NOTE 17 – NOTES PAYABLE – CONVERTIBLE

On July 15 and July 18, 2011, the Company received a total of $250,000 from two accredited investors in exchange for one year original issue discount notes in the aggregate amount of $275,000, convertible into the Company’s common stock at a conversion rate of $0.10 per share and bearing interest of 10%, plus five-year warrants to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The market value of the stock at the date of issuance of the warrants was $0.10. The warrants are issued as a result of a financing transaction and contain a beneficial conversion feature. As of December 31, 2011, the balance was $274,427.

Original issue discount in the amount of $25,000 is being expensed as interest over the term of the note. At December 31, 2011, the Company has recorded interest expense in the amount of $11,632.

Using the Black-Sholes valuation model, the Company determined there was an $0.01 intrinsic value associated with beneficial conversion feature. This feature is valued at $27,500 and is being amortized as interest expense with the corresponding amount be added to the carry value of the note.