(5) Convertible Debentures

6 Months Ended

Jun. 30, 2013

Notes

(5) Convertible Debentures

(5)       Convertible Debentures

During the period from August 24, 2011 to June 30, 2012, the Company issued various Convertible Debentures in the total amount of $176,000. During the six months ended June 30, 2013, the Company issued various Convertible Debentures in the total amount of $135,000. All debentures bear simple interest of 14% per annum with a one year maturity.  The outstanding principal and interest of the debenture is convertible into shares of common stock at a conversion price of $0.04 per share.  The conversion rate was based upon the market price of the Company's common stock as determined by reference to recent cash sales.  The Directors of the Company have approved the registration of 120% of the shares of common stock issuable upon conversion of the principal amount of the debentures issued in the year ending December 31, 2011 to allow for conversion of principal and interest on such debentures into shares of common stock.

Following is an analysis of the convertible debentures outstanding as of June 30, 2013 and 2012:

Description	Date of Agreement	Cost basis at Conversion	Original Amount	Unpaid principal balance	Term	Interest Rate
Debenture 1	8/24/2011	0.04	100,000	61,356	12 Months	16%
Debenture 2	9/27/2011	0.04	10,000	0	12 Months	16%
Debenture 3	10/10/2011	0.04	25,000	25,000	12 Months	16%
Debenture 4	12/20/2011	0.04	6,000	6,000	12 Months	16%
Debenture 5	2/17/2012	0.04	10,000	10,000	12 Months	16%
Debenture 6	3/9/2012	0.04	5,000	5,000	12 Months	16%
Debenture 7	3/19/2012	0.04	5,000	5,000	12 Months	16%
Debenture 8	4/29/2012	0.04	5,000	5,000	12 Months	16%
Debenture 9	4/25/2012	0.04	10,000	10,000	12 Months	16%
At June 30, 2012			176,000	127,356

Description	Date of Agreement	Cost basis at Conversion	Original Amount	Unpaid principal balance	Term	Interest Rate
Debenture 10	7/1/2012	0.04	25,000	12,333	12 Months	14%
Debenture 11	7/1/2012	0.04	25,000	0	12 Months	14%
Debenture 12	7/21/2012	0.04	25,000	19,500	12 Months	14%
Debenture 13	7/20/2012	0.04	62,000	62,000	12 Months	14%
Debenture 14	7/29/2012	0.04	10,000	10,000	12 Months	14%
Debenture 15	9/28/2012	0.04	25,000	25,000	12 Months	14%
Debenture 16	9/01/2012	0.04	10,000	10,000	12 Months	14%
Debenture 17	8/09/2012	0.04	15,000	21,400	12 Months	14%
Debenture 18	10/9/2012	0.04	5,000	5,000	12 Months	14%
Debenture 19	10/31/2012	0.04	12,500	12,500	12 Months	14%
Debenture 20	11/20/2012	0.04	5,000	5,000	12 Months	14%
Debenture 21	11/20/2012	0.04	2,000	2,000	12 Months	14%
Debenture 22	11/20/2012	0.04	2,000	2,000	12 Months	14%
Debenture 23	11/20/2012	0.04	5,000	5,000	12 Months	14%
Debenture 24	12/11/12	0.04	2,500	2,500	12 Months	14%
Debenture 25	12/29/12	0.04	2,500	2,500	12 Months	14%
Debenture 26	1/5/13	0.04	2,500	2,500	12 Months	14%
Debenture 27	1/6/13	0.04	50,000	50,000	12 Months	14%
Debenture 28	2/21/13	0.04	2,500	2,500	12 Months	14%
Debenture 29	4/19/13	-	32,500	32,500	12 Months	8%
Debenture 30	5/28/13	-	47,500	47,500	9 Months	8%
At June 30, 2013			$544,500	$459,089

Under the terms of the Convertible Debentures, the interest rate is increased to 16% if the Company fails to make payments when due. As of June 30, 2013, the Company had failed to make required payments on convertible debentures totaling $66,000.

On January 18, 2013 debenture 2 totaling $9,219 was converted to 275,450 shares of common stock.

As of June 30, 2013, the Company allowed securities transfers on debentures 1,10,11,12 and 17, and issued new debentures 29 and 30 totaling $190,000 to nine note holders.  Debenture 11 in the amount of $25,000 was converted in full and partial conversions totaling $93,074 occurred which resulted in a derivative liability of $296,471 and a loss on debt settlement of $297,174.  We evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes were not afforded the exemption for conventional convertible instruments due to their variable conversion rates. The notes have no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to recognize the notes under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument. The Company elected to initially and subsequently measure the notes in their entirety at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the imputed interest associated with the embedded derivative. The debt discount is amortized over the life of the note and recognized as interest expense. For the period ended June 30, 2013, the Company recognized $36,208 as interest expense. The derivative liability is adjusted periodically according to the stock price fluctuations. At the time of conversion, any remaining derivative liability will be charged to additional paid-in capital. For purpose of determining the fair value of the note, the Company used the Black Scholes option valuation model.

The significant assumptions used in the Black Scholes valuation are as follows:

	Stock price at valuation $	Conversion Price $	Years to Maturity %	Risk Free Rate %	Volatility %
Debenture 1	0.003 - 0.004	0.002 - 0.015	.25	0.080 – 0.040	182.1 – 339.5
Debenture 10	0.019 - 0.004	0.004 - 0.008	.27	0.060 – 0.040	298.0 – 339.5
Debenture 12	0.019 - 0.004	0.002 - 0.004	.25	0.050 – 0.040	270.1 – 339.5
Debenture 17	0.031 - 0.004	0.002 - 0.016	.25	0.060 – 0.040	273.5 – 339.5
Debenture 29	0.030 - 0.004	0.002 - 0.015	.25	0.080 – 0.040	182.1 – 339.5
Debenture 30	0.030 - 0.004	0.004 - 0.030	.25	0.120 – 0.040	295.0 – 339.5

The change in derivative liability recognized in the financial statements as of June 30, 2013 was $296,471.