preceding the issuance of the Notes and, for the warrant contained in one Unit, using a Black Scholes valuation model and the following assumptions: volatility – 50.50%, risk free rate - 0.22%, dividend rate – 0.00%.  The Company recorded a discount against the debt for the beneficial conversion feature totaling $254,004, which is being amortized into interest expense through the maturity dates of the Notes.  For the three months ended March 31, 2013, the Company recorded amortization of the discount of $31,750.  As of March 31, 2013 the net carrying value of the Notes totaled $423,235, net of unamortized discount of $201,137.  For the three months ended March 31, 2013 interest expense on the Notes of $15,609 was recorded.

In connection with the issuance of the October and November 2012 Notes, the Company paid no cash transactions fees to brokers. 

The following is a summary of convertible debentures outstanding as of March 31, 2013:

	Face Value	Initial Discount	Accumulated Amortization	Carrying Value
July 2012 Notes	$213,642	$ (84,788)	$  28,263	$ 157,117
September 2012 Notes	330,900	(115,712)	33,749	248,937
October & November Notes	59,000	(13,317)	2,999	48,682
November – Related Party Notes	565,372	(240,687)	49,868	374,553
Total	$ 1,168,914	$  (454,504)	$114,879	$ 829,289