Really?
From 3rd Quarter 10Q, 2010:
Quote:
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December 13, 2007 Debenture
The Company entered into a Securities Purchase Agreement with an accredited investor on December 13, 2007 for the sale of $1,500,000 in a convertible debenture bearing interest at 7.25% per annum, payable on or before December 12, 2010.
A prospectus relates to the resale of the common stock underlying the convertible debenture. The terms of the convertible debenture calls for the investor to provide the Company with an aggregate of $1,500,000 as follows;
$200,000 was disbursed on December 13, 2007, with aggregate additional funding of $575,000 during the year ended December 31, 2008.
$1,300,000 secured promissory note bearing interest at 7.75% per annum, due on demand at any time after February 1, 2011. The investor is obligated to make monthly periodic prepayments of $250,000 during each month that the promissory in outstanding. Interest is payable on a monthly basis, commencing January 15, 2008. The interest rate shall be increased by 0.25 percentage points per each Periodic Prepayment that is not paid by the investor, provided however that in no event shall the interest rate exceed an amount equal to 12.5%. During the year ended December 31, 2008, the Company received $575,000 under this promissory note.
Accordingly, we have received a total of $794,000 pursuant to the Securities Purchase Agreement through September 30, 2010. Pursuant to the convertible debenture the investor may convert the amount paid towards the Securities Purchase Agreement into common stock of the Company at a conversion price equal to the lesser of (i) $0.25, or (ii) 80% of the average of the 5 lowest volume weighted average prices during the 20 trading days prior to investor’s election to convert (the percentage being a “Discount Multiplier” ). If any portion of the principal or accrued interest on this convertible debenture is not paid within ten (10) days of when it is due, the Discount Multiplier shall decrease by one percentage point (1%) for all conversions of the convertible debenture. If the investor elects to convert a portion of the convertible debenture and, on the day that the election is made, the volume weighted average price is below $0.01, we shall have the right to prepay that portion of the convertible debenture that investor elected to convert, plus any accrued and unpaid interest, at 150% of such amount. In the event that we elect to prepay that portion of the convertible debenture, investor shall have the right to withdraw its conversion notice.
We evaluated this agreement pursuant to FASB Statement No. 133 and due to the Company’s option to settle in cash if the weighted average price drops below a certain point and sufficient shares appear available, we determined no embedded derivatives existed and FASB No. 133 did not apply.
As required by Emerging Issues Task Force Issue 98-05 “Accounting for Convertible Securities with Beneficial Conversion Features” , we valued the beneficial conversion feature related to the outstanding debt which was treated as a loan discount and amortized to interest expense using the effective interest rate method over the life of the note.
During the three months ended September 30, 2010, the investor converted $65,700 of the outstanding principal into 821,250,000 shares of common stock of the Company.
In accordance with the option allowed in SFAS 155, the Company has elected to value the derivative separately at the fair value on the issuance date using the Black-Scholes valuation model and bifurcate the instrument. The result of the valuation is a discount on debt of $284,300 as of September 30, 2010. We estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 4 years; (2) a computed volatility rate from 132% to 197%(3) a discount rate of 2.10% and (4) zero dividends. The discount is equal to the value of the note issued, as it can only be discounted up to the value of the note and is being amortized over the life of the note using the effective interest method. For the nine months ended September 30, 2010 $0 was amortized.
In accordance with the option allowed in SFAS 155, the Company has elected to value the derivative separately at the fair value on the issuance date using the Black-Scholes valuation model and bifurcate the instrument. The result of the valuation is a derivative liability in the amount of $355,102 as of September 30, 2010. We estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of 4 years; (2) a computed volatility rate from 132% to 197%(3) a discount rate of 45% and (4) zero dividends. The discount is equal to the value of the note issued, as it can only be discounted up to the value of the note and is being amortized over the life of the note using the effective interest method. The gain/loss on derivative is equal to the difference between the discount on debt and the derivative liability. The instrument was re-valued at period end, and the resulting change for the year of $46,907 was included in the statement of operations as a net gain on the derivative liability.
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