CONVERTIBLE DEBENTURES

3 Months Ended

Mar. 31, 2012

Convertible Debentures [Abstract]

Convertible Debentures [Text Block]

11. CONVERTIBLE DEBENTURES

The Company has outstanding convertible debentures as follows:

Convertible debentures as of March 31, 2012, are as follows:

												Period		Period
							Origination		Origination			End		End			Period End
Origination		Maturity		Interest			Principal		Discount			Principal		Discount			Debenture,
Date		Date		Rate			Balance		Balance			Balance		Balance			Net Balance		Ref.
	10/4/2010		4/4/2011		5	%	$	20,635	$	(20,635	)	$	12,647	$	-		$	12,647		(1)
	11/27/2010		5/27/2011		10	%		125,000		(53,571	)		117,500		-			117,500		(2)
	1/7/2011		11/11/2011		5	%		76,000		(32,571	)		48,000		-			48,000		(3)
	2/10/2011		1/14/2011		8	%		42,500		(42,500	)		-		-			-		(4)
	9/12/2011		6/14/2012		8	%		37,500		(37,500	)		-		-			-		(4)
	3/9/2011		3/9/2012		10	%		50,000		(34,472	)		-		-			-		(5)
	5/3/2011		5/5/2012		5	%		300,000		(206,832	)		300,000		(18,960	)		281,040		(6)
	8/31/2011		8/31/2013		5	%		10,000		(4,286	)		10,000		(3,033	)		6,967		(7)
	9/8/2011		9/20/2011		10	%		39,724		(17,016	)		-		-			-		(8)
	2/10/2012		2/10/2014		10	%		7,500		-			1,150		-			1,150		(9)
	3/14/2012		2/10/2014		10	%		5,500		-			2,100		-			2,100		(10)
	12/19/2011		9/21/2012		8	%		37,500		(37,500	)		37,500		(24,999	)		12,501		(4)
	2/7/2012		2/7/2014		10	%		16,000		-			15,400		-			15,400		(11)
	2/10/2012		2/10/2014		10	%		39,724		-			39,724					39,724		(11)
	3/9/2012		3/9/2014		10	%		56,250		-			56,250		-			56,250		(11)
Totals												$	640,271				$	593,279

(1) The Company converted an accounts payable for legal services to a convertible debenture. At the option of the lender, the principal amount of the note plus any accrued interest may be converted in whole or in part into Common Stock at the conversion price per share of $.001 by written notice. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term. The Company valued the beneficial conversion feature (BCF) of the convertible debenture at $20,635, the “ceiling” of its intrinsic value. The Company accreted the discount to the convertible debenture and recognize interest expense through its maturity. On the maturity date of the debenture, the lender sold and assigned the debenture to an unrelated third party for the face value of the debenture. See Note 21. SUBSEQUENT EVENTS regarding lawsuit filed by this party against the Company and the original lender.

(2) The Company purchased exclusive rights for license of certain intellectual property from an unrelated party. The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the technology or a reasonable negotiated rate based on similar invention. The debenture is convertible to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender. Conversion price per share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price. The Company valued the BCF of the convertible debenture at $53,517, its intrinsic value. The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion. Because there is no assurance of success and the invention is still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense in during the year ended 2010. Both parties have agreed to confidentiality regarding the invention during the pre-prototype stage. In addition, the Company has agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

On February 10, 2012, the holder of this debenture entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest. The purchase will be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”. The First Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The Second Closing, will occur 90 days after the first closing for $11,500 paid/assigned. All subsequent closing’s will be for $11,500 and occur in 30 day increments after the Second Closing. This will continue until the full principal balance of $125,000, plus accrued interest has been purchased/assigned. See Ref. (9) for discussion of new terms on the assigned portions of the debenture.

(3) The Company ratified a technology and license agreement with commitment for purchase of inventory related to an agreement signed in 2010, which set pricing for products if minimum quantity purchases were met. Since the Company did not purchase the minimum quantities, but desired to maintain the technology and licensing rights along with the pricing, it agreed to purchase the 2010 balance shortage in 2011, as well as the 2011 minimum quantities. The agreement required the Company issue a convertible debenture for $76,000, and $38,000 of restricted common stock at $.15 per share. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days. On June 1, 2011, the Company issued 253,334 shares of restricted common stock at $.15 per share, or $38,000 as required by the agreement. The Company valued the BCF of the convertible debenture at $32,571. The Company accreted the discount to the convertible debenture and will recognize interest expense through paid in full or converted.

(4) The Company borrowed $42,500 in exchange for a convertible debenture. The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due. Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same. Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There is a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company valued the BCF of the convertible debenture at $42,500, the “ceiling” of its intrinsic value. Accordingly, the $42,500 debenture is discounted by the amount of the BCF. The Company accreted the discount to the convertible debenture through its maturity and will recognize interest expense until paid in full or converted.

From the same lender, the Company borrowed $37,500 twice in exchange for two other convertible debentures under the same general terms and conditions as the previous debenture. The second convertible debenture although dated December 19, 2011, with a maturity date of September 21, 2012, was not funded until February 2012. However, the executed documents were not ratably adjusted to conform to funding date.

On February 7, 2012, the lender sold/assigned all rights and interest on the first debenture having net book value of $11,000 plus accrued interest of $3,328. On March 9, 2012, the lender sold/assigned all rights and interest on the second debenture having a net book value of $24,500, plus $1,448 of accrued interest. See reference (11) which discusses the terms and conditions surrounding the new debentures issued upon extinguishment of the two originals as well as accounting treatment of the transactions.

(5) The Company borrowed $50,000 in exchange for a convertible debenture. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 50,000 and 100,000 warrants at $.25 and $.35 per share, respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $34,472, which is recorded as a discount against the debenture. The Company accreted the discount to the convertible debenture through its maturity and recognize interest expense until paid in full or converted. Before discount, the Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

(6) The Company borrowed $300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $.25 and $.35 per share, respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $206,832, which is recorded as a discount against the debenture. The Company will accrete the discount to the convertible debenture through its maturity and recognize interest expense until paid in full or converted. Before discount, the Company determined the FMV of the warrants as $45,000 using the Black-Scholes valuation model.

(7) The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $4,286. The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted. See Note 9. OTHER LIABILITIES, regarding additional $10,000 provided by lender to the Company.

(8) The Company converted a note payable and related accrued interest of $39,724 into a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $17,025. Because the debenture was issued and matured in the third quarter of 2011, the full amount of the discount, $17, 025 was accreted and recognized as interest expense during the period.

On February 10, 2012, the lender sold/assigned all rights and interest on the debenture having a net book value of $39,724, plus $1,552 of accrued interest. See reference (11) which discusses the terms and conditions surrounding the new debenture issued upon extinguishment of the original as well as accounting treatment of the transaction.

(9) The Company entered a new debenture agreement upon sale/assignment of the original lender under the debenture as discussed in reference (2) above. Because the stated terms of the new debenture agreement are significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transaction is treated as extinguishment of the old debenture and recording of the new for accounting purposes. Because the debenture is being assigned/sold in installments, the Company is calculating and recognizing gain or loss on the extinguishment as it occurs. During the three months ended March 31, 2012, the new holder(lender) purchased $7,500 of the original $125,000 principal balance, and based on this transaction, the Company recorded a $4,286 loss on extinguishment.

The stated interest rate of the $7,500 debenture is 10% and the Company may prepay the debenture at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debenture is $.000275 per share and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term. As of March 31, 2012, the lender had assigned $5,500 under the debenture to four separate parties, and had converted $850 of the debenture to stock. See reference (10).

(10) This line is comprised of the assignment of $5,500 of the convertible debenture with the same stated terms and conditions equally to four separate parties. During the three months ended March 31, 2012, each converted $850 of the $1,375 assigned to them to stock for a combined principal balance remaining at quarter end of $2,100. Due to the smaller transaction amounts, these four debenture holders have been combined for presentation purposes.

(11) The Company entered into three new debenture agreements upon sale/assignment of the original lenders under the debentures as discussed in references (4) and (8) above. Because the stated terms of the new debenture agreement and principal amounts are significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transactions are treated as extinguishment of the old debentures and recording of the new for accounting purposes. As a result of these three transactions, the Company recognized a combined loss on extinguishment of $71,577.

The new debentures were issued with the following terms and conditions: The stated interest rate of the debentures is 10% and the Company may prepay at any time in an amount equal to 150% of the principal and accrued interest. The conversion price under the debentures is $.000275 per share and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.

Convertible debentures as of December 31, 2011, are as follows:

												Period		Period
							Origination		Origination			End		End			Period End
Origination		Maturity		Interest			Princiapal		Discount			Principal		Discount			Debenture,
Date		Date		Rate			Balance		Balance			Balance		Balance			Net Balance		Ref.
	10/4/2010		4/4/2011		5	%	$	20,635	$	(20,635	)	$	12,647	$	-		$	12,647		(1)
	11/27/2010		5/27/2011		10	%		125,000		(53,571	)		125,000		-			125,000		(2)
	1/7/2011		11/11/2011		5	%		76,000		(32,571	)		48,000		-			48,000		(3)
	2/10/2011		1/14/2011		8	%		42,500		(42,500	)		11,000		-			11,000		(4)
	9/12/2011		6/14/2012		8	%		37,500		(37,500	)		37,500		(22,917	)		14,583		(4)
	3/9/2011		3/9/2012		10	%		50,000		(34,472	)		50,000		(6,607	)		43,393		(5)
	5/3/2011		5/5/2012		5	%		300,000		(206,832	)		300,000		(70,669	)		229,331		(6)
	8/31/2011		8/31/2013		5	%		10,000		(4,286	)		10,000		(3,570	)		6,430		(7)
	9/8/2011		9/20/2011		10	%		39,724		(17,016	)		39,724		-			39,724		(8)
Totals												$	633,871				$	530,108

Reference numbers in right hand column of table entitled Ref. refer to paragraphs above the table.