Quarterly report pursuant to sections 13 or 15(d)

4. Convertible Debentures

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4. Convertible Debentures
9 Months Ended
Sep. 30, 2012
Convertible Debt [Abstract]  
Note 4. Convertible Debentures

Convertible debentures consist of the following:

 

    September 30,
2012
    December 31,
2011
 
             
Convertible debentures   $ 43,450     $ 1,720,460  
                 
Less, remaining debt discount     (27,890 )     (1,550,918 )
Convertible debentures, net   $ 15,560       169,542  

  

From December 13, 2010 through July 23, 2012, the Company conducted private offerings of up to $10,000,000 aggregate face amount of its convertible notes. A total of $8,302,153 aggregate face amount of the notes were sold for an aggregate purchase price of $7,547,411. Through December 31, 2011, $6,239,029 of these notes were sold, of which $4,518,425 were converted to shares of common stock during 2011, leaving a balance of convertible notes outstanding as of December 31, 2011 of $1,720,460. During 2012, the Company sold an additional $2,064,774 of these convertible notes, and additional $3,741,784 of these notes were converted to shares of common stock, leaving a balance of convertible notes outstanding of September 30, 2012 of $43,450. While the stated interest rate on the notes is 0%, the actual interest rate on the notes is 10% per annum. The notes mature on the first anniversary of their respective date of issuance. The notes outstanding at September 30, 2012 are convertible, at the option of the note holder, into 132,550 shares of common stock of the Company (the “Conversion Shares”) at a conversion price of $0.25-$0.40 per share (the “Conversion Price”).

 

Each of the investors in the offerings received, for no additional consideration, a warrant entitling the holder to purchase a number of shares of the Company’s common stock equal to 100% of the number of shares of common stock into which the notes are convertible (the “Warrant Shares”).  Each warrant is exercisable on a cash basis only at an initial price of $0.30-$0.40 per share, and is exercisable immediately upon issuance and for a period of two (2) to three (3) years from the date of issuance. Warrants to acquire 7,405,716 shares of common stock were granted during the nine months ended September 30, 2012.

   

During 2012, the Company sold $2,064,774 of convertible notes for aggregate consideration of $1,831,440, resulting in a discount of $187,094 and conversion of $46,240 of accounts payable. The aggregate relative value of the warrants issued in the 2012 offerings were valued at $832,814 using the Black-Scholes-Merton option valuation model with the following assumptions; risk-free interest rate of .23%-.28%; dividend yield of 0%; volatility factors of the expected market price of common stock of 111%; and an expected life of two to three years (statutory term). The Company also determined that the notes contained a beneficial conversion feature of $1,036,259.  The aggregate value of $2,064,774 of the 2012 Offering Warrants, the beneficial conversion feature and the note discount are considered as debt discount and will be amortized over the life of the notes.  The value of this debt discount was added to the outstanding debt discount of $1,550,918 as of December 31, 2011.  During the period ended September 30, 2012, the Company amortized $3,587,802 of debt discount, resulting in an unamortized debt discount balance of $27,890 as of September 30, 2012.

 

As of September 30, 2012, the outstanding balance of the notes was $43,450.