Convertible Debt - Unrelated Party

3 Months Ended

Mar. 31, 2014

NOTE 5. CONVERTIBLE DEBT – UNRELATED PARTY

The Company entered into a series of convertible debt arrangements with an unrelated financier (“Financier”). The promissory notes carry interest at an 8% annual rate and are due nine months from the transaction date. The notes have a conversion option which allows the Financier to convert the principal and accrued interest into common shares based on the average of the lowest three closing prices of the Companies stock over the prior ten to fifteen days. That price is then discounted by 42% to arrive at the conversion price. The Company has the right to repurchase the notes during the first 180 days at a price which includes accrued interest plus the original principal amount multiplied by 150%.

The Company has calculated and recorded “Beneficial Conversion Options” on the notes, and reflects them as loan discounts which are amortized over the life of the notes. The calculation of the discounts is based on the difference between the note balance and the value of the common stock conversion. The conversion is calculated based on the three lowest closing prices during the ten to fifteen days preceding the loan transaction, discounted by 42%.

The outstanding combined debt was as follows as of December 31:

	March 31, 2014		December 31, 2013
Face amount of debt	$	57,800	$	115,500
Accrued interest		13,501		3,295
Less unamortized loan discounts		-		(32,581	)
	$	71,301	$	86,214

SMOKY MARKET FOODS INC 10-Q