Convertible Debentures

9 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

Convertible Debentures

NOTE 3. CONVERTIBLE DEBENTURES

Current Year Convertible Notes

During the nine months ended September 30, 2013, the Company entered into note agreements with an unaffiliated investor for the issuance of convertible promissory notes of $109,500, in the aggregate (together referred to as the “CY Convertible Notes”) as follows:

June 28, 2013	$	21,500
August 14, 2013		16,000
August 23, 2013		51,000
September 25, 201		21,000
Total	$	109,500

Among other terms, the CY Convertible Notes mature on its nine month anniversary (the “Maturity Date”), unless prepayment of any of the CY Convertible Notes is required in certain events, as called for in the agreement. The CY Convertible Notes of June 28, 2013 and August 14, 2013 are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest two trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date the request for conversion is faxed to the Company. The CY Convertible Notes of August 23, 2013 and September 25, 2013 are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 40% of the lowest trading price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date the request for conversion is faxed to the Company. In addition, the CY Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.

The CY Convertible Notes bears interest at eight percent (8%) per annum, payable in cash or shares of our common stock at the Conversion Price. Upon the occurrence of an Event of Default (as defined in the CY Convertible Notes), the Company is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holders may at their option declare the CY Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable. Further terms call for the Company to maintain shares reserved for issuance as stated in the CY Convertible Note.

We received net proceeds from the CY Convertible Notes of $103,000 after debt issuance costs of $6,500 paid for lender fees. These debt issuance costs will be amortized over the term of the CY Convertible Note or such shorter period as the CY Convertible Note may be outstanding. Accordingly, as the CY Convertible Note is converted to common stock prior to their expiration date, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. For the three and nine months ended September 30, 2013, $1,553 of these costs had been expensed as debt issuance costs.

Convertible Debentures: Date of Issuance	Gross Proceeds from Convertible Debentures		Net Proceeds from Convertible Debentures		Debt Issuance Costs from Convertible Debentures		Amortization of Debt Issuance Costs at September 30, 2013
June 28, 2013	$	21,500	$	18,000	$	3,500	$	1,219
August 14, 2013		16,000		15,000		1,000		174
August 23, 2013		51,000		50,000		1,000		141
September 25, 2013		21,000		20,000		1,000		19
Total	$	109,500	$	103,000	$	6,500	$	1,553

We have determined that the conversion feature of the CY Convertible Notes represents an embedded derivative since the CY Convertible Note is convertible into a variable number of shares upon conversion. Accordingly, the CY Convertible Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives meet the criteria of ASC 815 (formerly SFAS 133 and EITF 00-19), and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the CY Convertible Notes. Such discount will be accreted from the date of issuance to the maturity dates of the CY Convertible Notes. The change in the fair value of the liability for derivative contracts will be credited to other income (expense) in the consolidated statements of operations at the end of each quarter. The $109,500 face amount of the CY Convertible Notes were stripped of its conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds to the conversion option attributed to the debt. The beneficial conversion feature (an embedded derivative) included in the CY Convertible Notes resulted in an initial debt discount of $109,500 and an initial loss on the valuation of derivative liabilities of $297,812 for a derivative liability balance of $407,312 at issuance.

The fair values of the CY Convertible Notes were calculated at issue date utilizing the following assumptions:

Issuance Date	Fair Value	Term	Assumed Conversion Price	Market Price on Issue Date	Volatility Percentage	Interest Rate
6/28/13	$46,668	9 months	$0.0170	$0.0370	703%	4.5%
8/14/13	59,949	9 months	0.00395	0.0149	570%	4.5%
8/23/13	189,695	9 months	0.0041	0.0062	574%	4.5%
9/25/13	111,000	9 months	0.0014	0.0075	589%	4.5%

At September 30, 2013, the Company revalued the derivative liability balance of the CY Convertible Notes; the change in the derivative liability decreased by $153,992.

The fair value of the CY Convertible Note was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value	Term	Assumed Conversion Price	Volatility Percentage	Interest Rate
$253,320	9 months	$0.003/$.00375	590%	4.5%