4. Convertible Debenture | 9 Months Ended |
Sep. 30, 2013 |
Notes to Financial Statements | ' |
4. Convertible Debenture | ' |
4. Convertible Debenture |
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During December 2011, the Company received $100,000 as a deposit for entering into a distribution agreement. On March 22, 2012, the Company converted the $100,000 deposit into a convertible debenture. The convertible debenture bears interest at a rate of five-percent (5%) per annum and is payable March 21, 2014. At the Holder’s option, principle and unpaid accrued interest shall be convertible into common stock at a rate of $0.50 per share. In |
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addition to the common stock, the Holder shall receive warrants to purchase an equal number of shares of common stock exercisable at $1.00 per share. These warrants expire at the earlier of 180 days after the common stock commences quotation on the OTC Bulletin Board or one-year from exercise. |
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On September 25, 2012, the Company issued a $100,000 convertible debenture. The convertible debenture bears interest at a rate of five-percent (5%) per annum and is payable September 20, 2013. At the Holder’s option, principle and unpaid accrued interest shall be convertible into common stock at a rate of $0.50 per share. In addition to the common stock, the Holder shall receive warrants to purchase an equal number of shares of common stock exercisable at $1.00 per share. These warrants expire at the earlier of 180 days after the common stock commences quotation on the OTC Bulletin Board or one-year from exercise. This convertible debenture extended 360 days on September 21, 2013 |
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On May 23, May 31, June 10, July 29, August 14, and September 25, 2013, the Company issued a $10,000, $10,000, $25,000, $4,000, $50,000 and $20,000 convertible debentures, respectively. The convertible debentures bear interest at a rate of ten-percent (10%) per annum and is payable May 18, May 26, June 5, 2014, July 24, august 9, September 20, 2014, respectively. At the Holder’s option, principle and unpaid accrued interest shall be convertible into common stock at a rate of $0.50 per share. In addition to the common stock, the Holder shall receive warrants to purchase an equal number of shares of common stock exercisable at $1.00 per share. These warrants expire at the earlier of 180 days after the common stock commences quotation on the OTC Bulletin Board or one-year from exercise. |
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The Compound derivative comprises certain derivative features embedded in the host convertible debenture contracts including the conversion feature and warrants both of which contain anti-dilution protections. These instruments were combined into one compound derivative and bifurcated from the host instrument at fair value. The Company applied the Black-Scholes Merton valuation technique to fair value these derivatives because this technique embodies all of the assumptions necessary to fair value these compound derivative instruments. |
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Since the derivative financial instruments are required to be recorded, both initially, and subsequently, at fair value, there were insufficient proceeds to allocate any amount to the convertible debentures and, accordingly, it has no carrying value on the date of inception. Additionally, proceeds were insufficient to record the fair values of the derivative financial instruments, resulting in initial interest expense of $283,844. It should be noted that the derivative instruments will be adjusted to fair value at each reporting date. As the Company does not have historical volatility data for its own stock, the expected volatility was based upon the Company’s peer group in the industry in which it does business. Fair values are highly influenced by the trading stock price and volatility of the peer group, changes in our credit risk and market interest rates. |
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The company amortizes the discount on the convertible debentures resulting from the initial allocation over the term of the convertible debt instruments using the effective method. Amortization expense arising from this method for the nine months ended September 30, 2013 and 2012 was approximately $214,963 and $0, respectively. These amounts have been included as a component of interest expense. |
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