Note 4 - Convertible Debentures

12 Months Ended

Dec. 31, 2013

Notes

Note 4 - Convertible Debentures

Note 4 – Convertible Debentures

During the years ended December 31, 2012 and 2011, the Company issued various convertible debentures for cash in the total amount of $409,500.  All debentures issued in 2011 and 2012 are unsecured and 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 $30.00 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 following is a schedule of the convertible debentures outstanding as of December 31, 2012:

Description	Date	Conversion Price	Original Principal Amount	Unpaid Principal Balance	Term	Interest Rate
Debenture 1	8/24/11	$30.00	$100,000	$100,000	12 months	14%
Debenture 2	9/27/11	$30.00	10,000	9,219	12 months	14%
Debenture 3	10/10/11	$30.00	25,000	25,000	12 months	14%
Debenture 4	12/20/11	$30.00	6,000	6,000	12 months	14%
Debenture 5	2/17/12	$30.00	10,000	10,000	12 months	14%
Debenture 6	3/9/12	$30.00	5,000	5,000	12 months	14%
Debenture 7	3/19/12	$30.00	5,000	5,000	12 months	14%
Debenture 8	4/29/12	$30.00	5,000	5,000	12 months	14%
Debenture 9	4/25/12	$30.00	10,000	10,000	12 months	14%
Debenture 10	7/1/12	$30.00	25,000	25,000	12 months	14%
Debenture 11	7/1/12	$30.00	25,000	25,000	12 months	14%
Debenture 12	7/21/12	$30.00	25,000	25,000	12 months	14%
Debenture 13	7/20/12	$30.00	62,000	62,000	12 months	14%
Debenture 14	7/29/12	$30.00	10,000	10,000	12 months	14%
Debenture 15	9/28/12	$30.00	25,000	25,000	12 months	14%
Debenture 16	9/1/12	$30.00	10,000	10,000	12 months	14%
Debenture 17	8/9/12	$30.00	15,000	15,000	12 months	14%
Debenture 18	10/9/12	$30.00	5,000	5,000	12 months	14%
Debenture 19	10/31/12	$30.00	12,500	12,500	12 months	14%
Debenture 20	11/20/12	$30.00	5,000	5,000	12 months	14%
Debenture 21	11/20/12	$30.00	2,000	2,000	12 months	14%
Debenture 22	11/20/12	$30.00	2,000	2,000	12 months	14%
Debenture 23	12/11/12	$30.00	5,000	5,000	12 months	14%
Debenture 24	12/2/12	$30.00	2,500	2,500	12 months	14%
Debenture 25	2/17/12	$30.00	2,500	2,500	12 months	14%
Total at December 31, 2012			$409,500	$408,719

Under the terms of the convertible debentures issued in 2011 and 2012, the interest rate is increased to 16% if the Company fails to make payments when due.  As of December 31, 2012, the Company had failed to make required payments on convertible debentures totaling $141,000.

During the year ended December 31, 2013, the Company issued various convertible debentures in the total amount of $1,224,516: $945,500 cash; $10,000 original issue discount; $5,000 services; $203,000 for other notes payable; and $61,016 for accrued interest payable.  In addition in 2013, $84,534 cash payments were made to reduce the principal balance of convertible debentures and a total principal balance of $548,411 was extinguished through the conversion of principal to common shares of the Company.  The debentures issued in 2013 are unsecured and bear simple interest ranging from 6% to 15% per annum, with maturities ranging from six months to one year.  The outstanding principal and accrued interest of the debentures are convertible into shares of the Company’s common stock at a fixed conversion price ranging from $0.15 to $30.00 per share in addition to variable discounted pricing based on the Bloomberg closing bid price or a discount of the market price.  The following is a schedule of the convertible debentures outstanding as of December 31, 2013:

Description	Date	Conversion Price	Original Principal Amount	Unpaid Principal Balance	Term	Interest Rate
Debenture 1	10/10/11	$30.00	25,000	25,000	12 months	16%
Debenture 2	12/20/11	$30.00	6,000	1,466	12 months	16%
Debenture 3	2/17/12	$30.00	10,000	10,000	12 months	16%
Debenture 4	3/9/12	$30.00	5,000	5,000	12 months	16%
Debenture 5	3/19/12	$30.00	5,000	5,000	12 months	16%
Debenture 6	4/29/12	$30.00	5,000	5,000	12 months	16%
Debenture 7	4/25/12	$30.00	10,000	10,000	12 months	16%
Debenture 8	10/9/12	$30.00	5,000	5,000	12 months	16%
Debenture 9	10/31/12	$30.00	12,500	12,500	12 months	16%
Debenture 10	11/15/12	$30.00	5,000	5,000	12 months	16%
Debenture 11	11/20/12	$30.00	2,000	2,000	12 months	16%
Debenture 12	12/11/12	$30.00	2,500	2,500	12 months	16%
Debenture 13	12/29/12	$30.00	2,500	2,500	12 months	16%
Debenture 14	1/5/13	$30.00	2,500	2,500	12 months	14%
Debenture 15	2/5/13	$30.00	2,500	2,500	12 months	14%
Debenture 16	7/11/13	Variable	21,500	21,500	12 months	12%
Debenture 17	7/23/13	Variable	62,000	62,000	9 months	8%
Debenture 18	7/26/13	Variable	78,500	78,500	12 months	8%
Debenture 19	7/29/13	$30.00	10,000	10,000	12 months	14%
Debenture 20	8/2/13	Variable	21,500	21,500	12 months	12%
Debenture 21	8/30/13	Variable	37,500	37,500	12 months	15%
Debenture 22	9/4/13	Variable	50,000	50,000	12 months	8%
Debenture 23	9/23/13	Variable	25,000	25,000	12 months	14%
Debenture 24	9/27/13	Variable	25,402	25,402	12 months	14%
Debenture 25	9/26/13	Variable	7,500	7,500	12 months	15%
Debenture 26	9/30/13	Variable	5,250	5,250	12 months	15%
Debenture 27	9/30/13	Variable	7,500	7,500	12 months	15%
Debenture 28	9/30/13	Variable	9,750	9,750	12 months	15%
Debenture 29	10/1/13	$1.50	75,000	75,000	12 months	14%
Debenture 30	10/2/13	$1.50	50,000	50,000	12 months	14%
Debenture 31	10/3/13	Variable	3,750	3,750	12 months	8%
Debenture 32	10/23/13	Variable	50,000	50,000	12 months	6%
Debenture 33	10/25/13	Variable	52,000	52,000	9 months	8%
Debenture 34	10/25/13	Variable	30,000	30,000	9 months	8%

Description	Date	Conversion Price	Original Principal Amount	Unpaid Principal Balance	Term	Interest Rate
Debenture 35	11/6/13	$1.50	50,000	50,000	12 months	14%
Debenture 36	11/29/13	Variable	30,000	30,000	6 months	15%
Debenture 37	11/29/13	Variable	25,000	25,000	6 months	15%
Debenture 38	11/29/13	Variable	25,000	25,000	6 months	15%
Debenture 39	12/2/13	Variable	25,000	25,000	6 months	15%
Debenture 40	12/2/13	Variable	1,476	1,476	6 months	15%
Debenture 41	12/2/13	Variable	1,476	1,476	6 months	15%
Debenture 42	12/2/13	Variable	1,476	1,476	6 months	15%
Debenture 43	12/2/13	Variable	1,475	1,475	6 months	15%
Debenture 44	12/30/13	$0.15	10,000	10,000	6 months	14%
Debenture 45	8/14/13	$1.875	100,000	100,000	12 months	14%
Debenture 46	2/24/12	Variable	11,268	11,268	12 months	15%
Total at December 31, 2013			$1,004,823	$1,000,289
Less discount				(408,194)
				$592,095

We evaluated the convertible debentures 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. We elected to recognize the notes under paragraph 815-15-25-4, whereby there would be a separation into a host contract and derivative instrument. We elected to initially and subsequently measure the notes in their entirety at fair value, with changes in fair value recognized in earnings.  We 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 year ended December 31, 2013, we amortized debt discount of $445,979 to interest expense. The derivative liability is adjusted periodically according to the stock price fluctuations and was $2,104,849 at December 31, 2013.  For purpose of estimating the fair value of the convertible debentures, we used the Black Scholes option valuation model.

At December 31, 2013, the convertible debentures and related accrued interest payable were convertible into approximately 7,963,000 shares of our common stock.

	Derivative Liability	Debt Discount	Gain (Loss) on Derivative Liability
Derivative liability at inception of new    convertible debt	$1,269,103	$(499,260)	$(769,843)
Conversion of convertible debt	(982,668)	(354,913)	708,837
Loss on derivative liability	1,818,414	-	(1,818,414)
Amortization of debt discount to    interest expense	-	445,979	-
Balance at December 31, 2013	$2,104,849	$(408,194)	$(1,879,420)

The significant assumptions used in the Black Scholes valuation as of December 31, 2013 are as follows:

Stock price at valuation: $3.00

Conversion prices ranging from $0.075 to $1.50

Years to maturity ranging from .25 to .81

Risk free interest rates ranging from: .07% to .14%

Volatility ranging from: 323.27 to 555.81

The change in derivative liability recognized as a loss in our financial statements for the year ended December 31, 2013 was $1,879,420.

Accrued interest payable for the convertible debentures was $52,209 and $35,470 as of December 31, 2013 and 2012, respectively.