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7) Convertible Debentures
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Sep. 30, 2012
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| 7) Convertible Debentures | 7) CONVERTIBLE DEBENTURES
On April 23, 2012, the Company borrowed $350,000 from two unrelated parties pursuant to convertible debenture agreements. The debentures bear interest at 5.0% per annum and have a term of five years, maturing on April 22, 2017. The debentures are convertible into common stock at $0.25 per share.
On July 10 and August 31, 2012 the Company borrowed $50,000 and $100,000 from two unrelated parties pursuant to convertible debenture agreements. The debentures bear interest at 5.0% and 6% per annum and have a term of five years, maturing on July 10 and August 31, 2017. The debentures are convertible into common stock at $0.25 per share.
The Company accounted for the issuance of the convertible debentures in accordance with ASC 815 “Derivatives and Hedging” and ASC 740, “Debt” accordingly, the embedded conversion options of the convertible debentures are derivative liabilities and are marked to market though earnings at the end of each reporting period. The gross proceeds from the sale of the debentures of $500,000 were recorded net of $500,000 related to the beneficial conversion features of the convertible debentures. In addition, the company recorded benefits of $24,000 which represents the fair value of conversion options in excess of the debt discount recorded. This amount is to be recorded as a component of interest expense in the statement of operations. The debt discount is to be charged to interest expense ratably over the term of the convertible debenture.
Interest expense related to these debentures for the three and nine month periods ended September 30, 2012 consisted of the following:
On February 8, 2012, the Company borrowed $32,500 from an unrelated third party, pursuant to a convertible debenture agreement. The debenture bears interest at 8% per annum and matures on November 6, 2012. The loan agreement provides for the right of the holder to convert the loan principal and interest into shares of common stock at a stated conversion price of the average of the two lowest daily trades in the previous 30 days with a 49% discount.
The Company accounted for the issuance of the convertible debenture in accordance with ASC 815” Derivatives and Hedging.” The debenture is convertible into an indeterminate number of shares for which the Company cannot determine if it has sufficient authorized shares to settle the transaction with. Accordingly, the embedded conversion option is a derivative liability and is marked to market through earnings at the end of each reporting period.
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