CONVERTIBLE NOTES PAYABLE

3 Months Ended

Mar. 31, 2015

WHC Capital, LLC

On August 12, 2014 the Company entered into a Convertible Promissory Note with WHC Capital, LLC. (“WHC”). The Convertible Promissory Note provides the Company with a note in the principal amount of $210,000. The net proceeds the Company received was $135,000 as $60,000 of Original Issue Discount and a financing fee of $15,000 was netted out from the total principal. The Convertible Promissory Note matures on February 11, 2015, and the Company shall make monthly installments of $25,000, commencing September 11, 2014, with the balance due at maturity. As of December 31, 2014, payments in the amount of $50,000 have been made and the balance remaining at December 31, 2014 is $160,000. As the Company failed to make their required $25,000 installment (and subsequent installments), on November 10, 2014, they have defaulted on the WHC Convertible Promissory Note. As a result of the default, pursuant to the terms of WHC Convertible Promissory Note, the November 10, 2014 installment of $25,000 is increased by 30%, and bears interest at 22%. Additionally, the default leads to acceleration and then the full note is increased by 150% to total $330,581. The Company is in process of negotiating a settlement with WHC. As of December 31, 2014, the Company recorded $170,418 in default interest and penalties. In the three months ended March 31, 2015, the Company converted $29,262 of these notes into shares of common stock.

The Convertible Promissory Note may not be prepaid in whole or in any part except as otherwise explicitly set forth in the agreement. Any amount of principal or interest on this Convertible Promissory Note which is not paid when due shall bear interest at the rate of twenty-two percent (22%) per annum from the due date thereof until the same is paid (see above).

WHC shall have the right and at any time after February 11, 2015 to convert all or any part of the outstanding and unpaid principal amount of the Convertible Promissory Note into shares of the Company’s common stock at a conversion price of a thirty-percent (30%) discount off the average of the three (3) lowest intra-day trading prices during the twenty (20) trading days immediately preceding a conversion date, as reported by NASDAQ. The Company recognized a derivative liability in the amount of $229,213 when the note became convertible. Of that amount $141,667 was recognized as debt discount. This amount is amortized using the straight-line method over the life of the Convertible Promissory Note. For the period ended March 31, 2015, the Company has amortized $48,898, with $92,769 remaining as of March 31, 2015.

In accordance with the Convertible Promissory Note agreement, if at any time when the note is outstanding, the Company issues or sells, any common shares for no consideration or for consideration per share less than the conversion price in effect on the date of such issuance of such shares of common stock, then immediately upon that issuance, the conversion price will be reduced to the amount of the consideration per share received by the Company.

In addition, the Company has recognized an original issue discount in the amount of $60,000. This amount is amortized using the straight-line method over the life of the Convertible Promissory Note. For the period ended March 31, 2015, the Company has amortized $11,650, with $349 remaining as of March 31, 2015.

The WHC note was issued with 500,000 warrants, expiring thirty-six months from the execution of the warrant agreement are exercisable into 500,000 common shares of the Company’s Common Stock at $.15 per share. The fair value of the warrants were estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 128.14%, risk free interest rate of 1.00%; and expected term of three years. The fair value of the warrants on the date of issuance is reflected as a debt discount in the amount of $24,760 and an increase to additional paid-in capital. Through the period ended March 31, 2015, there was amortization of the debt discount of $6,334 to bring the debt discount to $0 as of March 31, 2015.

JMJ Financial

On September 3, 2014 the Company entered into a Convertible Note with JMJ Financial (“JMJ”). The Convertible Note provides the Company with a note in the principal amount up to $300,000. The Company received an initial tranche of gross proceeds of $50,000, and net proceeds of $45,000, the $5,000 being Original Issue Discount. The term of the Convertible Note is two years. There is no interest due if the Company repays the note in the first three months. If the Company fails to repay the note within the 90 day period, a one-time interest charge of twelve percent (12%) shall be applied to the principal. A second tranche with similar terms of $25,000 gross proceeds and $22,500 net proceeds was received on December 18, 2014.

JMJ has the right after the 90^th day, at its election, to convert all or part of the outstanding and unpaid principal and accrued interest into shares of common stock at a conversion price of 60% of the lowest trade price in the 20 trading days previous to the conversion. On December 3, 2014, when the first tranche of the JMJ Note became convertible, the Company recognized a derivative liability in the amount of $66,204, of which $50,000 was recognized as a debt discount. The Company recognized a fair value adjustment of $5,070 through December 31, 2014 bringing the derivative liability balance down to $61,134 at December 31, 2014. In the three months ended March 31, 2015, the Company converted $16,519 of convertible notes into shares of common stock. On March 16, 2015, the second tranche became convertible and the company recognized a derivative liability in the amount of $23,273, of which $19,880 was recognized as debt discount. For the period ended March 31, 2015 there was amortization of the debt discount of $21,755 to bring the unamortized debt discount down to $48,125.

In addition, the Company has recognized an original issue discount in the amount of $7,500. At December 31, 2014, the debt discount net of amortization was $6,587. This amount is amortized using the straight-line method over the life of the Convertible Promissory Note. For the period ended March 31, 2015, the Company has amortized $1,467, with $5,120 remaining as of March 31, 2015.

KBM Worldwide, Inc.

On November 7, 2014 the Company entered into a Convertible Promissory Note with KBM Worldwide, Inc. (“KBM”). The Convertible Promissory Note in the principal amount of $53,500 accrues interest at the rate of 8% per annum and matures August 7, 2015. Any amount of principal or interest on this Convertible Promissory Note which is not paid when due shall bear interest at the rate of 22% per annum (“Default Rate”). The Company received net proceeds of $50,000 for this note, paying $3,500 of fees related to the note out of closing. On January 9, 2015, the Company was funded an additional $40,000.

KBM shall have the right to convert this note into shares of the Company’s common stock after 180 days at a conversion price equal to 61% (39% discount) of the average of the three lowest trading prices during the ten trading day period ending on the latest complete trading day prior to conversion. Upon becoming convertible, the conversion feature will be accounted for as an embedded derivative liability.

There has been no payments made on this note through March 31, 2015, and the Company has accrued $2,399 in interest of which $1,766 is for the period ended March 31, 2015.

On April 15, 2015, KBM notified the Company that they were in default of their Convertible Promissory Notes due to the Company’s failure to be in compliance with the reporting requirements of the Exchange Act. As a result of this default, and as discussed in the Convertible Promissory Note with KBM, the notes are due on demand for immediate payment representing 150% of the remaining outstanding principal balance, together with Default Interest as provided for in the notes. If the payment is not paid within 5 days of the notice of default, KBM has the right at its sole discretion to convert the default amount into equity as provided for in the notes.

LG Capital Funding, LLC

On November 18, 2014 the Company entered into a Convertible Redeemable Note with LG Capital Funding, LLC. (“LG”). The Convertible Redeemable Note in the principal amount of $42,000 accrues interest at the rate of 8% per annum and matures November 18, 2015. The note may be prepaid at any time up to the 180^th day at a prepayment penalty as stipulated in the note agreement. The Company received net proceeds of $40,000 for this note, paying $2,000 of fees related to the note out of closing.

LG shall have the right to convert this note into shares of the Company’s common stock after 180 days at a conversion price equal to 65% (35% discount) of the lowest trading prices during the twenty trading day period ending on the latest complete trading day prior to conversion. Upon becoming convertible, the conversion feature will be accounted for as an embedded derivative liability.

There has been no payments made on this note through March 31, 2015, and the Company has accrued $1,224 of which $828 is for the period ended March 31, 2015.

Long-term Debt Summary – March 31, 2015	WHC Capital			JMJ Financial			KBM Worldwide			LG Capital			Total
Principal Amount	$	210,000		$	75,000		$	93,500		$	42,000		$	420,500
Original Issue Discount		-			(5,120	)		-			-			(5,633	)
Debt Discount		(93,118	)		(48,125	)		-			-			(133,276	)
Principal converted to stock		(29,262	)		(16,518	)		-			-			(45,780	)
Default Interest Added		170,418			-			-			-			170,581
Principal Repayments		(50,000	)		-			-			-			(50,000	)
Total – March 31, 2015		208,038			5,236			93,500			42,000			348,774
Less: Current portion of convertible notes payable		(208,038	)		(5,236	)		(93,500	)		(42,000	)		(348,774	)
Long-term portion of convertible notes payable	$	-		$	-		$	-		$	-		$	-

- 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

North American Oil & Gas Corp. 10-Q