CONVERTIBLE NOTE PAYABLE

12 Months Ended

Dec. 31, 2011

On April 18, 2011, the Company received a loan from Heriot Holdings Limited in the amount of $17,000 (“2011 Note”). The loan bears interest at a rate of 10% per annum and is due and payable on April 18, 2012. The loan is classified as “Convertible Note Payable” on the accompanying consolidated balance sheet of the Company. As of the date of these financials the loan is in default and has not been converted. The Company is currently negotiating an extension. The 2011 Note is convertible at $0.05.

Under U.S. GAAP, a beneficial conversion feature is required to be recognized on the date that a convertible instrument becomes convertible into equity shares and the fair market value of those equity shares exceeds the conversion price under the convertible instrument. These amounts are recorded as a reduction in the face value of the issued convertible or debt instrument with an offset going to additional paid-in-capital. This reduction will accrete through the profit and loss statement as interest expense using the interest rate method over the life of the convertible or debt instrument. In accordance with U.S. GAAP we recognized approximately $17,000 as a reduction to the face value of the Note Payable as a discount at issuance. For the year ended December 31, 2011 we amortized approximately $12,000 of the discount as non-cash interest expense in the accompanying financial statements in “Interest and other income, net”.

Convertible Note Payable obligations as of December 31, 2011 and 2010 is as follows:

	2011			2010
Convertible Note Payable	$	17,000		$	-
Less: Debt Discount		(5,000	)		-
	$	12,000		$	-

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details

Bay Acquisition Corp. 10-K