Convertible Debentures (Convertible Debt [Member])

12 Months Ended

Dec. 31, 2013

Convertible Debt [Member]

Short-term Debt [Line Items]

CONVERTIBLE DEBENTURES

9. CONVERTIBLE DEBENTURES

2010 Convertible Debenture

During November 2010, a director invested $50,000 in the Convertible Debenture Series 2010 plus Series B Warrants. The debenture bore a 2% interest rate, a maturity date of December 31, 2015 and included a warrant for the right to purchase 95,493 shares at a $.2618 exercise price with a December 31, 2015 maturity date. Upon conversion, the director was entitled to receive the number of shares of Common Stock that could be purchased with two hundred percent (200%) of the face amount of the Debentures together with accrued interest and with the Common Stock valued using the weighted average price for the five-day trading period before the notice of conversion. The debenture became convertible on June 30, 2011.   On March 1, 2012, the debenture was converted to 940,734 shares of stock. Accrued interest of $1,285 was settled in full during September, 2012.

The Company analyzed the conversion option of all the 2010 convertible debt. As discussed in Footnote 13, the Company considered derivative accounting under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion feature should be classified as a liability due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The embedded conversion feature was measured at fair value at the date of inception and at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings.

2011 Convertible Debenture – Series A Warrants

During April 2011, the Company began offering its Convertible Debentures - Series 2011 and Series A Warrants. The Debentures bore a 12% interest rate, a maturity date of December 31, 2016 and included warrants in an amount equal to the principal amount divided by 50% of the Debenture conversion price. Total numbers of warrants attached with the convertible debentures are 18,475,827 with a exercise price equal to 50% of the debenture conversion price. Upon conversion, the holder was entitled to receive the number of shares of Common Stock that could have been purchased with 200% of the principal amount of the Debenture, together with accrued and unpaid interest and the shares valued using the weighted average price for a five-day trading period preceding the Debenture investment. The Company issued $1,675,000 in debentures in 2011 to sixteen investors. During 2012, fifteen of the sixteen investors elected to convert a total of $1,575,000 Debenture Series 2011 into 16,831,553 shares of common stock. A total of $179,312 in accrued interest on the converted debentures was settled, $16,167 in cash and $163,145 with 870,543 shares of common stock. As of December 31, 2013 and 2012, there is one outstanding debenture for $100,000. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to a convertible note payable as a discount of $1,475,000 recorded to the convertible debenture. Amortization of debt discount of $18,182 and $1,402,273 was recognized in 2013 and 2012, respectively. The remaining balance of unamortized discount is $54,545 and $72,727 at December 31, 2013 and 2012, respectively. Accrued interest outstanding on the debenture as of December 31, 2013 and 2012 are $30,429 and $18,396, respectively.

As a result of the issuance of 2010 convertible debt to a director and because the debt became convertible on June 30, 2011, the conversion option of all other third party convertible notes became tainted. Under ASC 815-15“Derivatives and Hedging”, all other tainted share settleable instruments must be reclassified from equity to liability. As a result of the full conversion of 2010 convertible debts on March 1, 2012, the derivative treatment on these other third party convertible notes ended and the derivative liabilities for an amount of $ 683,602 must be reclassified back to equity. See discussion in Note 13.

2011 Convertible Debenture – Series B Warrants

During July 2011, the Company began offering its Convertible Debentures Series 2011 and Series B warrants. The Debentures bore a 12% interest rate, a maturity date of December 31, 2016 and included warrants in an amount equal to the principal amount divided by the Debenture conversion price. Total numbers of warrants attached with the convertible debentures are 8,961,614 with an exercise price equal to the debenture conversion price. Upon conversion, the holder was entitled to receive the number of shares of Common Stock that could have been purchased with 200% of the principal amount of the Debenture, together with accrued and unpaid interest and the shares valued using the weighted average price for a five-day trading period preceding the Debenture investment provided however, that the conversion price shall not be less than ten cents per share at any time and the conversion price shall not be more than ten cents per share for investments made prior to October 1, 2011. By resolution of the Board on December 16, 2011, the ten cent conversion price per share was extended to investments made after October 1, 2011. The Company issued $896,161 in debentures in 2011 to nineteen investors. During 2012, eighteen of the nineteen investors elected to convert a total of $846,161 Debenture Series 2011 into 16,923,227 shares of common stock. A total of $45,941 in accrued interest on the converted debentures was settled with 459,412 shares of common stock. As of December 31, 2013 and 2012 there is one outstanding debenture for $50,000. Accrued interest as December 31, 2013 and 2012 are $13,216 and $7,200, respectively.

As a result of the issuance of 2010 convertible debt to a director and because the debt became convertible on June 30, 2011, the conversion option of all other third party convertible notes became tainted. Under ASC 815-15“Derivatives and Hedging”, all other tainted share settleable instruments must be reclassified from equity to liability. As a result of the full conversion of 2010 convertible debts on March 1, 2012, the derivative treatment on these other third party convertible notes ended and the derivative liabilities for an amount of $663,160 must be reclassified back to equity. See discussion in Note 13.

2012 Convertible Debenture – Series C Warrants

On February 17, 2012, the Company began offering the Putable-Callable Debenture Series 2012 and Series C Warrants. The debentures bear interest at 8% per annum and mature on December 31, 2019. The convertible debenture is convertible at a conversion price equal to the weighted average price for the three-day trading period before the notice of conversion. The convertible note is also subject to dilutive adjustments for share issuances (full ratchet reset feature).On that date, the Company sold $500,000 of debentures to four directors of which $320,000 are converted from shareholders notes payable and invested $180,000 in new proceeds. Total numbers of warrants attached with the convertible debentures are 2,500,000 with an exercise price equal $0.1. On April 23, 2012, the directors converted $500,000 of debentures and $7,242 in accrued interest to 5,790,452 shares of restricted common stock and 2,500,000 Series C warrants were cancelled.

Because these convertible debentures have full reset adjustments tied to future issuances of equity securities by the Company, they are subject to derivative liability treatment under ASC 815-40-15 “Determining whether an Instrument (or Embedded feature) is Indexed to an Entity's Own Stock”. ASC 815-40-15 require as of the date the convertible debenture issued, the derivative liability to be measured at fair value and $445,204 is recorded as a debt discount. As a result of full conversion on April 23, 2012, the derivative treatment on these convertible debentures ended and the derivative liabilities for an amount of $536,528 must be reclassified back to equity with the change in fair value of $91,324 recorded to loss on derivative liability.