Long Term Obligations

6 Months Ended

Jun. 30, 2013

NOTE 4. Long Term Obligations

On May 27, 2011, the Company sold convertible promissory notes in the aggregate principal amount of $15,275,000, convertible into an aggregate of approximately 2,679,824 shares of Series A-2 Convertible Preferred Stock at a price of $5.70 per share, with each share being convertible into ten shares of common stock. The convertible promissory notes were sold along with convertible preferred stock and warrants for aggregate gross proceeds of $30,550,000, which after deducting issuance costs of $2,524,963 left net proceeds of $28,025,037. Interest on the convertible promissory notes accrues at a rate of 5% per annum, and may either be paid on the last day of each fiscal quarter, or added to the principal amount of the notes, at the Company’s option.

Using the relative fair value of the securities issued, the Company initially allocated the gross proceeds of $30,550,000 as follows:

Security	Allocated Fair Value		Issuance Costs			Interest Expense		Net Allocation

Series A-1 Convertible Preferred Stock	$	10,724,991	$	(886,422	)	$	—	$	9,838,569
Convertible promissory notes		10,072,592		(832,502	)		2,255,074		11,495,164
Warrants		9,752,417		(806,039	)		—		8,946,378

Total	$	30,550,000	$	(2,524,963	)	$	2,255,074	$	30,280,111

The debt discount (which includes the discount associated with the embedded conversion derivative) related to the debt element of the convertible promissory notes of $14,442,497 is being amortized as non-cash interest expense using the effective yield method over the 3.5 year contractual term of the convertible promissory notes. The $832,502 in issuance costs allocated to the convertible promissory notes was recorded as a deferred financing cost, which is also being amortized as a non-cash interest expense using the effective yield method over the 3.5 year contractual term of the promissory notes.

The Company values the derivative liability for the conversion element of the convertible promissory notes using a Monte Carlo Simulation approach, using assumptions provided by management reflecting conditions at the valuation dates.

The fair value of this derivative liability at June 30, 2013 and 2012, was estimated to be $439 and $401,921, respectively, using a closing stock price of $0.04 and $0.07, respectively, and based on the following assumptions:

	June 30, 2013	June 30, 2012

Risk-free interest rate	0.03%	0.23%
Remaining contractual term	1.41 Years	2.41 Years
Expected volatility	148.74%	112.40%
Dividend yield	0%	0%

The fair value of this derivative liability at December 31, 2012 and 2011, was estimated to be $274,928 and $1,931,295, respectively. The decrease in the fair value of this derivative liability of $274,489 and $1,529,374 during the six months ended June 30, 2013 and 2012, respectively, was recorded as a revaluation gain (see Note 9).

The balance of the convertible promissory notes comprises the following at June 30, 2013, and December 31, 2012:

	June 30, 2013		December 31, 2012

Convertible Promissory Notes Payable:
Face value	$	15,275,000	$	15,275,000
Interest added to principal		1,678,037		1,262,028
Stated value		16,953,037		16,537,028
Debt discount – conversion element, net of accumulated amortization of $2,760,773 and $1,298,628 respectively		11,681,724		13,143,869

Notes payable, net of debt discount	$	5,271,313	$	3,393,159