7. FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is determined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level one — Quoted market prices in active markets for identical assets or liabilities;

Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	Fair value measurement using inputs						Carrying amount at
Financial instruments	Level 1		Level 2		Level 3		12/31/2012
Liabilities:
Derivative instruments	$	–	$	1,016,341	$	–	$	1,016,341
Total	$	–	$	1,016,341	$	–	$	1,016,341

	Fair value measurement using inputs						Carrying amount at
Financial instruments	Level 1		Level 2		Level 3		12/31/2011
Liabilities:
Derivative instruments	$	–	$	1,043,639	$	–	$	1,043,639
Total	$	–	$	1,043,639	$	–	$	1,043,639

During the year ended December 31, 2012, the Company entered into various note agreements. At the option of the holder, these notes are convertible into the Company’s shares of common stock at various conversion prices.

Issue Date	Conversion Price Clause
01/26/12	Lower of (i) $2.00 or (ii) 50% of lowest closing bid price 30 trading days preceding conversion date
1/31/12	Lower of (i) $2.00 or (ii) 50% of lowest closing bid price 30 trading days preceding conversion date
2/16/12	Lower of (i) $2.00 or (ii) 50% of lowest closing bid price 30 trading days preceding conversion date
2/21/12	Lower of (i) $2.00 or (ii) 50% of lowest closing bid price 30 trading days preceding conversion date
6/6/12	Lower of (i) $0.50 or (ii) 50% of average closing bid price 3 trading days preceding conversion date
7/20/12	55% of Market Price / average of the lowest 3 trading prices, 10 trading days preceding conversion date
8/23/12	55% of Market Price / average of the lowest 3 trading prices, 10 trading days preceding conversion date
11/12/12	31% of Market Price / lowest trading price, 120 days preceding conversion date
12/24/12	55% of Market Price / lowest trading price, 120 days preceding conversion date

As per ASC 815 Derivatives & Hedging, these convertible notes payable do not meet the definition of a “conventional convertible debt instrument” since the debt is not convertible into a fixed number of shares. The debt can be converted into common stock at a conversions price that is a percentage of the market price; therefore the number of shares that could be required to be delivered upon “net-share settlement” is essentially indeterminate. Therefore, the convertible debenture is considered “non-conventional,” which means that the conversion feature must be bifurcated from the debt and shown as a separate derivative liability.

The fair value of the conversion liability will be adjusted to fair value each balance sheet date with the change being shown as a component of net income.

The fair value of the derivative liability at the inception of these convertible notes payable were shown as a debt discount with any discount greater than the face amount of the debt being as financing costs in the year ended December 31, 2012.

Funding Date	Amount of Debt	Fair Value of Derivative Liability	Amount Applied to Debt Discount	Recorded as Debt Issuance Cost
01/26/12	50,000	199,842	50,000	149,842
1/31/12	50,000	99,901	50,000	49,901
2/16/12	60,000	239,871	60,000	179,871
2/21/12	40,000	79,937	40,000	39,937
6/6/12	30,000	93,875	30,000	63,875
7/20/12	27,500	212,706	27,500	185,206
8/23/12	32,500	53,870	32,500	21,370
11/12/12	16,000	195,202	16,000	179,202
12/24/12	22,500	272,976	22,500	250,476
	328,500	1,448,180	328,500	1,119,680

At December 31, 2012, the fair value of the conversion liabilities was $1,016,341. During the year ended December 31, 2012, the gain due to the change in the fair value of these derivative liabilities was recorded as $1,475,481.

At December 31, 2011, the fair value of the conversion liabilities was $1,043,639. During the year ended December 31, 2011, the loss due to the change in the fair value of these derivative liabilities was recorded as $284,378.