On May 21, 2010, the Company issued a 9% senior secured convertible debenture in the principal amount of $350,000 with an 8% original issue discount of $28,000 (the "Debenture"). The Debenture was paid in full in November 2011.  However, the Debenture was issued with detachable warrants to purchase 500,000 shares of common stock with an exercise price of $0.77 which expire in five years and contain full-ratchet and other standard anti-dilution protections.

The Company has accounted for these transactions in accordance with FASB ASC Topic 470-20 "Debt with Conversion and Other Options". Due to the full-ratchet anti-dilution protection in the warrants, they are considered to be derivative instruments.  As such, the original fair market value of the warrants of $86,950 was recorded as a debt discount and as a derivative liability. The derivative liability was adjusted to the fair market value of the warrants at September 30, 2012 of $51,000, with the changes in value of $18,400 and $24,800 being recorded as derivative expense on the statements of operations for the three and nine months ended September 30, 2012, respectively.