Notes to the Consolidated Financial Statements
September 30, 2012
(Unaudited)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements presented are those of PCS Edventures!.com, Inc., an Idaho corporation, and its wholly owned subsidiary, PCS LabMentors, Ltd., a Canadian company (collectively, the Company).
On August 3, 1994, PCS Education Systems, Inc. was incorporated under the laws of Idaho to develop and operate stand-alone learning labs.
In October 1994, PCS exchanged common stock on a one-for-one basis for common stock of PCS Schools, Inc. As a result of this exchange, PCS Schools, Inc. became a wholly owned subsidiary of PCS. In the late 1990s, the Company divested the stand-alone learning labs to focus more on a hands-on module coupled with web-based technology for use in the classroom.
On March 27, 2000, PCS changed its name from PCS Education Systems, Inc. to PCS Edventures!.com, Inc.
On November 30, 2005, PCS entered into an agreement with 511092 N.B. LTD., a Canadian corporation (LabMentors) to exchange PCS common stock for common stock of 511092 N.B. LTD. as disclosed in the 8-K as filed with the Securities and Exchange Commission (the SEC) on December 9, 2005 and amended on February 15, 2006. As a result of the definitive Share Exchange Agreement, 511092 N.B. LTD. became a wholly owned subsidiary of the Company. In December 2005, the name of this subsidiary was formally changed to PCS LabMentors, Ltd. It remains a Canadian corporation.
NOTE 2 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The September 30, 2012, consolidated financial statements presented herein are unaudited, and in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows. Such financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report on Form 10-K for PCS Edventures!.com for the fiscal year ended March 31, 2012. The March 31, 2012, consolidated balance sheet is derived from the audited balance sheet included therein.
The operating results for the three and six-month periods ended September 30, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013.
NOTE 3 - GOING CONCERN
The Companys consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The established sources of revenues are not sufficient to cover the Companys operating costs. The Company has accumulated significant losses and payables and generated negative cash flows. The combination of these items raises substantial doubt about its ability to continue as a going concern. Managements plans with respect to alleviating this adverse position are as follows:
During the fiscal year ended March 31, 2012, PCS began the transition to a new marketing model that would address the challenges presented by the current budgetary cuts in the educational market. First, PCS has focused its primary development and marketing resources on the afterschool market where funding is more predictable and available than traditional school budgets, many of which are undergoing significant cuts. Second, PCS recognizes that its experience in operating learning centers creates a unique opportunity to supplement the current PCS business model through opening learning centers in partnership with schools. This approach combines
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PCS expertise in experiential learning with its considerable store of intellectual property comprised of learning frameworks, content, proprietary hardware, and software developed over the past two decades while increasing the throughput of our existing direct sales efforts. This marketing approach will incorporate the large body of PCS intellectual property into an afterschool program that families will pay tuition to attend. PCS developed a relationship with Sage International, an International Baccalaureate charter school based in Boise, to provide the facility and classroom for the afterschool program, and PCS, in exchange, provides the equipment and support. The school uses the material during the day as part of the curriculum, and PCS operates for-profit afterschool classes on weekends, evenings, during breaks and after the close of the school day. PCS conducted market tests of holiday camps during November and December of 2011 and in March of 2012, refining and confirming basic assumptions related to the business plan, and opened for afterschool and summer programs in April of 2012. The PCS Learning Center at Sage generated $8,522 and $20,429 of revenue in the three and six months ended September 30, 2012, respectively.
The business plan proposes the continued promotion and growth of the PCS Learning Center at Sage to further demonstrate proof of the concept, and the opening of two additional learning centers in FY2013, one more located in the Boise market, partnering with another local school, and a third opening in a market of strategic importance yet to be determined. The premise of the business plan is two-fold: 1) learning center revenues will be more consistent and predictable for the Company to plan and manage cash and growth; and 2) an established network of learning centers will serve as highly effective showrooms for sales of PCS products and services into neighboring districts. Also of note, close partnerships with schools provide an opportunity to test and improve PCS products on a regular basis.
Also related to the learning center business, PCS signed a license and royalty agreement with Creya Learning of India (CL). CL will use PCS content and support services to implement experiential learning curriculums into Indian schools and to build out a network of experiential learning centers in India that will function as premier afterschool locations as well as product showrooms. PCS, as part of the agreement, will receive ongoing royalties on the tuition charged to students attending PCS based programs. In Q1, FY2013, PCS also executed a STEM consulting agreement with Cultural Innovations for science center and STEM consulting services in the Kingdom of Saudi Arabia and concluded work associated with a tender competition contract initiated in Q2 of FY2012 with Tatweer Holding Company of Saudi Arabia. PCS will continue to pursue additional international opportunities to offset the continued challenges to the domestic economy and to take advantage of global market needs for PCS type products and services.
Product development in FY2013 has focused on continued improvements and refinements to PCS products and curriculum, primarily PCS Robotics related materials. Executive management continues in its conviction that the K12 educational robotics market represents a viable market opportunity for PCS.
The Company reported record results for the quarter ended September 30, 2012. Revenue of $1,308,510, up 73% from the same quarter last year, and net income of $99,627, compared to a loss of ($295,802) in the same quarter last year, was driven by a $740,000 sale that involved the delivery and implementation of afterschool robotics programs into 74 sites in 13 states. Educational robotics kit sales worldwide are projected to exceed $1.6B in 2014, and PCS Edventures is actively pursuing this market. These 74 sites are part of a much larger network of programs that the Company is working with to expand on this opportunity. Offsetting the positive income effect of the increase in sales was a charge of $128,044 due to the change in fair value of the derivatives related to a portion of our debt (see Note 7). Revenue for the six months ended September 30, 2012, were $1,873,542, an increase of 42% compared to the same period in the prior year. Net loss for the six-month period ended September 30, 2012 was ($256,191) after the charge of $205,271 for the change in fair value of the derivatives related to a portion of our debt (see Note 7). Net loss for the same period of the prior year, during which time there was no derivative charge, was ($900,582), thus showing a marked improvement in the results of operations. Cash flow from operations for the six months ended was $150,259.
While the efforts put in by management and the entire employee team are beginning to be realized, as illustrated by the improved results for the first and second quarters of this fiscal year, the ability of the Company to continue as a going concern is dependent upon our ability to successfully accomplish the plans described in the preceding paragraphs, to raise capital as needed, to continue to monitor and reduce overhead costs, and to attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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NOTE 4 - PREPAID EXPENSES
Prepaid expenses for the periods are as follows:
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|
| |
|
September 30, 2012
|
March 31, 2012
|
Prepaid insurance
|
$ 10,292
|
$ 15,991
|
Prepaid trade show/travel
|
5,531
|
3,354
|
Prepaid inventory
|
131,162
|
17,000
|
Prepaid software
|
28,641
|
11,964
|
Prepaid expenses, other
|
14,498
|
10,000
|
Total Prepaid Expenses
|
$ 190,124
|
$ 58,309
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NOTE 5 - FIXED ASSETS
Assets and depreciation for the periods are as follows:
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| |
|
September 30, 2012
|
March 31, 2012
|
Computer/office equipment
|
$ 10,112
|
$ 10,112
|
Server equipment
|
154,107
|
154,107
|
Software
|
127,355
|
127,355
|
Accumulated depreciation
|
(244,040)
|
(234,682)
|
Total Fixed Assets
|
$ 47,534
|
$ 56,892
|
Fixed Asset depreciation expense for the three months ended September 30, 2012 and 2011 was $4,679 and $11,782, respectively. Fixed Asset depreciation expense for the six months ended September 30, 2012 and 2011 was $9,358 and $67,122, respectively.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses for the periods are as follows:
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|
| |
|
September 30, 2012
|
March 31, 2012
|
Credit card debt
|
$ 53,572
|
$ 56,872
|
Interest payable
|
40,122
|
31,915
|
Sales tax payable
|
1,028
|
14,030
|
Other
|
-
|
953
|
Total accrued expenses
|
$ 94,722
|
$ 103,770
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NOTE 7 NOTES PAYABLE
Notes payable consisted of the following:
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|
|
| |
|
September 30, 2012
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March 31, 2012
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Notes Payable Current
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$ 95,667
|
$ 283,668
|
Notes Payable Long Term
|
|
25,000
|
-
|
Line of Credit
|
|
33,993
|
36,335
|
Convertible Notes
|
|
340,000
|
315,000
|
Debt Discount
|
|
(65,918)
|
-
|
Total Notes Payable
|
$ 428,742
|
$ 635,003
|
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Notes Payable
On December 30, 2011, the Company entered into a note payable in the amount of $30,000. The note bears interest at ten percent (10%) per annum and was due on February 28, 2012. This note was subsequently extended to July 31, 2012. A second extension was issued on this note, under the same terms and conditions, with a new maturity date of December 31, 2012.
On January 6, 2012, the Company entered into a promissory note in the amount of $35,000. The note paid interest at ten percent (10%) per annum. The note was due and payable with accrued interest on or before March 6, 2012, and was secured by certain accounts receivable of the Company. Upon collection of the pledged receivables the amount was rolled into a new promissory note dated January 26, 2012, in the aggregate amount of $175,000 with interest payable at fifteen percent (15%) per annum. This note was due and payable on or before April 10, 2012. The aggregate amount of $175,000 plus accrued interest was paid in full on April 18, 2012, upon receipt of the receivable related to the pledged purchase order used to secure the January 26, 2012 note. The January 26, 2012 note included attached warrants to purchase 175,000 shares of restricted Rule 144 common stock at a rate of $0.12 per share for the first 18 months and $0.18 per share for the remaining 18 months. The warrants expire 36 months from the date of the agreement. The warrants attached to the note were valued using the Black Scholes Valuation Model, resulting in a fair value of $8,006, the balance of which was fully amortized as of March 31, 2012.
On January 13, 2012, the Company entered into two separate promissory notes in the amount of $35,000 each for an aggregate amount of $70,000. The notes bear interest at nine percent (9%) per annum and are due and payable on or before January 10, 2013. Minimum monthly payments of 1.5% of the loan balances are required and are submitted to Lenders financial institution. Principal payments of $4,333 had been paid as of September 30, 2012.
On March 14, 2012, the Company entered into a promissory note for $10,000. The note bears interest at ten percent (10%) per annum and was due and payable on or before April 30, 2012. This note was subsequently extended and was due and payable on or before July 31, 2012. On July 30, 2012, the Company repaid this note in the amount of $10,380.83. The payment consisted of $10,000 in principal and $380.83 in accrued interest. The interest paid included $46.58 that was accrued in Interest Payable and expensed as of March 31, 2012.
On April 18, 2012, we entered into a promissory note with Anthony A. Maher for $25,000 with an interest rate of 7.5% per annum. The balance is due in full on or before April 18, 2017.
On June 14, 2012, we executed a promissory note with one of our shareholders, for $60,000 at 15% interest per annum, secured by seven of our sales orders to finance inventory purchases. The promissory note was due on or before August 14, 2012. There is no conversion feature associated with this promissory note. This note was subsequently rolled into a $560,000 note dated July 17, 2012.This transaction involved the issuance of a promissory note, which was payable with interest of 15% per annum, in cash on or before September 30, 2012. The $60,000 due August 14, 2012 was rolled in-to the new promissory note agreement as part of the amount borrowed. The Company issued 100,000 warrants with a 36 month term at $0.15 per share exercise price as part of this agreement. The promissory note was secured by a purchase order in the amount of $741,780 dated July 16, 2012. The loan proceeds were utilized to purchase inventory to fulfill the Purchase Order, bring certain vendors and payable accounts current, and finance the operations and logistics required to fulfill and support the order. This loan was repaid in full, including accrued interest of $11,277, on September 4, 2012.
Line of Credit
On September 13, 2011, the Company drew down a line of credit at a financial institution in the amount of $39,050. The line of credit bears interest at 17.5% per annum. The Company makes variable monthly payments. As of September 30, 2012, the Company has paid $5,057 in principal leaving a balance of $33,993 payable.
Convertible Notes
On March 31, 2011, the Company entered into several convertible promissory notes in the aggregate amount of $215,000. The notes are convertible into common stock at a rate of $0.15 per share. The notes bear interest at ten percent (10%) per annum and include attached warrants to purchase two shares of restricted Rule 144 common stock for every dollar loaned, at a rate of $0.15 per share, for an aggregate total of 430,000 restricted Rule
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144 common shares. The notes were due on June 29, 2011, and are secured by that portion or percentage of the Borrowers Intellectual Property which the principal amount of the note bears to the fair market value of all Intellectual Property of the Borrower. Intellectual Property of the Borrower is defined to mean all trademarks, registered or unregistered, marks, logos, business names, proprietary computer software, curriculum, copyrighted material, registered or unregistered, trade names, patents and patent applications, and all general intangibles relating to the foregoing. Notwithstanding the foregoing, Intellectual Property shall not include any license, property or contract right the granting of a security in which would be prohibited by law or contract. The warrants expire 36 months from date of agreements. The Company recognized a discount on the debt issued, which was composed of an embedded beneficial conversion feature and attached warrants. The Company measured the beneficial conversion feature by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment date using the effective conversion price of the notes. This intrinsic value is limited to the portion of the proceeds allocated to the notes, and was calculated as $58,000. The warrants attached to the notes were valued using the Black Scholes Valuation Model, resulting in a fair value of $63,479, the balance of which was fully amortized as of June 30, 2011.
The Company extended the due date on the convertible notes payable dated March 31, 2011 in the aggregate amount of $215,000. These notes were originally due on June 29, 2011 and subsequently extended. In consideration for the first note extension, the Company issued an additional 430,000 restricted Rule 144 common stock warrants. The restricted Rule 144 common stock warrants allow for the purchase of one share of restricted Rule 144 common stock at $0.15 per restricted Rule 144 common stock warrant. The warrants expire 36 months from the date of the original warrant agreement. The fair market value of these warrants was calculated using the Black Scholes Valuation Model, resulting in an expense of $61,995 during the quarter ended June 30, 2011. On February 10, 2012, the notes were extended to August 25, 2013, with repayments to be made quarterly beginning in May, 2012, in the amount of $40,000 per quarter, with the remaining balance due in August 2013. No additional warrants were issued in connection with subsequent extensions.
On August 1, 2012, the Company issued amendments to the convertible note agreements and extended the due date with the repayments in the amount of $40,000 per quarter to begin April, 2013, and the final payments due in August, 2014, with any remaining balance due at that time. In consideration for extending the due date of the promissory notes, the expiration dates on the warrants issued on March 31, 2011 and June 27, 2011, were amended and extended an additional three years, making the new expiration dates August 1, 2017. At the Lenders sole option, Lenders may elect to receive payment of their respective note and all accrued interest in restricted common stock of the Borrower at the price per share of said common stock at same rate as the warrants.
On February 29, 2012, the Company entered into three separate convertible promissory notes in the aggregate amount of $100,000. The notes bear interest at ten percent (10%) per annum and were due on May 30, 2012. At the sole option each respective Lender, the outstanding balance of the notes may be converted into shares of restricted Rule 144 common stock of the Borrower at a price per share of $0.05. In the event Lender elects to convert any outstanding balance due under this note into such shares, Lender shall give written notice to the Borrower seven (7) days prior to the effective date of such exercise. At Borrowers sole option, Borrower may elect to pay Lender in cash up to one-half (1/2) of the then principal and interest due under the note. In such event, the remaining balance of principal and interest shall be converted as provided under the note agreement. On June 14, 2012, one of the notes, in the amount of $50,000, was converted into 1,028,770 shares of our restricted common stock in accordance with the terms of the convertible promissory note. A second extension was issued for the remaining two notes in an aggregate amount of $50,000, under the same terms and conditions, with a new maturity date of October 31, 2012. These two notes were subsequently extended, with no changes to the terms, and are now due and payable on or before December 31, 2012.
On April 23, 2012, we entered into a Securities Purchase Agreement whereby we issued an 8% convertible promissory note in an aggregate amount of $32,500, convertible into shares of common stock of the Company at the expiration of six months, at a discount to market of 42% of the Market Price, which means the average of the lowest three (3) Closing Bid Prices for the common stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The Company recognized a discount on the debt issued related to the derivative liability. The Company measured the derivative liability using a lattice model as described in Note 8, of which $4,850 was amortized during the six months ended September 30, 2012.
The convertible promissory note has a due date of January 26, 2013; can be pre-paid, subject to varying Optional Prepayment Date payments ranging from 125% if prepaid during the first 30 days to 150% if prepaid prior
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to the expiration of 180 days. Conversion is restricted so that conversions will not result in an ownership of more than 4.99% of the outstanding common stock of the Company by the note holder. The Company is at all times required to reserve at least four times the amount of shares that may be subject to conversion at any time for issuance on conversion. The note holder also has a first right of refusal on any additional funding of up to $100,000.
The agreements contain customary representations and warranties, customary affirmative and negative covenants, customary anti-dilution provisions, and customary events of default that entitle the note holder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the convertible promissory note.
On June 4, 2012, we entered into a second Securities Purchase Agreement with the same party as the April 23, 2012 agreement, whereby we issued an 8% convertible promissory note in an aggregate amount of $28,750, convertible into shares of common stock of the Company under the same terms as the first note dated April 23, 2012. The Company recognized a discount on the debt issued related to the derivative liability. This debt discount was calculated as $28,750, of which $5,174 was amortized during the six months ended September 30, 2012.
On July 16, 2012, we entered into a third Securities Purchase Agreement with the same party as our April 23 and June 4, 2012 agreements, whereby we issued an 8% convertible promissory note in an aggregate amount of $13,750, convertible into shares of common stock of the Company under the same terms as the first note dated April 23, 2012. The Company recognized a discount on the debt issued related to the derivative liability. This debt discount was calculated as $13,750, of which $1,436 was amortized during the six months ended September 30, 2012.
On June 7, 2012, Leann R. Gilberg, Robert O. Grover and Brett A. Newbold, three of our officers, as well as one employee shareholder, and one additional shareholder, each converted his/her respective $2,400 convertible promissory note dated May 3, 2012, into 60,288 shares of our restricted common stock in accordance with the terms of said convertible promissory notes. Forms 4 were filed for the three officers on June 12, 2012. The Company recognized a discount on the debt issued related to the embedded beneficial conversion feature. The Company measured the beneficial conversion feature by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment date using the effective conversion price of the notes. This intrinsic value was calculated as $9,889, of which $7,184 was amortized during the three months ended June 30, 2012, at the time of conversion with the remaining balance included in the gain on redemption at conversion.
The above transactions were entered into with parties who meet the definition of an accredited investor as that term is defined in Rule 501 of Regulation D of the SEC. The securities were offered and sold pursuant to an exemption from registration under the Securities Act of 1933, as amended (the Securities Act), pursuant Section 4(2) thereof.
NOTE 8 DERIVATIVE FINANCIAL INSTRUMENTS
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. The Company utilizes various types of financing to fund our business needs, including convertible debts with conversion features and other instruments not indexed to our stock. The convertible notes include fluctuating conversion rates. The Company uses a lattice model for valuation of the derivative. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and then re-valued at each reporting date, with changes in the fair value reported in income in accordance with ASC 815. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net cash settlement of the derivative instrument could be required within the 12 months of the balance sheet date.
As discussed in Note 7 under convertible notes, the Company issued convertible notes payable that provide for the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Companys common stock. The number of shares of common stock to be issued is based on the future price of the Companys common stock. As of September 30, 2012, the number of shares of common stock issuable upon conversion of promissory notes and warrants could exceed the Companys maximum number of authorized common shares. Due to the fact that the
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number of shares of common stock issuable is not able to be determined definitively, the equity environment is tainted and all additional convertible debentures and warrants are included in the value of the derivative. Pursuant to ASC 815-15 Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities on the issuance date. The fair values of the Companys derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, using a lattice model. The Company recorded current derivative liabilities of $253,811 at September 30, 2012. The change in fair value of the derivative liabilities for the three and six months ended September 30, 2012 resulted in a loss of $128,044 and $205,271, respectively, which was reported as other income/(expense) in the consolidated statements of operations.
The following presents the derivative liability value by instrument type at September 30, 2012:
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|
| |
|
September 30,
|
|
2012
|
Convertible Notes
|
|
$ 219,121
|
Common Stock Warrants
|
|
34,690
|
|
$ 253,811
|
The fair market value determined for the derivative liability is $253,811. A total of $84,889 was recorded as a debt discount up to the face value of the notes and the excess of $4,254 was expensed.
The following is a summary of changes in the fair market value of the derivative liability during the six months ended September 30, 2012:
| |
|
Derivative
Liability Total
|
Balance, April 23, 2012
|
|
Increase in derivative value due to issuances of convertible notes and tainting of other
convertible notes and warrants
|
$ 108,905
|
Promissory notes converted during the period
|
(36,349)
|
Change in fair market value of derivative liabilities due to mark to market adjustments
|
39,461
|
Balance, June 30, 2012
|
112,017
|
Increase in derivative value due to issuances of convertible notes andwarrants
|
18,054
|
Change in fair market value of derivative liabilities due to mark to market adjustments
|
123,740
|
Balance, September 30, 2012
|
$ 253,811
|
Key inputs and assumptions used to value the convertible debentures and warrants issued during the six months ended September 30, 2012:
·
The projected volatility curve for each valuation period was based on the historical volatility of the Company.
·
The stock price would fluctuate with the Company projected volatility.
·
An event of default for the convertible note would occur 5% of the time, increasing 1.00% per month to a maximum of 10%.
·
Alternative financing for the convertible note would be initially available to redeem the note 0% of the time and increase monthly by 1% to a maximum of 10%.
·
The monthly trading volume would average $200,000 in the period and would increase at 5% per month.
·
The Holder would automatically convert the notes at the greater of two times the conversion price or stock price if the registration was effective and the Company was not in default.
·
The Holder would exercise the warrant at maturity if the stock price was above the exercise price.
·
The Holder would exercise the warrant at target prices starting at the greater of two times the exercise price or the stock price; and lowering such target as the warrants approached maturity.
·
The Holder would automatically convert all of the shares at a stock price of price equal to the target price.
·
The Holder would convert on a monthly basis in amounts not to exceed the average quarters trading volume based on historical performance, assuming the volume would increase by 5% each month.
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NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2008, the Company adopted guidance which defines fair value, establishes a framework for using fair value to measure financial assets and liabilities on a recurring basis, and expands disclosures about fair value measurements. Beginning on January 1, 2009, the Company also applied the guidance to non-financial assets and liabilities measured at fair value on a non-recurring basis, which includes goodwill and intangible assets. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of September 30, 2012: