Convertible Debt

3 Months Ended

Mar. 31, 2013

Convertible Debt [Abstract]

Convertible Debt

Note 6 - Convertible Debt

The components of our convertible debt are summarized as follows:

	Due	March 31, 2013			December 31, 2012
8% convertible promissory notes	Beginning August 2017	$	8,878,188		$	7,128,187
Less debt discount			(2,107,710	)		(1,457,025	)
Total – long term debt		$	6,770,478		$	5,671,162

8% Convertible Promissory Notes

During the three months ended March 31, 2013 pursuant to the same terms of our existing 8% convertible promissory notes (the “Notes”), we issued and sold to Melvin Lenkin, Samuel Rose and others (collectively the “Investors”, see Note 14 regarding related party transactions) (i) an aggregate principal amount of $1,750,001 of our Notes which are initially convertible into shares of our common stock, at a conversion price equal to $0.40 per share of common stock, subject to adjustment as provided on the terms of the Notes, and (ii) associated warrants to purchase, in the aggregate, 4,375,004 shares of common stock, subject to adjustment as provided on the terms of the warrants.

The Notes, including all outstanding principal and accrued and unpaid interest, are due and payable on the earlier of five years from date of issuance or upon the occurrence of an Event of Default (as defined in the Notes). We may prepay the Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the Notes at a rate of 8.0% per annum, payable during the first three years that the Notes are outstanding in shares of common stock, valued at the weighted average price of a share of common stock for the twenty consecutive trading days prior to the interest payment date, pursuant to the terms of the Notes. During the fourth and fifth years that the Notes are outstanding, interest that accrues under the Notes shall be payable in cash.

Accrued but unpaid interest due on March 31, 2013 for the three months ended March 31, 2013, was paid with approximately 252,700 shares of common stock, in lieu of cash, which were issued subsequent to March 31, 2013 with a value of approximately $171,800.

The warrants are exercisable at an exercise price of $0.60 per share of common stock, subject to adjustment as provided for by the terms thereof, for a period commencing on the date of issuance and ending on the earlier to occur of the date that is (i) three years after the date upon which the weighted average price of a share of common stock for the 90 consecutive trading days prior to such date is at least $2.00 per share, and (ii) five years after the date on which the Note to which the applicable warrant is related has been repaid in full.

The issuance costs of approximately $124,700, plus the fair values of the conversion option derivative liability and the warrants derivative liability were recorded as a discount to the Notes. This debt discount is amortized to other expenses in our statement of operations over the initial term of the 8% Notes. During the three months ended March 31, 2013, we amortized approximately $143,900 of the discount to other expenses in our statement of operations. There was no corresponding transaction for the three months ended March 31, 2012. See Note 5 for further discussion of these derivative liabilities.