Note 5 - Convertible Debentures

6 Months Ended

Jun. 30, 2014

Notes

Note 5 - Convertible Debentures

NOTE 5 – CONVERTIBLE DEBENTURES

During the six months ended June 30, 2014 and the years ended December 31, 2013, 2012 and 2011, the Company issued various convertible debentures.  The debentures are generally unsecured and bear interest ranging from 6% to 22% per annum, with maturities ranging from two months to two years.  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 $0.0025 to $30.00 per share or variable discounted pricing based on the market price of the Company’s common stock.  The following is a schedule of the convertible debentures outstanding as of June 30, 2014:

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	-	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	7/29/13	$30.00	10,000	10,000	12 months	14%
Debenture 19	8/2/13	Variable	21,500	10,000	12 months	12%
Debenture 20	8/30/13	Variable	37,500	37,500	12 months	15%
Debenture 21	9/4/13	Variable	50,000	50,000	12 months	8%
Debenture 22	9/23/13	Variable	25,000	25,000	12 months	14%
Debenture 23	9/27/13	Variable	25,402	21,546	12 months	14%
Debenture 24	9/26/13	Variable	7,500	-	12 months	15%
Debenture 25	9/30/13	Variable	5,250	-	12 months	15%
Debenture 26	9/30/13	Variable	7,500	-	12 months	15%
Debenture 27	9/30/13	Variable	9,750	-	12 months	15%
Debenture 28	10/1/13	$0.0025	75,000	71,250	12 months	14%
Debenture 29	10/2/13	$1.50	50,000	50,000	12 months	14%
Debenture 30	10/3/13	Variable	3,750	3,750	12 months	8%
Debenture 31	10/23/13	Variable	50,000	35,000	12 months	6%
Debenture 32	10/25/13	Variable	52,000	52,000	9 months	8%
Debenture 33	10/25/13	Variable	30,000	47,455	9 months	8%
Debenture 34	11/6/13	$1.50	50,000	50,000	12 months	14%
Debenture 35	11/29/13	Variable	30,000	30,000	6 months	15%
Debenture 36	11/29/13	Variable	25,000	-	6 months	15%
Debenture 37	11/29/13	Variable	25,000	25,000	6 months	15%
Debenture 38	12/2/13	Variable	25,000	25,000	6 months	15%
Debenture 39	12/2/13	Variable	1,475	1,475	6 months	15%

Description	Date	Conversion Price	Original Principal Amount	Unpaid Principal Balance	Term	Interest Rate
Debenture 40	12/30/13	$0.15	10,000	10,000	6 months	14%
Debenture 41	8/1/13	$0.0025	150,000	146,250	12 months	14%
Debenture 42	2/24/12	Variable	11,268	11,268	12 months	15%
Debenture 43	1/12/14	Variable	26,000	26,000	2 months	22%
Debenture 44	1/12/14	Variable	60,000	60,000	13 months	12%
Debenture 45	3/20/14	$0.06	10,000	10,000	12 months	18%
Debenture 46	3/25/14	$0.06	10,000	10,000	12 months	18%
Debenture 47	3/28/14	$0.06	55,000	55,000	12 months	18%
Debenture 48	1/27/14	Variable	53,000	53,000	9 months	8%
Debenture 49	1/20/14	$.0025	10,000	10,000	12 months	14%
Debenture 50	2/10/14	$0.06	8,000	8,000	12 months	14%
Debenture 51	2/18/14	$0.06	5,000	5,000	12 months	14%
Debenture 52	3/17/14	$0.06	25,000	24,400	12 months	18%
Debenture 53	2/3/14	$0.06	50,000	48,800	12 months	18%
Debenture 54	6/23/13	$0.001	35,000	17,500	6 months	10%
Debenture 55	6/23/13	$0.001	17,500	17,500	6 months	10%
Debenture 56	5/21/14	Variable	150,000	150,000	12 months	16%
Debenture 57	4/23/14	$0.04	10,500	10,500	12 months	14%
Debenture 58	4/16/14	Variable	33,500	33,500	24 months	12%
Debenture 59	5/8/14	$0.06	43,860	43,860	13 months	14%
Debenture 60	5/8/14	$0.06	4,000	4,000	12 months	14%
Debenture 61	5/8/14	Variable	28,900	28,900	9 months	8%
Debenture 62	6/3/14	Variable	15,000	15,000	12 months	8%
Debenture 63	4/10/14	$0.06	60,000	60,000	11 months	18%
Debenture 64	4/11/14	$0.06	2,272	2,272	11 months	18%
Debenture 65	4/9/14	$0.06	75,000	75,000	11 months	18%
Total at June 30, 2014				$1,658,726
Less discount				(589,353)
				1,069,373
Current portion				1,065,936
Long-term portion				$       3,437

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%

Description	Date	Conversion Price	Original Principal Amount	Unpaid Principal Balance	Term	Interest Rate
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%
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				$1,000,289
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 with variable conversion prices 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 and debt discount representing the imputed interest associated with the embedded derivative.

For those convertible debentures with fixed conversion prices, we recorded a beneficial conversion feature at the inception of the debt to additional paid-in capital and to debt discount where the conversion price was less that the market price of the stock.

The debt discount is amortized over the life of the note and recognized as interest expense.  For the six months ended June 30, 2014 and 2013, we amortized debt discount of $700,873 and $79,682, respectively, to interest expense.  The derivative liability is adjusted periodically according to the stock price fluctuations and was $1,898,798 and $2,104,849 at June 30, 2014 and December 31, 2013, respectively.  For purpose of estimating the fair value of the convertible debentures, we used the Black Scholes option valuation model.

At June 30, 2014, the convertible debentures and related accrued interest payable were convertible into approximately 167,035,000 shares of our common stock.

During the six months ended June 30, 2014, we had the following activity in the accounts related to the convertible debentures:

	Derivative Liability	Debt Discount	Gain (Loss) on Derivative Liability	Gain on Extinguishment of Debt	Interest Expense
Balance at December 31, 2013	$2,104,849	$(408,194)
Adjustment to derivative liability	(820,145)	-	$820,145	-	-
New debt – debt discount	1,022,715	(403,162)	(661,052)	-
New debt – original issue discount		(1,000)		-
New debt – beneficial conversion feature		(540,089)		-
Amortization of debt discount to interest    expense	-	693,959	-	-	(693,959)
Debt conversions and repayments	(408,621)	69,133	-	(538,141)	-
Balance at June 30, 2014	$1,898,798	$(589,353)	$159,093	$(538,141)	$(693,959)

In estimating the fair value of the derivatives and calculating the adjustment to the derivative liability during the six months ended June 30, 2014, we used the Black-Scholes pricing model with the following range of assumptions:

Risk-free interest rate	0.04 - 0.11%
Expected life in years	0.1 -1.79
Dividend yield	0%
Expected volatility	402.5% - 561.26%

As indicated in the schedule of convertible debentures as of June 30, 2014, several of the convertible debentures are delinquent.  We believe we have good relationships with the debenture holders, and continue to have discussions with them regarding the extension of maturity dates.