Convertible Debentures and Notes Payable

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

Convertible Debentures and Notes Payable

NOTE 7 – CONVERTIBLE DEBENTURES AND NOTES PAYABLE

Convertible debentures

In February 2010, the Company entered into a securities purchase agreement with certain institutional and private investors pursuant to which it sold convertible debentures for an aggregate of $3,075,000, which accrued a fixed sum of interest equal to 6% of the principal amount automatically upon issuance of the debenture. The conversion price in effect for these debentures, on any conversion date, was equal to $0.35 if conversion was at the election of the holder, or the lesser of $0.35 and the average closing price of the Company’s common stock for the 120 consecutive trading days up to, but not including, the maturity date if automatically converted at the maturity date which was August 24, 2011, or the per share subscription price of any other equity securities issued by the Company for financing purposes subsequent to the original issue date of the debenture, in each case subject to certain adjustments. To the extent any of the debentures were outstanding as of the maturity date, and were automatically converted pursuant to the terms of the debentures, then investors holding such debentures would receive warrants to purchase the number of shares of common stock equal to one half of the number of shares of common stock issued upon automatic conversion of the debenture. The Company could prepay all or part of the principal without penalty provided interest is paid proportionately with the principal being prepaid. The fair market value of the Company’s common stock was $0.43 per share on the date of the agreement. Consequently, the difference between the anticipated conversion price of $0.35 and the closing price of $0.43, multiplied by the number of issuable common shares upon conversion, was recorded as a beneficial conversion feature with an increase to equity and a debt discount in the amount of $702,857. This amount was accreted to interest expense through August 24, 2011.

On August 24, 2011, the maturity date of the convertible debentures pursuant to the terms of the Securities Purchase Agreement, the Company automatically converted the debentures into common stock and Class H warrants. The Securities Purchase Agreement required one Class H warrant to be issued for every two shares of common stock. A total of 18,108,340 shares of common stock and 9,054,175 Class H warrants were issued. The debentures were converted at the lesser of the average stock price for the prior 120 consecutive trading days or $0.18 per share. The Class H Warrants issued at the time of conversion have an exercise price of $0.22 and expire August 24, 2015. The Company recognized an additional charge against interest expense and additional paid in capital for $2,372,143 as a result of the conversion of the convertible debentures. The amount was the result of the additional shares that were issued from the automatic conversion over those shares originally calculated.

On July 27, 2012, the Company entered into a securities purchase agreement with certain institutional and private investors pursuant to which it sold convertible debentures for an aggregate of $3,069,900. The debentures bear interest at 8%, mature July 2017 and are unsecured. These debentures are convertible at any time into shares of the Company's common stock at an initial conversion price of $0.225 per share, subject to adjustment in certain conditions. Under certain conditions, the Company may force the conversion of the debentures any time following the one year anniversary of the closing date. In addition, after the second anniversary of the closing date, the Company will have the right to redeem all or part of the debentures at any time prior to the maturity date. The Company also has the right prior to the second anniversary of the closing date to redeem all or part of the debentures if the Company successfully consummates a financing of the proposed Hobbs, New Mexico de-conversion facility in the amount of at least $25 million. Any redemption of the debentures by the Company requires the payment of a redemption fee as set forth in the debentures.

Each investor also received a common stock purchase warrant to purchase common stock equal to twenty five percent (25%) of the shares issuable upon conversion of the debentures. The Warrants are immediately exercisable at a price of $0.30 per share and have a term of five years.

In accordance with FASC 470-20, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion, the Company allocated the proceeds to the debentures and warrants based on their relative fair value resulting in $2,703,144 being allocated to the debentures and $366,756 being allocated to the warrants. Subsequent to the allocation, the Company calculated a beneficial conversion feature of $25,656. The allocated warrant value and the beneficial conversion feature were recorded as debt discount and will be accreted to interest expense over the five-year life of the debentures.

In connection with this offering, the Company paid a fee and issued to the placement agent a warrant to purchase 1,091,520 shares of the Company’s common stock. The placement warrant had a fair value of $133,285. The value of the placement warrant and the fees are recorded as offering costs and will be amortized to expense over the life of the debentures.

The fair value of the warrants, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of .65%, expected dividend yield of 0%, expected volatility of 88%, and an expected life of 5 years.

Notes payable

In June 2011, the Company entered into an agreement with a related party to obtain financing for certain equipment. The amount financed was $45,000, and included a security interest in the equipment financed and matured June 2012. The note was paid in full in 2012.

In March 2012, the Company renegotiated the terms of a $500,000 unsecured note payable to its former Chairman of the Board. The original loan required annual interest payments on the principal balance at 7% per year, payable each April 1st, and the note was to mature on April 1, 2012. Pursuant to an amendment to the loan, the maturity date was extended from April 1, 2012 to November 1, 2012, and accrued interest in the amount of $35,000 was paid in cash on March 30, 2012. Additionally, 204,167 shares of the Company’s common stock were issued on April 1, 2012 to the former Chairman in lieu of the interest to be paid in cash on the loan from April 1, 2012 to November 1, 2012, based on an annual interest rate of 14% and the closing price of the Company’s common stock of $0.20 per share on March 23, 2012. On July 27, 2012, as part of a private placement transaction, which is described above, the former Chairman of the Board, converted $100,000 of this $500,000 note due from the Company as consideration for purchase of convertible debentures in the offering, thereby reducing the amount due from the Company under the original note to $400,000. In October 2012, the Company renegotiated the remaining $400,000 unsecured note payable which was to mature in full on November 1, 2012, and the terms of the note were further modified. Pursuant to the terms of the modification, the Company made a $200,000 principal payment on October 29, 2012. Starting on November 1, 2012, interest began to accrue on the remaining principal balance at an annual rate of 5% and the remaining principal payments were to be made in $100,000 installments on December 1, 2012 and January 1, 2013. In November 2012, the note was further modified to state that the remaining $100,000 installments would be made on January 1, 2013 and February 1, 2013. Subsequently, in January 2013, the Company renegotiated the remaining $100,000 of the note. Per the modified agreement, the remaining $100,000 principal will continue to accrue interest at a rate of 5% until March 2013. All principal and accrued interest was paid in full in March 2013.

Notes payable as of December 31, 2012 and 2011 consist of the following:

	2012		2011
Note payable to a related party bearing interest at 8.5%; monthly installments of $3,925, secured by a equipment.	$	-	$	22,977
Note payable to a finance company bearing interest at 8.9%; monthly installments of $674, secured by a vehicle.		-		2,648
Note payable to a finance company bearing interest at 9.4%; monthly installments of $679, secured by a vehicle.		-		2,734
Note payable to the former chairman of the board, interest accrues at 5%; All principal and interest repaid March 2013; unsecured.		100,000		500,000
Total notes payable		100,000		528,359
Less: current maturities		(100,000)		(528,359)
Notes payable, excluding current installments	$	-	$	-

Maturities of notes payable obligations at December 31, 2012 are as follows:

Years ending December 31,
2013	$	100,000
Thereafter		-
	$	100,000