CONVERTIBLE DEBENTURES AND DERIVATIVE LIABILITIES | 9 Months Ended |
Sep. 30, 2013 |
Debt Disclosure [Abstract] | ' |
CONVERTIBLE DEBENTURES AND DERIVATIVE LIABILITIES | ' |
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NOTE 3 – CONVERTIBLE DEBENTURES AND DERIVATIVE LIABILITIES |
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The Company has identified the embedded derivatives related to its convertible notes, consisting of the conversion feature, its preferred stock, consisting of the conversion feature, and its warrants. Since certain of the notes are convertible into a variable number of shares, the conversion features of those debentures are recorded as derivative liabilities. Since the warrants and the conversion feature of the preferred stock have a price reset feature, they are recorded as derivative liabilities. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to adjust to fair value as of each subsequent balance sheet date. |
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Greystone $52K Financing |
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On April 2, 2013, the Company entered into a Securities Purchase Agreement with Greystone Capital Partners, Inc. (Greystone), an accredited investor, providing for the sale by the Company to Greystone of an 8% convertible debenture in the aggregate principal amount of $52,000 (the “Greystone Debenture”). The Greystone Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable on the Maturity Date. Greystone may convert, at any time, the outstanding principal and accrued interest on the Greystone Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is the lesser of (i) ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (“Conversion Price”). The Conversion Price may be adjusted pursuant to the other terms of this Debenture. |
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With the exception of the shares the Company is obligated to issue to previous investors, for as long as the Debenture is outstanding, the Conversion Price of the Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants. |
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The conversion feature of the April 2013 Greystone debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $494,723. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.14%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 140%; and (4) an expected life of 1 year. The Company has allocated $52,000 to debt discount, to be amortized over the life of the debt, with the balance of $442,723 being charged to expense at issue. |
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IBC Funds $25K Financing |
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On June 7, 2013, the Company entered into a Securities Purchase Agreement with IBC Funds, LLC (IBC), an accredited investor, providing for the sale by the Company to IBC of an 8% convertible debenture in the aggregate principal amount of $25,000 (the “June 2013 Debenture”). The June 2013 Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable on the Maturity Date. The Investor may convert, at any time, the outstanding principal and accrued interest on the June 2013 Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is the lesser of (i) ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (“Conversion Price”). The Conversion Price may be adjusted pursuant to the other terms of this Debenture. |
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With the exception of the shares the Company is obligated to issue to previous investors, for as long as the Debenture is outstanding, the Conversion Price of the Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants. |
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The conversion feature of the June 2013 IBC debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $211,876. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.135%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 147%; and (4) an expected life of 1 year. The Company has allocated $25,000 to debt discount, to be amortized over the life of the debt, with the balance of $186,876 being charged to expense at issue. |
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IBC Funds $20K Financing |
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On July 2, 2013, the Company entered into a Securities Purchase Agreement with IBC Funds, LLC (IBC), an accredited investor, providing for the sale by the Company to IBC of an 8% convertible debenture in the aggregate principal amount of $20,000 (the “July 2013 Debenture”). The July 2013 Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable on the Maturity Date. The Investor may convert, at any time, the outstanding principal and accrued interest on the July 2013 Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is the lesser of (i) ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (“Conversion Price”). The Conversion Price may be adjusted pursuant to the other terms of this Debenture. |
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With the exception of the shares the Company is obligated to issue to previous investors, for as long as the Debenture is outstanding, the Conversion Price of the Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants. |
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The conversion feature of the July 2013 IBC debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $184,294. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.16%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 156%; and (4) an expected life of 1 year. The Company has allocated $20,000 to debt discount, to be amortized over the life of the debt, with the balance of $164,294 being charged to expense at issue. |
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IBC Funds $50K Financing |
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On August 14, 2013, the Company entered into a Securities Purchase Agreement with IBC Funds, LLC (IBC), an accredited investor, providing for the sale by the Company to IBC of an 8% convertible debenture in the aggregate principal amount of $50,000 (the “IBC August 2013 Debenture”). The IBC August 2013 Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable on the Maturity Date. The Investor may convert, at any time, the outstanding principal and accrued interest on the IBC August 2013 Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is the lesser of (i) ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (“Conversion Price”). The Conversion Price may be adjusted pursuant to the other terms of this Debenture. |
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With the exception of the shares the Company is obligated to issue to previous investors, for as long as the Debenture is outstanding, the Conversion Price of the Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants. |
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The conversion feature of the IBC August 2013 IBC debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $453,643. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.135%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 234%; and (4) an expected life of 1 year. The Company has allocated $50,000 to debt discount, to be amortized over the life of the debt, with the balance of $403,643 being charged to expense at issue. |
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CP US Income Group $50K Financing |
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On August 14, 2013, the Company entered into a Securities Purchase Agreement with IBC Funds, LLC (IBC), an accredited investor, providing for the sale by the Company to IBC of an 8% convertible debenture in the aggregate principal amount of $50,000 (the “CP US August 2013 Debenture”). The CP US August 2013 Debenture matures on the first anniversary of the date of issuance (the “Maturity Date”) and bears interest a rate of 8% per annum, payable on the Maturity Date. The Investor may convert, at any time, the outstanding principal and accrued interest on the CP US August 2013 Debenture into shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) at a conversion price that is the lesser of (i) ninety percent (90%) discount of the average of the closing bid price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date as quoted by Bloomberg, LP or (ii) the average of the closing bid price per share during the five (5) trading days prior to the date of any such conversion (“Conversion Price”). The Conversion Price may be adjusted pursuant to the other terms of this Debenture. |
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With the exception of the shares the Company is obligated to issue to previous investors, for as long as the Debenture is outstanding, the Conversion Price of the Debenture shall be subject to adjustment for issuances of Common Stock or securities convertible into common stock or exercisable for shares of Common Stock at a purchase price of less than the then-effective Conversion Price, on any unconverted amounts, such that the then applicable Conversion Price shall be adjusted using full-ratchet anti-dilution on such new issuances subject, to customary carve outs, including restricted shares granted to officers, and directors and consultants. |
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The conversion feature of the CP US August 2013 debenture contains a variable conversion rate. As a result, we have classified the conversion feature as a derivative liability in the financial statements. At issue, we have recorded a conversion feature liability of $453,643. The value of the conversion feature liability was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.135%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 234%; and (4) an expected life of 1 year. The Company has allocated $50,000 to debt discount, to be amortized over the life of the debt, with the balance of $403,643 being charged to expense at issue. |
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During the nine months ended September 30, 2013 we recorded additions to our derivative conversion liabilities related to the conversion feature attributable to interest accrued during the period. These additions aggregated $138,844 and $400,653 for the three and nine months ended September 30, 2013, respectively, which has been charged to interest expense. |
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During the nine months ended September 30, 2013, $148,459 of principal was converted into 1,048,830 shares of common stock. The Company has recorded expense of $208,125 for the nine months ended September 30, 2013 related to the change in fair value of the conversion feature through the dates of conversion. |
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At September 30, 2013, we recalculated the fair value of our embedded conversion features and warrants subject to derivative accounting and have determined that their fair value at September 30, 2013 was $9,518,660. The value of the conversion liabilities and warrant liabilities was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.12% - 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 222% - 295%; and (4) an expected life of 0.50 – 2.75 years. We recorded gain of $5,116 and $6,197,965 for the three and nine months ended September 30, 2013, respectively. |
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The Company is in default on eleven of its convertible notes, aggregating $641,825 of unpaid principal and $163,172 of unpaid accrued interest. The Company has not repaid principal or accrued but unpaid interest that has become due and payable under the notes. The Company is currently working with the note holders on making arrangements to honor its obligations under the notes, however, there can be no assurance that any such arrangements will ever materialize or be permissible or sufficient to cover any or all of the obligations under the notes. |
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