Derivative Liabilities

12 Months Ended

Dec. 31, 2013

Derivative Liabilities [Abstract]

DERIVATIVE LIABILITIES

13.  DERIVATIVE LIABILITIES

 2010 Convertible Debenture

The Company issued a $50,000 2010 Convertible Debenture which became convertible on June 30, 2011.

As discussed in Note 9, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the above convertible debentures. The fair value of the instruments was determined by using Black-Scholes option-pricing model, assuming maximum value.

As a result of full conversion on March 1, 2012, under ASC 815- 15 “Derivatives and Hedging”, the instruments are measured at fair value at the date of termination with the change in fair value recorded to earnings. The fair value of the instruments related to the 2010 convertible debenture was $40,182 and was recognized as loss on derivative and reclassified out of liabilities to equity.

2011 Convertible Debenture

The Company issued $1,675,000 and $896,161 in 2011 Convertible Debenture – Series A and B, respectively. As discussed in the Note 9, 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. On March 1, 2012 the 2010 convertible debenture was fully converted to common stock, the conversion feature of these other convertible debts was no longer tainted. Under ASC 815-15 “Derivatives and Hedging”, the conversion feature of these other convertible debts must be measured at fair value on termination date with the change in fair value recorded to earnings. The fair value of the conversion feature on these other convertible debts on March 1, 2012 was $1,346,762 and was recognized as loss on derivative and reclassified out of liabilities to equity. The fair value of the instruments was determined by using Black-Scholes option-pricing model, assuming maximum value.

2012 Convertible Debenture

As discussed in note 9 on February 17, 2012, the Company issued $500,000 in 2012 Convertible Debenture Series C which had a reset to its conversion price. Under ASC 815-40-15 “Determining whether an Instrument (or Embedded feature) is Indexed to an Entity's Own Stock”, on the date the convertible debenture issued, the derivative liability was measured at fair value. The fair value of the conversion feature was determined to be $445,204 and was recognized as debt discount.

As a result of full conversion on April 23, 2012, the derivative treatment on these convertible debentures ended, the instruments are re-measured at fair value at the date of termination with the change in fair value recorded to earning. The fair value of the instrument was $536,528 and was re-classified out of liabilities to equity. The change in fair value of $91,324 was recognized as loss on derivative. Also the debt discount of $445,204 was fully amortized. The fair value of the instruments was determined by using Black-Scholes option-pricing model, assuming maximum value.

Warrants

The Company had 67,765,365 warrants outstanding on December 31, 2011. On March 1, 2012, as a result of full conversion of the 2010 convertible debentures, under ASC 815- 15 “Derivatives and Hedging”, the instruments are measured at fair value at the date of termination with the change in fair value recorded to earnings. The fair value of the instruments related to the warrants was $2,507,317 and was recognized as loss on derivative and reclassified out of liabilities to equity. The fair value of the instruments was determined by using Black-Scholes option-pricing model, assuming maximum value.

The Company issued 2,500,000 in warrants on February 17, 2012 which was during the period the 2010 Debenture created derivative accounting. Therefore, the Company recorded $195,000 as derivative liability on the issuance date and was reclassified out of equity to liabilities. On March 1, 2012, as a result of full conversion of the 2010 convertible debentures, under ASC 815- 15 “Derivatives and Hedging”, the instruments are measured at fair value at the date of termination with the change in fair value recorded to earnings. The fair value of the instruments related to the warrants was $237,500 and was reclassified out of liabilities to equity. The change in fair value of $42,500 was recognized as loss on derivative. The fair value of the instruments was determined by using Black-Scholes option-pricing model, assuming maximum value.

The following table summarizes the derivative liabilities included in the balance sheet:

Balance at December 31, 2011	$	0
Record derivative liability as debt discount		445,204
Change in fair value of derivative liability		4,028,085
Settlement of derivative liability due to conversion of related notes		(4,473,289	)
Balance at December 31, 2012	$	0