(8) Long-term Debt

12 Months Ended

Dec. 31, 2012

Notes

(8) Long-term Debt

(8)       Long-term Debt

In December 2010 and January 2011, the Company issued three $30,000 face value notes, bearing interest at 14% and due in monthly installments of principal and interest through July 2016. Each note was issued with a commitment to issue 917,136 shares of the Company's common stock and five year warrants to acquire 1,146,420 shares of the Company's common stock at $0.03271 per share. Each $30,000 note was issued with common stock and warrants valued at $18,236 and treated as a discount to be amortized over the term of the debt of 66 months, resulting in an effective interest rate on the debt of approximately 75%. The value of the shares, notes and detachable warrants was determined using their relative fair values as follows:  The notes were assigned a value equal to their face value; the common stock was assigned a value of $0.02617 per share based on sales of common stock to investors near the date of the notes and; the warrants were valued using the Black Scholes option pricing model with a term of five years, an exercise price of $0.03271, a market price at the date of grant of $0.02617, a risk free interest rate of 2.02%, an expected volatility of 100% and a dividend yield of 0%.

In March 2011, the Company issued a $40,000 face value note, bearing interest at 14% and due in monthly installments of principal and interest through April 2015. The note was issued with a commitment to issue 1,528,560 shares of the Company's common stock. The common stock issued with the note was assigned a relative value of $20,000 and treated as a discount to be amortized over the term of the debt of 48 months, resulting in an effective interest rate on the debt of approximately 69%.  The fair value assigned to stock was based upon the market price of the Company's common stock as determined by reference to recent cash sales.   

Following is an analysis of the debt transactions:

Description	Date of Agreement	Principal Amount	Interest Rate	Term	Payment Terms
Note 1	December 31, 2010	$30,000	14%	66 Months	$350 per month for 6 months and $698 per month for 60 months, including interest
Note 2	December 31, 2010	30,000	14%	66 Months	$350 per month for 6 months and $698 per month for 60 months, including interest
Note 3	January 31, 2011	30,000	14%	66 Months	$350 per month for 6 months and $698 per month for 60 months, including interest
Note 4	March 31, 2011	40,000	14%	48 Months	$467 per month for 6 months and $1,210 per month for 42 months,including interest

To originate the notes payable, the Company issued common stock and warrants as follows:

			Warrants
Description	Date of Agreement	Shares Issued	Shares	Exercise Price	Term
Note 1	December 31, 2010	917,136	1,146,420	$0.03271	5 years
Note 2	December 31, 2010	917,136	1,146,420	0.03271	5 years
Note 3	January 31, 2011	917,136	1,146,420	0.03271	5 years
Note 4	March 31, 2011	1,528,560	-	-	-

Following is an analysis of the note payable transactions:

	December 31, 2012	December 31, 2011
Face value of notes	$130,000	$130,000
Proceeds from notes payable	$130,000	$130,000
Less value associated with common stock issued in connection with origination of notes	(48,236)	(48,236)
Less value of detachable warrants issued in connection with origination of notes	(26,472 )	(26,472)
Net value of notes at date of origination	55,292	55,292
Amortization of discount associated with common stock and detachable warrants	32,659	14,405
Net long-term debt	$87,951	$69,697
Payments not made in accordance with note terms	$39,652	$19,676

Following is an analysis of future annual maturities of long-term debt at December 31, 2012:

Year Ending December 31,	Contractual Principal Payments	Amortization Of Discount	Annual Principal Maturities
2013	59,223	17,584	41,639
2014	31,727	14,407	17,320
2015	25,052	8,256	16,796
2016	13,998	1,802	12,196
2017	-	-	-
Total future contractual payments	$130,000	$42,049	$87,951

            At December 31, 2012, the Company was in default on its long-term debt due its failure to make payments due under the terms of debt agreements.  Holders of notes did not express desire to declare entire principal balances due immediately, and note balances are reported with original maturities.