Debt

9 Months Ended

12 Months Ended

Sep. 30, 2011

Dec. 31, 2010

Debt

Note 5 Debt

At September 30, 2011 and December 31, 2010, debt consists of the following:

	September 30, 2011			December 31, 2010
Convertible debt – secured – derivative liabilities	$	1,847,097		$	380,000
Conventional convertible debt – secured		-			225,000
Convertible debt - unsecured		-			78,249
Less: debt discount		(1,159,352	)		(331,261	)
Convertible debt – net		687,745			351,988
Secured debt		-			187,500
Unsecured debt		1,128,637			-
Total debt		1,816,382			539,488
Less: current portion		(1,023,441	)		(289,488	)
Long term debt	$	792,941		$	250,000

Debt in default of $30,000 is included as a component of short-term debt.

(A)   Convertible Debt – Secured – Derivative Liabilities

During the nine months ended September 30, 2011, the Company issued $3,798,733 in convertible debt – secured – derivative liabilities. The Company issued these debt instruments with 13 different sets of conversion terms.  The Material terms of the Company’s convertible debt – secured – derivative liabilities are as follows:

			Amount of Principal Raised
Interest Rate	6% - 12	%
Default interest rate	15% - 22	%
Maturity	April 5, 2011 to June 2, 2014
Conversion terms 1	Average 10 day trade pricing divided by 200% of outstanding principal balance		$	827,600
Conversion terms 2	Lesser of: Average of the lowest 2 closing prices of the 5 days preceding conversion date or $0.025/share		$	775,000
Conversion terms 3	60% of the average of the lowest 3 closing prices in the 10 days preceding conversion date		$	170,000
Conversion terms 4	$0.03		$	100,000
Conversion terms 5	65% of the average of the lowest 3 closing prices in the 30 days preceding conversion		$	303,800
Conversion terms 6	62% of the lowest closing prices in the 7 days preceding conversion date		$	40,000
Conversion terms 7	70% of the average of the lowest 3 closing prices in the 30 days preceding conversion		$	600,000
Conversion terms 8	50% of the average closing prices in the 10 days preceding conversion		$	85,000
Conversion terms 9	45% of the lowest 3 closing prices in the 10 days preceding conversion		$	277,500
Conversion terms 10	35% of the lowest 3 closing prices in the 10 days preceding conversion		$	100,000
Conversion terms 11	Lesser of: 50% of average of the lowest 3 closing prices of the 20 days preceding conversion date or $0.05/share		$	33,000
Conversion terms 12	50% of lowest trade price in preceding 20 days		$	45,000
Conversion terms 13	80% of lowest trade price in preceding 30 days		$	441,833
			$	3,798,733

During the nine months ended September 30, 2011, the Company converted $2,379,913 in notes into 132,321,172 shares of the Company’s common stock at prices ranging from $0.01 to $0.08 per share, based upon the terms of the debt conversion.

The following is a summary of the Company’s convertible debt – secured:

Convertible debt – secured – derivative liabilities – December 31, 2010	$	380,000
Issuance of convertible debt – secured – derivative liabilities		3,798,733
Conversions of convertible debt to common stock		(2,331,636	)
Convertible debt - secured – September 30, 2011	$	1,847,097

(B)   Conventional Convertible Debt – Secured

Terms of the Company’s conventional convertible debt are as follows:

● Interest rate 8%,

● All notes were due by December 31, 2010, and were converted in 2011,

● Conversion of principal and accrued interest at rates ranging from 150% - 300%,

● Secured by all assets of the Company, and

● All conversion rates associated with these instruments were at or above market. There is no BCF.

During the nine months ended September 30, 2011, the Company issued 7,226,649 shares of common stock, having a fair value of $426,970 ($0.06 - $0.10/share) to settle convertible notes payable, originating prior to December 31, 2010, having a face value of $225,000.  As a result, the Company recorded a loss on debt conversion of $137,017.

The following is a summary of the Company’s conventional convertible debt –secured:

Conventional convertible debt - secured – December 31, 2010	$	225,000
Settlement of debt through issuance of common stock		(225,000	)
Conventional convertible debt - secured – September 30, 2011	$	-

(C)   Convertible Debt – Unsecured

During the nine months ended September 30, 2011, $102,649 was converted into 11,501,829, shares of common stock, having a fair value of $76,647 ($0.101/share), based upon the quoted closing trading price. The Company recorded a loss on debt settlement of $24,107.

During the nine months ended September 30, 2011, the Company issued an additional $90,000 of conventional convertible notes, convertible at 200% of the face value of the note, bearing 8% interest annually.

The following is a summary of the Company’s unsecured debt:

Unsecured debt – December 31, 2010	$	78,249
Issuance of convertible secured notes		90,000
Settlement of debt through issuance of common stock		(102,649	)
Unsecured debt – September 30, 2011	$	65,600

 Table above this has been combined with convertible secured debt

(D) Secured Debt

During the nine months ended September 30 2011, $187,500 was converted into 7,500,000 shares of common stock, having a fair value of $437,500 ($0.058/share - $0.059/share), based upon the quoted closing trading price. The Company recorded a loss on debt settlement of $250,000.

The following is a summary of the Company’s secured debt:

Secured debt – December 31, 2010	$	187,500
Settlement of debt through issuance of common stock		(187,500	)
Secured debt – September 30, 2011	$	-

(E) Debt Issue Costs

The following is a summary of the Company’s debt issue costs:

Debt issue costs – net – December 31, 2010	$	34,404
Issue costs paid during nine months ended September 30, 2011		219,368
Amortization of debt issue costs – September 30, 2011		(225,686	)
Debt issue costs – net – September 30, 2011	$	28,086

(F) Debt Discount

During the nine months ended September 30, 2011, the Company issued convertible debt with embedded derivatives and warrants. The Company recorded the derivatives and warrants at fair value and are amortizing the debt discount over the life of the debt.  Debt discount is as follows:

Debt discount balance at December 31, 2010	$	331,261
Discount recorded for convertible notes issued during nine months ended September 30, 2011		3,262,323
Accretion of debt discount to interest expense during the nine months ended September 30, 2011		(2,434,232	)
Debt discount balance at September 30, 2011	$	1,159,352

Note 5 Debt

At December 31, 2010 and 2009, debt consists of the following:

	2010			2009
Convertible debt	$	605,000		$	897,500
Less: debt discount		(331,261	)		(467,636	)
Convertible debt - net		273,739			429,864
Secured debt		187,500			-
Unsecured debt		78,249			30,000
Total debt		539,488			459,864
Less: current portion		(289,488	)		(459,864	)
Long term debt	$	250,000		$	-

Debt in default of $427,500 is included as a component of short-term debt. In 2011, $347,500 of this total was settled with the issuance of stock.

(A) Convertible Debt – Secured – Derivative Liabilities

During 2010, the Company issued convertible notes, totaling $380,000, with the following provisions:

● Interest rate 8%,

● Default interest rate of 22% on notes aggregating $130,000,

● Notes are due in May, June and September 2011 (short term - $130,000), and October and December 2013 (long term - $250,000),

● Conversion rates equal to 60% or 70% of the market price on date of conversion by applying a specified formula that utilizes the average of quoted closing prices preceding the conversion date by 10 or 30 days, and then takes either lowest price in the period or the average of the three lowest; and

● Secured by all assets of the Company

The investor is entitled at its option to convert all or part of the principal and accrued interest into shares of the Company’s common stock at a conversion price as discussed above.  The Company classified the embedded conversion feature as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle. See Note 6 regarding accounting for derivative liabilities.

In the first quarter of 2011, the Company issued 1,585,944 shares of common stock, having a fair value of $91,235 ($0.05 - $0.06/share) to settle convertible notes payable, originating in 2010, having a face value of $50,000.  As a result, the Company recorded a loss on debt conversion of $41,235.

During 2010, the Company amortized $48,739 to interest expense.

(B) Conventional Convertible Debt - Secured

During 2010, the Company issued conventional convertible notes, totaling $466,000, with the following provisions:

● Interest rate 8%,

● All notes were due by December 31, 2010,

● Conversion of principal and accrued interest at rates ranging from 150% - 300%; and

● Secured by all assets of the Company

● All conversion rates associated with these instruments were at or above market. There is no BCF.

In the first quarter of 2011, the Company issued 5,257,614 shares of common stock, having a fair value of $384,407 ($0.06 - $0.10/share) to settle convertible notes payable, originating prior to December 31, 2010, having a face value of $145,000.  As a result, the Company recorded a loss on debt conversion of $239,407.

In 2010, the Company accrued $22,770 for interest for all convertible debt.

In 2009, the Company issued $897,500 in convertible notes under the same terms as discussed above.  The Company recorded a BCF of $547,000, amortized $79,364 and reflected a balance of $429,864, which was amortized in full during 2010. The Company repaid $5,000 in 2009.

Accrued interest on the 2009 debt was $14,721.

(C) Secured Debt

During February 2010, the Company issued original issue discount notes having a face value of $187,500 for gross proceeds of $150,000. The issuance costs of $37,500 was recorded to interest expense and charged to additional paid in capital. These notes were non-interest bearing, secured by the Company’s accounts receivable and due in May 2010.  At December 31, 2010, these notes were in default.

These debt holders were also entitled to one share of common stock for every three dollars of principal invested.  The Company issued 50,000 shares of common stock, as additional interest expense, having a fair value of $30,500 ($0.61/share), based upon the quoted closing trading price.

In the first quarter of 2011, $187,500 was converted into 7,500,000 shares of common stock, having a fair value of $450,000 ($0.06/share), based upon the quoted closing trading price. The Company recorded a loss on debt settlement of $262,500. As of March 31, 2011, the balance of secured debt is $0.

(D) Unsecured Debt

During 2010, the Company executed loans, for $1,144,608, with the following provisions:

● Interest rate at 0%, 8%, or 10%,

● Notes are due on demand, or; March 2010, December 2010 and September 2011

At December 31, 2010, $15,000 was in default. However, in 2011, the Company issued 478,897 shares of common stock, having a fair value of $47,889 ($0.10/share), based upon the quoted closing trading price. The Company recorded a loss on debt settlement of $29,389. As of March 31, 2011, the balance of unsecured debt is $15,000.

In 2010, the Company accrued $2,400 for interest.

In 2009, the Company executed loans for $30,000.  The loans bore interest at 10% and was unsecured. At December 31, 2010, this debt was in default.

(E) Debt Issue Costs

During the year ended 2010 and 2009, the Company paid debt issue costs totaling $42,000 and $0, respectively.

The following is a summary of the Company’s debt issue costs:

Debt issue costs paid – 2010	$	42,000
Amortization of debt issue costs – 2010		(7,596	)
Debt issue costs – net – 2010	$	34,404

During 2010, the Company amortized $7,596.

(F) Debt Discount

During the year ended 2010 and 2009, the Company recorded debt discounts totaling $380,000 and $547,000, respectively.

The debt discount recorded in 2010 pertains to convertible debt that contains embedded conversion options that are required to bifurcated and reported at fair value (See Note 9).

In 2009, all debt discounts were associated with conventional convertible debt that contains a BCF.