Looking at the last 10K again, there are a couple of things that look like payoffs in light of this SEC investigation.
In February 2011, the Company purchased technology from an unrelated third party for $3,150,000 by
issuing a 5% convertible note payable (the Kaleidoscope Note). The note is due on demand, but not
sooner than six months from the date of issuance, and provides for nominal interest at the rate of five
(5.0%) percent per annum. The note may be converted into unregistered shares of the Company’s
common stock, par value $0.001 per share at the Conversion Price, as defined below, in whole, or in part,
at any time beginning 180 days after the date of the notes, at the option of the holder. The Conversion
Price shall be equal to 30% multiplied by the Variable Conversion Rate which is equal to the average of
the three (3) lowest closing bid prices of the Common Stock during the ten (10) trading day period prior
to the date of conversion. The convertible notes payable only become convertible 180 days from issuance,
and until the notes payable become convertible, no derivative liability was recorded as a result of the
conversion feature. The note became convertible in August 2011 and accordingly, the Company recorded
a derivative liability of $5,430,958. At September 30, 2011, the derivative liability was marked-to-market
and the balance was $5,432,887. As of September 30, 2011 there is a balance on this note of $3,073,641,
plus accrued interest of $94,433.
[color=red]In August 17, 2011, the Company was notified that $500,000 of the Kaleidoscope Note was assigned to
an unrelated third party.[/color] The assigned note payable retained the same conversion terms as the
Kaleidoscope Note. The Company recorded a derivative liability of $1,167,416. On August 19, 2011 and
September 22, 2011, the note holder converted $21,906 and $13,013, respectively, and the Company
issued 146,039,992 and 216,880,251 shares of the Company’s common stock, respectively. As of
September 30, 2011, the balance on this note was $465,081. At September 30, 2011, the derivative
liability was marked-to-market and the balance was $1,086,271
[color=red]In August 23, 2011, the Company was notified that $50,000 of the Kaleidoscope Note was assigned to an
unrelated third party.[/color] The assigned note payable retained the all the same conversion terms as the
Kaleidoscope Note with the exception of the Conversion Price. In connection with the assignment, the
Company issued an amendment to the note to change the conversion price to 40% of the average of the
three lowest closing bid prices of the Common Stock during the ten trading day period prior to the date of
conversion. Upon assignment the note became convertible, and, accordingly, the Company recorded a
derivative liability of $75,349. On August 29, 2011 and September 16, 2011, the note holder converted
$12,500 and $5,000, respectively, and the Company issued 78,125,000 and 83,333,333 shares of the
Company’s common stock, respectively. As of September 30, 2011, the balance on this note was $32,500.
At September 30, 2011, the derivative liability was marked-to-market and the balance was $49,057.
[color=red]In September 2011, the Company was notified that $250,000 of the Kaleidoscope Note was assigned to
an unrelated third party.[/color] The assigned note payable retained the all the same conversion terms as the
Kaleidoscope Note. Upon assignment the note became convertible, and, accordingly, the Company
recorded a derivative liability of $583,810. As of September 30, 2011, the balance on this note was
$250,000. At September 30, 2011, the derivative liability was marked-to-market and the balance was
$583,915.
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