NOTES PAYABLE AND LONG TERM DEBT

12 Months Ended

Dec. 31, 2012

Notes Payable and Long Term Debt [Abstract]

DEBENTURES

NOTE 7. NOTES PAYABLE AND LONG TERM DEBT

Debentures

In February 2011, two investors subscribed to purchase an aggregate of $200,000 of debentures and warrants from us. The debentures have an aggregate principal amount of $200,000 and bear interest at 10% per year. The entire principal amount of the debentures is due in one lump sum on June 30, 2013. The debentures were issued with three sets of detachable warrants as follows: (i) Series A Warrants to purchase an aggregate of 100,000 shares of common stock at the price of $1.50 per share that expired on December 31, 2012, (ii) Series B Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $3.00 per share that expire on December 31, 2013, (iii) Series C Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $5.00 per share that expire on December 31, 2013.

Between October and December 2010, three investors subscribed to purchase an aggregate of $200,000 of debentures and warrants from us. The debentures have an aggregate principal amount of $200,000 and bear interest at 10% per year. The entire principal amount of the debentures is due in one lump sum on June 30, 2013. The debentures were issued with three sets of detachable warrants as follows: (i) Series A Warrants to purchase an aggregate of 100,000 shares of common stock at the price of $1.50 per share that expired on December 31, 2012, (ii) Series B Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $3.00 per share that expire on December 31, 2013 (iii) Series C Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $5.00 per share that expire on December 31, 2013.

Following is an analysis of debentures payable at December 31:

	2012		2011
Stated value of debentures payable	$	400,000	$	400,000
Less: unamortized value of warrants issued		28,912		85,720
	$	371,088	$	314,280

During the years ended December 31, 2012 and 2011, we recorded $56,808 and $51,931 in interest expense related to the amortization of the warrants value associated with the debentures.

Third-party note payable

On March 9, 2012, we entered into an uncollateralized note payable with a third party for $50,000. The note is due March 9, 2015 and bears interest at 10% per year. Interest is payable quarterly and the full principal amount is due upon maturity. The note payable balance was $50,000 and $0 at December 31, 2012 and December 31, 2011, respectively.

Convertible and secured notes payable

On June 27, 2012, we issued a $500,000 convertible promissory note bearing interest at 12% per year which matures on March 27, 2014. This note provides for six quarterly payments of interest commencing on September 27, 2012, and continuing thereafter on December 27, March 27, June 27, and September 27 throughout the term of the promissory note. On the maturity date, a balloon payment of the entire outstanding principal plus any accrued but unpaid interest is due. Under the terms of the convertible note, the holder received a detachable warrant to purchase 69,445 shares of our common stock at the price of $1.80 per share that expires on June 27, 2014. The holder of the note also has the right to convert into common stock, at $1.50 per share, up to 50% of the principal amount after twelve months and up to 100% of the principal amount after fifteen months from the original issue date.

On August 29, 2012, we issued a $1,000,000 three-year secured promissory note bearing interest at 12% per year, with thirty-five monthly payments of interest commencing on September 29, 2012, and continuing thereafter on the 29^th day of each successive month throughout the term of the promissory note. Under the terms of the secured promissory note, the holder received a detachable warrant to purchase 333,333 shares of our common stock at the price of $1.60 per share that expires on August 29, 2015. This promissory note is secured by $3,000,000 in gross accounts receivable. On the maturity date, one balloon payment of the entire outstanding principal amount plus any accrued and unpaid interest is due.

In accordance with ASC 470-20, Debt with Conversion and Other Options, the proceeds received from the convertible note were allocated between the convertible note and the detachable warrant based on the fair value of the convertible note without the warrant and the warrant. The portion of the proceeds allocated to the warrant was recognized as additional paid-in capital and a debt discount. The debt discount related to the warrant is accreted into interest expense through the maturity of the convertible note. The effective conversion price of the common stock did not exceed the stated conversion rate; therefore, there is no beneficial conversion feature associated with the convertible note. Similarly, the proceeds received from the secured note were allocated between the secured note and the detachable warrant based on the fair value of the secured note without the warrant and the warrant. The portion of the proceeds allocated to the warrant was recognized as additional paid-in capital and a debt discount. The debt discounts related to the warrants are accreted into interest expense over the lives of the notes.

The weighted-average estimated fair value of the warrants issued with the convertible and secured notes was $0.62 and $0.81 per share, respectively, using the Black-Sholes pricing model with the following assumptions:

	Convertible			Secured
Description	Note			Note
Expected volatility		128	%		133	%
Risk-free interest rate		0.31	%		0.36	%
Expected life		2 years			3 years
Dividend yield		0	%		0	%

The following table provides an analysis of activity related to the convertible and secured notes for the year ended December 31, 2012:

	Convertible			Secured
Description	Note			Note
Proceeds received on issuance of notes in 2012	$	500,000		$	1,000,000
Discount allocated to warrants		(46,716	)		(212,598	)
Note balances after discount		453,284			787,402
Accretion of discount to interest expense		11,679			30,000
Note balances at December 31, 2012	$	464,963		$	817,402
Total allocated to additional paid in capital	$	46,716		$	212,598
Unamortized discount at December 31, 2012	$	35,037		$	182,598
Contractual interest expense for 12 months ended  at December 31, 2012	$	30,000		$	40,000
Effective interest rate on notes		17.3	%		19.1	%

The following table provides a listing of the future maturities of long-term debt:

	Contractual		Principal
	Amounts		Amounts
Year	Due		Due
2013	$	400,000	$	257,576
2014		500,000		453,284
2015		1,050,000		837,402
Total	$	1,950,000	$	1,548,262