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Debt Obligations

9 Months Ended

Sep. 30, 2013

4. Debt Obligations

Convertible Debentures

In August 2010, in a series of transactions, the Company issued five unsecured, convertible debentures, with an aggregate principal balance of $500,000, with interest rates of 8% per annum and a maturity date of August 2013. The debentures are convertible into shares of the Company’s stock at a conversion price of $0.50 per share. Also, in August 2010, the Company issued an unsecured, convertible debenture in the principal amount of $500,000 with an interest rate of 8% and a maturity date of August 2013. The debenture is convertible into shares of the Company’s stock at a conversion price of $0.40 per share. Interest on the above debentures is payable quarterly. At the Company’s option, interest due may be settled in cash or shares of Company common stock.

In January 2011, the debenture holders of aggregate $525,000 principal amount of 8% convertible debentures elected to convert their debentures into 1,300,000 shares of common stock.

On March 2, 2012, the Company issued an 8% convertible debenture, with a principal balance of $47,500, and a maturity date of November 29, 2012.

On April 25, 2012, the Company issued an 8% convertible debenture, with a principal balance of $27,500, and a maturity date of January 18, 2013.

On April 30, 2012, the debenture holder of $350,000 principal amount of 14% convertible debenture elected to convert $100,000 of the debenture into 250,000 shares of common stock.

On July 24, 2012, the Company issued an 8% convertible debenture, with a principal balance of $27,500, and a maturity date of April 19, 2013.

On September 4, 2012, the Company issued 2,033,898 shares of common stock following the conversion of $12,000 of a $47,500 8% convertible debenture.

On May 10, 2013, the Company issued 1,615 shares of Series C Stock in exchange for a $150,000 8% convertible debenture and accrued interest.

On September 9, 2013, the Company issued an 8% convertible debenture, with a principal balance of $27,500, and a maturity date of June 9, 2013.

A loan default fee was assessed by a lender and added to the principal amount of certain debentures totaling $45,250, due to failure to meet debenture agreement requirements in filing SEC reports timely. The fee was charged to operations during the third quarter ended September 30, 2013.

At September 30, 2013, an aggregate of $393,750 and $250,000 principal amount 8% and 14% convertible debentures, respectively, were outstanding.

Debt Discount

On February 23, 2012, the Company issued an 8% convertible debenture that was subject to derivative liability accounting. Using the Black-Scholes option pricing model, a fair value of the debenture’s beneficial conversion feature was determined to be $34,397 and has been recorded as debt discount.

On April 25, 2012 the Company issued an 8% convertible debenture that was subject to derivative liability accounting. Using the Black-Scholes option pricing model, the fair value of the debenture’s beneficial conversion feature was determined to be $27,500 and has been recorded as debt discount.

On April 30, 2012 following the conversion of $100,000 principal amount 14% debenture, the Company accelerated debt discount amortization of $56,333 to interest expense.

On July 24, 2012 the Company issued an 8% convertible debenture that was subject to derivative liability accounting. Using the Black-Scholes option pricing model, the fair value of the debenture’s beneficial conversion feature was determined to be $27,500 and has been recorded as debt discount.

On September 4, 2012 following the conversion of $12,000 principal amount 8% debenture, the Company accelerated debt discount amortization of $2,747 to interest expense.

On September 9, 2013 the Company issued an 8% convertible debenture that was subject to derivative liability accounting. Using the Black-Scholes option pricing model, the fair value of the debenture’s beneficial conversion feature was determined to be $26,422 and has been recorded as debt discount.

For the nine month periods ended September 30, 2013 and 2012, the Company amortized to interest expense using the effective interest method $162,099 and $303,347 of the debt discount related to the convertible debentures that included $11,974 and $59,080 of accelerated debt discount amortization, respectively, due to converted debenture amounts.

At September 30, 2013 and December 31, 2012, the aggregate unamortized debt discount was $24,390 and $160,067, respectively. The unamortized debt discount at September 30, 2013 is being amortized to interest expense using the effective interest method through the earlier of the conversion date or the maturity dates of the convertible debentures.

The following table summarizes the principal, unamortized debt discount and equity components of the Company’s convertible debentures derivative liability net carrying amount:

	September 30, 2013			December 31, 2012
Principal amount 8% convertible debenture short term	$	393,750		$	565,500
Principal amount 14% convertible debenture		250,000			250,000
Unamortized debt discount		(24,390	)		(160,067	)
Net carrying amount	$	619,360		$	655,433

Equity component (recognized in additional paid-in capital)	$	905,950		$	879,528

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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