NOTE 8 – CONVERTIBLE DEBT

During the first quarter of 2011, the Company sold for aggregate consideration of $62,500, five 1% convertible notes of $12,500 each (Notes), and warrants to purchase 750,000 shares of common stock, at an exercise price of $.125 (Warrants) for a term of three years.  The Convertible Notes accrue interest at the rate of 1% per annum, are non-amortizing, have a term of 3 years, subject to the Company’s right to extend the term for an additional three years, cannot be prepaid, and are convertible, at any time prior to the maturity date, as the same may be extended,  upon 75 days written notice of the holder, into shares of common stock, at a rate equal to $.125 per share. Accrued interest will be paid on the maturity date in shares of common Stock, valued at $.125 per share, and, unless the Convertible Note is converted prior to its maturity date, the principal amount of the Note may be repaid in cash or converted into common stock at a rate equal to $.125 per share, at the Company’s discretion.

During the second quarter of 2011, the Company sold for aggregate consideration of $52,000, 1% convertible notes and warrants to purchase 624,000 shares of common stock, at an exercise price of $.125 for a term of three years.  The Convertible Notes accrue interest at the rate of 1% per annum, are non-amortizing, have a term of 3 years, subject to the Company’s right to extend the term for an additional three years, cannot be prepaid, and are convertible, at any time prior to the maturity date, as the same may be extended, upon 75 days written notice of the holder, into shares of common stock, at a rate equal to $.125 per share. Accrued interest will be paid on the maturity date in shares of common Stock, valued at $.125 per share, and, unless the Convertible Note is converted prior to its maturity date, the principal amount of the Note may be repaid in cash or converted into common stock at a rate equal to $.125 per share, at the Company’s discretion.  

During the third quarter of 2011, the Company sold for aggregate consideration of $20,000, 1% convertible notes and warrants to purchase 240,000 shares of common stock, at an exercise price of $.125 for a term of three years.  The Convertible Notes accrue interest at the rate of 1% per annum, are non-amortizing, have a term of 3 years, subject to the Company’s right to extend the term for an additional three years, cannot be prepaid, and are convertible, at any time prior to the maturity date, as the same may be extended, upon 75 days written notice of the holder, into shares of common stock, at a rate equal to $.125 per share. Accrued interest will be paid on the maturity date in shares of common Stock, valued at $.125 per share, and, unless the Convertible Note is converted prior to its maturity date, the principal amount of the Note may be repaid in cash or converted into common stock at a rate equal to $.125 per share, at the Company’s discretion.  

The Company recorded a deferred debt discount in the amount of $130,421, to reflect the beneficial conversion feature of the convertible debt and fair value of the warrants pursuant to Emerging Issues Task Force (“EITF”) 00-27: Application of EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features on Contingently Adjustable Conversion Rates”, to certain convertible instruments. In accordance with EITF 00-27, the Company valued the beneficial conversion feature and recorded the amount of $47,283 as a reduction to the carrying amount of the convertible debt and as an addition to paid-in capital. Additionally, the relative fair value of the warrants ($83,138) was calculated and recorded as a further reduction to the carrying amount of the convertible debt and an addition to additional paid-in capital. The Company is amortizing the debt discount over the term of the debt.   Amortization of discounts was $93,892 for the nine months ended September 30, 2011.   

In addition, as an inducement to make this investment, the Company agreed to reprice 1,240,000 warrants, reducing the exercise price from $.25 to $.15.  The Company incurred deferred finance costs of $57,707.  These costs will be amortized over the remaining life of the warrants.  For the nine months ended September 30, 2011, the Company recognized $41,383 in deferred finance cost. The balance of the finance costs ($16,323) is recorded in other assets.

Convertible debt consists of the following: