Convertible Notes

9 Months Ended

Sep. 30, 2011

Note 5: Convertible Notes

In May 2011, the Company issued two 60 day convertible promissory notes totaling $930,000, bearing interest at 10% per year, with principal and interest due at maturity. The notes, including unpaid interest, are convertible at maturity, at the holders' option, into shares of the Company at a conversion price of $1.50 per share. Under the terms of the convertible notes, the holders received 973,334 detachable warrants to purchase shares of the Company's common stock at an exercise price of $1.50 per share expiring in two years. In March 2011, the Company issued a 60 day convertible promissory note in the amount of $200,000, bearing interest at 5% per year, with principal and interest due at maturity. The note, including unpaid interest, is convertible at maturity, at the holder's option, into shares of the Company at a conversion price of $1.00 per share. Under the terms of the convertible note, the holder received 200,000 detachable warrants to purchase shares of the Company's common stock at an exercise price of $1.50 per share expiring in two years.

In accordance with ASC 470-20, Debt with Conversion and Other Options , the proceeds received from the convertible notes were allocated between the convertible notes and the detachable warrants based on the relative fair value of the convertible notes without the warrants and the warrants. The portion of the proceeds allocated to the warrants was recognized as additional paid-in capital and a debt discount. In addition, the convertible notes contained a beneficial conversion feature at issuance equal to the intrinsic value of the market price of the underlying shares and the effective conversion price of the underlying shares. The beneficial conversion feature was recognized as additional paid-in capital, limited to the amount of proceeds received, and a debt discount. The debt discount related to warrants and the beneficial conversion feature is accreted into interest expense through maturity of the notes.

In June 2011, the Company issued six 180 day convertible promissory notes totaling $2,400,000, bearing interest at 10% with principal and interest due at maturity. The notes, including unpaid interest, are convertible at maturity, at the holders' option, into stock units of one share and one warrant at a conversion price of $1.00 per unit. The non-detachable warrants contain an exercise price of $1.50 per share and expire in two years.

In July 2011, the Company issued five 180 day convertible promissory notes totaling $455,000, bearing interest at 10% per year, with principal and interest due at maturity. The notes, including unpaid interest, are convertible at maturity, at the holders' option, into stock units of one share and one warrant at a conversion price of $1.00 per share. The non-detachable warrants contain an exercise price of $1.00 per share, expiring in two years.

In August 2011, the Company issued a 180 day convertible promissory note for $100,000, bearing interest at 10% per year, with principal and interest due at maturity. The note, including unpaid interest, is convertible at maturity, at the holders' option, into stock units of one share and one-half warrant at a conversion price of $1.00 per share. The 50,000 non-detachable warrants contain an exercise price of $1.00 per share. These warrants expire in two years. Also in August 2011, the Company issued a 180 day convertible promissory note for $50,000, bearing interest at 10% per year, with principal and interest due at maturity. The note, including unpaid interest, is convertible at maturity, at the holders' option, into shares of the Company at a conversion price of $1.00 per share.

The convertible notes contained a beneficial conversion feature at issuance equal to the intrinsic value of the market price of the underlying shares plus the fair value of the warrants and the conversion price of the convertible debt instrument. The beneficial conversion feature was recognized as additional paid-in capital, limited to the amount of proceeds received, and a corresponding debt discount to be accreted into interest expense through maturity of the notes. The weighted-average fair values of the detachable and non-detachable warrants were calculated using the Black Scholes-Merton pricing model using the following assumptions:

Expected volatility of underlying stock		58.38	%
Risk-free interest rate		0.45	%
Dividend yield		0.00	%
Expected life of warrants	2 years
Weighted-average fair value of warrants	$	0.95

Description	Amount
Proceeds received on issuance of new notes in 2011	$	3,935,000
Repayment of loan		(800,000)
Discount allocated to warrants		(628,739)
Discount allocated to beneficial conversion feature		(2,329,903)
Convertible notes after discount		176,358
Accretion of discount to interest expense		2,006,257
Conversion through issuance of common stock		(200,000)
Convertible notes at September 30, 2011		1,982,615
Unamortized discount at September 30, 2011		952,385
Total allocated to additional paid-in capital		2,958,642
Total shares of common stock to be issued, if-converted		2,945,583
Aggregate value of shares, if-converted at September 30, 2011		2,268,099
Contractual interest expense for nine months ended September 30, 2011		102,963
Effective interest rate on convertible notes	Greater than 100%

HUNT GLOBAL RESOURCES, INC. 10-Q