NOTE 12 – 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 a total of 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.

On February 24, 2012, the Company received an additional $62,500 from one of the above accredited investors in exchange for a one year original issue discount note in the amount of $68,750 convertible into the Company’s common stock at a conversion rate of $0.05 per share at an interest rate of 10% plus five-year warrants to purchase 1,250,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The Company determined there was an intrinsic value associated with beneficial conversion feature on this note. This feature is valued at $13,750 and is being amortized as interest expense with the corresponding amount reducing the carry value of the note. As a condition for this further investment a reduction in the conversion price of the original note and an equivalent reduction in the exercise price of the warrants were executed. 

On March 6, 2012, the above investor converted his original note payable in the amount of $137,500 into 1,833,333 shares of common stock.

On May 11, 2012, the Company received $12,500 from one accredited investor in exchange for a one year original issue discount note in the amount of $13,750 convertible into the Company’s common stock at a conversion rate of $0.05 per share at an interest rate of 10% plus five-year warrants to purchase 275,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The Company determined there was an intrinsic value associated with beneficial conversion feature on this note. This feature is valued at $1,545 and is being amortized as interest expense with the corresponding amount reducing the carry value of the note.

On July 15, 2012 the holder of one of the convertible notes in the amount of $137,500 exchanged this note for a new secured note in the amount of $165,000 for two years. The note contains an original issue discount of $27,500 which will be amortized on a quarterly basis of $3,438 per quarter. The note is secured by the Company’s intellectual property, notably the patent for OSPI.  In exchange for the security the investor agreed to waive rights to conversion of the note into the Company’s stock and the existing warrants which have been cancelled. 

As of September 30, 2012, the balance on the outstanding convertible notes, net of unamortized original issue discount is $22,372.