Senior Secured Convertible Debentures

12 Months Ended

Dec. 31, 2012

Senior Secured Convertible Debentures

Senior Secured Convertible Debentures

All share references have been adjusted to reflect a 50:1 reverse stock split by the Company on January 12, 2012.

During the years ended December 31, 2011 and December 31, 2012 the Company raised $4,935,000 from accredited investors via 10% Senior Secured Convertible Debentures. Specifically the Company raised $3,120,000 in 2011 and $1,815,000 on February 29, 2012. These debentures were converted to 19,505,523 shares of the Company’s common stock in accordance with the terms of the debenture.

Terms of the 10% Senior Secured Convertible Debenture are as follows:

• The maturity date of the 10% Senior Secured Convertible Debentures is September 30, 2013, but may be extended at the sole discretion of the Company to December 31, 2013.

• In connection with the Debenture offering, the Company also issued five (5) year warrants to purchase an aggregate of 104,400 shares of the Company’s common stock at an exercise price of $0.25 per share, subject to customary adjustments for stock splits, stock dividends, recapitalizations and the like.

• The Company has the right to force conversion of the 10% Senior Secured Convertible Debentures under certain terms and conditions.

• The 10% Senior Secured Convertible Debentures are secured under the terms of a Security Agreement by a security interest in all of the Company’s personal property. The relative fair value of the warrants and beneficial conversion features of the 10% Senior Secured Convertible Debentures were determined at the time of issuance using the methodology prescribed by current accounting guidance.

The Company converted the debentures in two phases as follows:

1.   During the year ended December 31, 2011 $1,112,500 of the outstanding 10% Senior Secured Convertible Debentures were converted to 4,445,000 shares of the Company’s common stock in accordance with their terms.

2.   In February 2012 the remaining $4,649,775 of the outstanding 10% Senior Secured Convertible Debentures was converted to 19,505,523 shares of the Company’s common stock in accordance with their terms.

Accounting for the Debentures:

• The Company determined the initial fair value of the 10% beneficial conversion feature was approximately $1.7 million.

• The initial fair value of the warrants of $61,649 and the beneficial conversion feature of $1,753,351 were recorded by the Company as a discount of $1,815,000, for the year ended December 31, 2012, and which the Company is amortizing to interest expense over the life of the 10% Senior Secured Convertible Debentures.

• The beneficial conversion feature of $3,120,000 was recorded by the Company as a discount of $3,120,000 for the year ended December 31, 2011, which the Company amortized to interest expense over the life of the 10% Senior Convertible Debentures.

Period Ended	Convertible Debentures Raised (Converted)			Beneficial Conversion Value
12/31/2010	$	827,275		$	700,708
3/31/2011	$	910,000		$	910,000
6/30/2011	$	882,500		$	882,500
9/30/2011	$	477,500		$	477,500
12/31/2011	$	850,000		$	850,000
	$	3,947,275		$	3,820,708
Converted	$	(1,112,500	)	$	(1,618,467	)
12/31/2011	$	2,834,775		$	2,202,241
12/31/2012	$	1,815,000		$	1,753,359
Subtotal	$	4,649,775		$	3,955,600
Converted				$	(3,661,781	)
2/29/2012	$	(4,649,775	)	$	(293,819	)
Outstanding	$	0		$	0

The senior secured convertible 10% Senior Secured Convertible Debentures consists of the following at December 31:

	December 31,
	2012		2011
Convertible debenture, interest at 10% per annum payable quarterly, due September 30, 2013 with separable warrants	$	2,834,775	$	3,395,000
Convertible debenture, interest at 10% per annum payable quarterly, due September 30, 2013 issued in exchange for notes payable and accrued interest to related party		1,815,000		552,275
Subtotal		4,649,775		3,947,275
Converted to common stock		(4,649,775)		(1,112,500)
Subtotal		0		2,834,775
Unamortized debt discount		0		(2,202,241)
Net book value	$	0	$	632,534