NOTE 6 – CONVERTIBLE DEBENTURES
Beginning on February 11, 2011 through December 31, 2011 the Company has entered into multiple convertible debenture agreements with a third party. These debentures carry interest at 8 to 15% per annum, are due in full starting on March 19, 2012, and are collateralized by 600,000 shares of the Company’s common stock held in escrow. At the option of the holder, any outstanding principle and unpaid interest balance is convertible into shares of the Company’s common stock. The conversion price is the highest of a) 50% of the average of the five lowest closing prices for the Company’s stock during the previous 15 trading days or b) $0.0001.
As of January 13, 2013, the Company is in default for nonpayment of one convertible debenture totaling $41,244 plus accrued interest of $5,324 At December 31, 2011, the principal portion of this note is classified on the balance sheet as current portion of notes payable.
In accordance with ASC 470, the Company has analyzed the beneficial nature of the conversion terms of these debentures and determined that a beneficial conversion feature (BCF) exists. The Company calculated the value of the BCF using the intrinsic method based on the stock price on the day of commitment, the discount as agreed to in the debenture, and the number of convertible shares. The combined value of the BCF for all debentures is $290,000. The BCF has been recorded as a discount to the debenture payable and to Additional Paid-in Capital.
In accordance with ASC 470, the Company is amortizing the BCF over the life of the debentures. As of December 31, 2011 the Company has recognized $341,366 in amortization which has been charged to interest expense resulting in a carrying value of the notes of $280,918 as of December 31, 2011.
On separate dates, the holder of these notes elected to convert a total of $534,263 of these debentures into shares of common stock. Based on the conversion terms, the holders received 20,782,048 shares of the Company’s common stock resulting in an average conversion price of less than $0.01 per share.