Notes Payable

12 Months Ended

Dec. 31, 2012

Note 9-Notes Payable

During July 2010, the Company entered into Series A 8% bonds for a total of $5,000,000, of which $1,235,500 was funded. The bonds matured during July 2012, with interest accruing at 8%. With the default, interest on the bonds accrues at 12%. The unpaid interest on the bonds shall be due and payable quarterly in arrears on the last day of each October, January, April, and July commencing in October 2010. The Company will make a bonus payment of $50,000 per bond upon maturity. The loans are currently in default and due on demand.

The holders each received five-year warrants to purchase 0.67 membership units of EGLLC per $50,000 bond at a purchase price of $37,500 per membership unit and on July 31, 2011 an additional five-year warrant to purchase 0.67 membership units of EGLLC per $50,000 bond at a purchase price of $37,500 per membership unit was issued. The warrants expire July 31, 2015. The warrants were valued using the Black-Scholes pricing model and expensed during 2010.

	December 31,
	2012			2011
Series A 8% bonds	$	919,779		$	1,399,779
Less current portion		(919,779	)		(1,399,779	)
	$	-		$	-

Promissory Notes - Related Parties

During 2012, the Company entered into a series of promissory notes with related parties for a total of $577,260. The notes mature on May 31, 2013 and accrue interest at a rate of 6%. The Company paid $371,523 on the notes during 2012.

	December 31,
	2012			2011
Promissory Notes	$	205,737		$	-
Less current portion		(205,737	)		-
	$	-		$	-

Promissory Notes

During 2012, the Company entered into a promissory note with an un-related party for a total of $500,000. The note matures on March 31, 2013 and accrues interest at a rate of 6%. Subsequent to December 31, 2012, this note was extended to May 31, 2013.

	December 31,
	2012			2011
Promissory Notes	$	500,000		$	-
Less current portion		(500,000	)		-
	$	-		$	-

Related Party Convertible Bridge Loans

During February 2012, the Company entered into three convertible bridge loans with a related parties totaling $1,800,000 due in August 2012. The loans were unsecured and called for 12% annual interest on the outstanding unpaid principal. The agreements provided that upon the reverse merger, the holder would be able to convert the entire principal and accrued interest then outstanding into Units of the Company at a conversion price of $1.00 per Unit. Each Unit consisted of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.50 per share. Each Unit also contained a contingent warrant exercisable upon closing of a private placement offering ("PPO") at a price of less than $1.25 per share. The conversion option was to expire upon the completion of a PPO within 90 days of the reverse merger. The Company did not complete the PPO with the 90 days causing the conversion feature to expire during July 2012. Because of the non-payment of interest, the bridge loans are considered in default and currently bear interest at the 14% default rate.

The Company analyzed the conversion option at issuance and again at the time of the reverse merger. Upon the reverse merger, the Company determined that the conversion options did not require bifurcation and accounting for as derivatives under ASC 815. The conversion options were considered indexed to the Company's stock (ASC 815-10-15-74) and, if freestanding to be classified in the statement of stockholder's equity (ASC 815-40-25). The Company calculated the beneficial conversion features to be valued at $532,905 and recorded this amount as a discount on the debt with a corresponding credit in equity. The debt discount was amortized over the term of the debt.

Unrelated Party Convertible Bridge Loans

During April 2012, the Company entered into a bridge loan with an unrelated party for $100,000 due October 2012. The loan is unsecured, has an annual interest rate of 12% on the outstanding, unpaid principal. Prior to the maturity date, the holder may have converted the entire principal and accrued interest, then outstanding, into Units as in the related party convertible bridge loans. Furthermore, should the Company have completed a PPO prior to the maturity date, the bridge loan would have automatically converted into Units. If no PPO was completed by maturity, the Holder had a put right exercisable within 30 days after the maturity date. The put was not exercised and because of the non-payment, the bridge loan is considered in default.

The Company analyzed the $100,000 convertible bridge loan upon issuance to determine if the conversion option required bifurcation and accounting for as a derivative instrument. The conversion option along with the contingent put did not meet the scope exception under ASC 815 to allow equity classification. As described above, the put could have been exercised at maturity if there was no PPO. The put was exercisable at the holder's option for 30 days following maturity. The complex embedded derivative consisting of the conversion option and the put was bifurcated and accounted for as derivative instrument separate from the host. The Company used the lattice pricing model to value the derivative. The value at issuance was de minims

	December 31,
	2012			2011
Convertible bridge loans principal amount - related party	$	1,800,000		$	-
Convertible bridge loans principal amount - unrelated party		100,000			-
Effect of beneficial conversion		(532,905	)		-
Accretion of debt discount		532,905			-
Net convertible bridge loans	$	1,900,000		$	-

- 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

Eastern Resources, Inc. 10-K