(5) Convertible Debentures

9 Months Ended

Sep. 30, 2013

Notes

(5) Convertible Debentures

(5)           Convertible Debentures

 During the period from October 10, 2011 to June 30, 2012, the Company issued various Convertible Debentures in the total amount of $176,000. During the nine months ended September 30, 2013, the Company issued various Convertible Debentures in the total amount of $763,500. The debentures bear simple interest of 8% to 15% per annum with maturities ranging from nine months to one year.  The outstanding principal and interest of the debenture is convertible into shares of common stock at a fixed conversion price ranging from $0.02 to  $0.04 per share in addition to variable discounted pricing based on the Bloomberg closing bid price or a discount of the market price.  The conversion rate was based upon the market price of the Company's common stock as determined by reference to recent cash sales.

Following is an analysis of the convertible debentures outstanding as of September 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	1,000	12 Months	16%
Debenture 2	10/10/2011	0.04	25,000	25,000	12 Months	16%
Debenture 3	12/20/2011	0.04	6,000	5,466	12 Months	16%
Debenture 4	2/17/2012	0.04	10,000	10,000	12 Months	16%
Debenture 5	3/9/2012	0.04	5,000	5,000	12 Months	16%
Debenture 6	3/19/2012	0.04	5,000	5,000	12 Months	16%
Debenture 7	4/29/2012	0.04	5,000	5,000	12 Months	16%
Debenture 8	4/25/2012	0.04	10,000	10,000	12 Months	16%
Debenture 9	7/20/2012	0.04	62,000	45,000	12 Months	16%
Debenture 10	7/29/2012	0.04	10,000	10,000	12 Months	16%
Debenture 11	8/09/2012	0.04	15,000	15,000	12 Months	16%
At September 30, 2012			253,000	136,466

Description	Date of Agreement	Cost basis at Conversion	Original Amount	Unpaid principal balance	Term	Interest Rate
Debenture 12	10/9/2012	0.04	5,000	5,000	12 Months	14%
Debenture 13	10/31/2012	0.04	12,500	12,500	12 Months	14%
Debenture 14	11/20/2012	0.04	2,000	2,000	12 Months	14%
Debenture 15	11/20/2012	0.04	5,000	5,000	12 Months	14%
Debenture 16	12/11/12	0.04	2,500	2,500	12 Months	14%
Debenture 17	12/29/12	0.04	2,500	2,500	12 Months	14%
Debenture 18	1/5/13	0.04	2,500	2,500	12 Months	14%
Debenture 19	2/21/13	0.04	2,500	2,500	12 Months	14%
Debenture 20	4/19/13	Variable	32,500	32,500	12 Months	8%
Debenture 21	5/28/13	Variable	47,500	47,500	9 Months	8%
Debenture 22	7/11/13	Variable	21,500	21,500	12 Months	8%
Debenture 23	7/23/13	Variable	62,000	62,000	9 Months	8%
Debenture 24	7/26/13	Variable	78,500	78,500	12 Months	8%
Debenture 25	8/2/13	Variable	21,500	21,500	12 Months	8%
Debenture 26	9/23/13	Variable	25,000	25,000	11 Months	8%
Debenture 27	8/30/13	Variable	37,500	37,500	12 Months	15%
Debenture 28	8/14/13	0.02	100,000	100,000	12 Months	14%
Debenture 29	9/4/13	Variable	50,000	50,000	12 Months	8%
At September 30, 2013			510,500	10,500

Under the terms of the 14% Convertible Debentures, the interest rate is increased to 16% if the Company fails to make payments when due. As of September 30, 2013, the Company had failed to make required payments on convertible debentures totaling $136,466.

As of September 30, 2013, the Company allowed securities transfers on debentures various debentures, and issued new debentures totaling $396,000 to eight note holders.  Various debentures were converted either in full or partially totaling $208,610 which resulted in a derivative liability of $1,490,457 and a loss on debt settlement of $579,310 for the three months ended September 30, 2013.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 three month period ended September 30, 2013, the Company recognized $182,084 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 prices at valuation ranging from: $0.0019 to $0.004

Conversion prices ranging from $.00095 to 0.002

Years to Maturity %: from .004 to 1.00

Risk free rates ranging from: . 01 to 1.0

Volatility ranging from: 166.2 to 762.7

The change in derivative liability recognized in the financial statements for the three month period ended September 30, 2013 was $1,193,984.