Financing

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 3 – Financing

At September 30, 2012, financial instruments arising from our financing transactions with YA Global, an accredited investor, included shares of our Series C preferred stock issued in February 2006, Series D preferred stock issued in January 2010, a series of thirty-three secured convertible debentures issued between August 2006 and July 2012 and various warrants to purchase shares of our common stock. All of our assets are pledged to secure our obligations under the debt securities. At various times, YA Global has assigned or distributed portions of its holdings of these securities to other holders, including persons who are officers of YA Global and its related entities, as well as to other holders who are investors in YA Global’s funds.

Secured Debentures - The underlying agreements for each of the thirty-three debentures are very similar in form, except in regard to the interest rate, conversion prices, and the number of warrants that were issued in conjunction with each of the debentures. The debentures are convertible into our common stock, at the option of the holder, at the lower of a fixed conversion price per share or a percentage of the lowest volume-weighted average price (“VWAP”) for a specified number of days prior to the conversion (the “look-back period”). The conversion is limited such that the holder cannot exceed 9.99% ownership of the outstanding common stock, unless the holder waives their right to such limitation. All of the debentures are secured according to the terms of a Security Pledge Agreement dated August 23, 2006, which was entered into in connection with the first convertible debenture issued to YA Global and which provides YA Global with a security interest in substantially all of our assets. The debentures are also secured by a Patent Security Agreement dated July 29, 2008. On August 13, 2010, our wholly owned subsidiary, NeoMedia Europe GmbH, became a guarantor of all outstanding financing transactions between us and YA Global, through pledges of their intellectual property and other movable assets. As security for our obligations to YA Global, all of our Pledged Property, Patent Collateral and other collateral is affirmed through the several successive Ratification Agreements which have been executed in connection with each of the 2010, 2011 and 2012 financings.

All debentures with YA Global contain provisions for acceleration of principal and interest upon default. Certain debentures also contain default interest rates and conversion prices, as reflected in the table below.

We evaluated the financing transactions in accordance with FASB ASC 815, Derivatives and Hedging, and determined that the conversion features of the Series C and Series D preferred stock and the Debentures were not afforded the exemption for conventional convertible instruments due to their variable conversion rates. The contracts have no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. Accordingly, either the embedded derivative instruments, including the conversion option, must be bifurcated and accounted for as derivative instrument liabilities or, as permitted by FASB ASC 815-15-25-4, Recognition of Embedded Derivatives, the instruments may be carried in their entirety at fair value.

At inception, we elected to bifurcate the embedded derivatives related to the Series C and Series D preferred stock and certain debentures, while electing the fair value option for the March 2007, August 2007, April 2008, May 2008 and April 2012 Debentures. FASB ASC 825, Financial Instruments, allows us to elect the fair value option for recording financial instruments when they are initially recognized or if there is an event that requires re-measurement of the instruments at fair value, such as a significant modification of the debt.

On May 25, 2012, the terms of the debentures held by YA Global were modified to extend the stated maturity dates to August 1, 2013 and reduce the interest rates to 9.5% per year, with interest being payable on the maturity date in cash or, provided certain equity conditions are satisfied, in shares of our Common Stock at the applicable conversion price. Because the effect of the modifications exceeded a significance threshold relative to cash flows prescribed by ASC 470-50, Debt Modifications and Extinguishments, the modifications of the amounts due under these arrangements were accounted for as extinguishments, whereby the existing debentures are considered to be retired and new debentures issued. The existing instruments were first adjusted to fair value as of May 25, 2012 using the interest rate and maturity date prior to the amendment. The fair value of the new instruments was then calculated using the modified interest rate and maturity date to determine the fair value of the instrument subsequent to the amendment. The differences in the fair values before and after the amendment were recorded as an extinguishment loss of approximately $27.5 million in the accompanying statements of operations.

As of the date of the modification, we have elected to carry all modified debentures at the fair value of the hybrid instrument with changes in the fair value of the debentures charged or credited to income each period.

The following table summarizes the significant terms of each of the debentures for which the entire hybrid instrument is recorded at fair value as of September 30, 2012:

									Conversion Price – Lower of Fixed Price or Percentage of VWAP for Look-back Period
						Default					Anti-Dilution
Debenture	Face		Interest			Interest			Fixed		Adjusted					Default			Look-back
Issuance Year	Amount		Rate			Rate			Price		Price		%			%			Period
	(in thousands)
2006	$	6,087		9.5	%		n/a		$	2.00	$	0.00486		90	%		n/a			125 Days
2007		6,900		9.5	%		n/a		$	2.00	$	0.00432-$0.00486		80%-90	%		n/a			125 Days
2008		6,468		9.5	%		20%-24	%	$	1.00-$2.00	$	0.00432-$0.00513		80%-95	%		50%-75	%		125 Days
2009		1,778		9.5	%		20	%	$	2.00	$	0.00513		95	%		50	%		125 Days
2010		3,806		9.5	%		20	%	$	0.10- $0.30	$	0.00513		95	%		50	%		60 Days
2011		2,129		9.5	%		20	%	$	0.10	$	0.00513		95	%		50	%		60 Days
2012		2,525		9.5	%		20	%	$	0.10	$	0.00513		95	%		50	%		60 Days
Total	$	29,693

For the portion of the debentures held by investors other than YA Global (which debentures were not modified on May 25, 2012) and for the Series C and Series D preferred stock, we continue to bifurcate the compound embedded derivatives related to the Series C and Series D preferred stock and these debentures and carry these financial instruments as liabilities in the accompanying balance sheet. Significant components of the compound embedded derivative include (i) the embedded conversion feature, (ii) down-round anti-dilution protection features and (iii) default, non-delivery and buy-in puts, all of which were combined into one compound instrument that is carried at fair value as a derivative liability. Changes in the fair value of the compound derivative liability are charged or credited to income each period.

The table below summarizes the significant terms of the debentures that are carried at their amortized cost and for which the compound embedded derivative is bifurcated and accounted for as a derivative liability as of September 30, 2012:

						Conversion Price – Lower of Fixed Price or Percentage of VWAP for Look-back Period
								Anti- Dilution
Debenture	Face					Fixed		Adjusted					Look-back
Issuance Year	Amount		Interest Rate			Price		Price		%			Period
	(in thousands)
2006	$	53		10.0	%	$	2.00	$	0.00486		90	%		125 days

Conversions –Our preferred stock and convertible debentures are convertible into shares of our common stock. Upon conversion of any of the convertible financial instruments in which the compound embedded derivative is bifurcated, the carrying amount of the debt, including any unamortized premium or discount, and the related derivative instrument liability are credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized. For instruments that are recorded in their entirety at the fair value of the hybrid instrument, the fair value of the hybrid instrument converted is credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized.

The following table provides a summary of the preferred stock conversions that have occurred since inception and the number of common shares issued upon conversion.

			Preferred		Preferred		Common
	Preferred shares		shares		shares		shares
	issued		converted		remaining		issued
	(in thousands)
Series C preferred stock		22		17		5		273,382
Series D preferred stock		25		22		3		245,162

The outstanding principal and accrued interest for the debentures as of September 30, 2012 is reflected in the following table in addition to the principal and interest converted since inception and the number of common shares issued upon conversion.

	Outstanding		Principal and
	principal and		accrued interest		Common
	accrued interest at		converted since		shares
	September 30, 2012		inception		issued
	(in thousands)
Debentures	$	43,683	$	7,852		1,057,239

Warrants - YA Global holds warrants to purchase shares of our common stock that were issued in connection with the convertible debentures and the Series C and Series D preferred stock. The warrants are exercisable at a fixed exercise price which, from time to time, has been reduced due to anti-dilution provisions when the Company has entered into subsequent financing arrangements with a lower price. The exercise prices may be reset again in the future if we subsequently issue stock or enter into a financing arrangement with a lower price. In addition, upon each adjustment in the exercise price, the number of warrant shares issuable is adjusted to the number of shares determined by multiplying the warrant exercise price in effect prior to the adjustment by the number of warrant shares issuable prior to the adjustment divided by the warrant exercise price resulting from the adjustment.

The warrants issued to YA Global do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each period.

2012 Financing Transactions – During 2012, we entered into Agreements to issue and sell six debentures to YA Global in the aggregate principal amount of $2,650,000. The debentures are convertible, at the option of the holder, at a conversion price equal to the lesser of (i) $0.10 or (ii) 95% of the lowest closing bid price of our common stock for the 60 trading days preceding the date of conversion. Except for the June 1, 2012 and July 20, 2012 debentures, at inception, all the debentures had an interest rate of 14% per year and had a maturity date of July 29, 2012. Subsequent to the May 25, 2012 modification, all the debentures bear interest at 9.5% and mature on August 1, 2013. We have the right to redeem a portion or all amounts outstanding under the debentures at a redemption premium of 10%, plus accrued interest. We also issued warrants to YA Global in conjunction with the debentures. The warrants were issued with an initial fixed exercise price of $0.15 per share; however, as a result of the anti-dilution protection in these warrants, the issuance of subsequent debentures for a lower price resets the fixed exercise price of the warrants to the lower price and adjusts the number of warrant shares issuable. All warrants issued during 2012 have a term of five years.

The following table provides a summary of the allocation of the components of the new debentures and warrants issued during the three months ended September 30, 2012. The hybrid debt instruments were valued as the present value of the cash flows, enhanced by the fair value of the conversion option valued using a Monte Carlo Simulation valuation method. The warrants were valued using a binomial lattice option valuation method. Significant assumptions used to value the hybrid debt instruments and warrants as of inception of the financings are also provided in the table below.

	July 20,
	2012
	issuance
	(in thousands)
Gross proceeds	$	450
Structuring and due diligence fee		(25	)
	$	425
Hybrid instrument	$	(732	)
Derivative warrants		(8	)
Day one derivative loss		315
	$	(425	)
Warrant shares issued (in thousands)		1,000
Initial exercise price of warrants	$	0.1500
Warrant valuation inputs:
Anti-dilution adjusted exercise price	$	0.0080
Expected life		5 years
Estimated volatility		174	%
Risk free rate of return		0.28	%
Dividend yield		—
Hybrid instrument valuation inputs:
Conversion price	$	0.006840
Equivalent volatility		176	%
Equivalent interest risk		14.00	%
Equivalent credit risk		7.21	%

Fair value disclosures

Bifurcated Embedded Derivative Instruments – Series C and Series D preferred stock and Convertible Debentures held by investors other than YA Global - For financings in which the embedded derivative instruments are bifurcated and recorded separately, the compound embedded derivative instruments are valued using a Monte Carlo Simulation methodology because that model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and conversion/redemption privileges) that are necessary to value these complex derivatives.

The conversion price in each of the convertible debentures is subject to adjustment for down-round, anti-dilution protection. Accordingly, if we sell common stock or common share indexed financial instruments below the stated or variable conversion price of the debenture, the conversion price adjusts to that lower amount.

The assumptions included in the calculations are highly subjective and subject to interpretation. Assumptions used as of September 30, 2012 included exercise estimates/behaviors and the following other significant estimates: (i) Preferred Stock: remaining term of 0.84 years, equivalent volatility of 133%, equivalent interest rate of 8%, equivalent credit-risk adjusted rate of 6.9% and anti-dilution adjusted conversion price of $0.005238, (ii) Convertible Debentures: Anti-dilution adjusted conversion price of $0.00486. Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.

Due to the variability of the conversion prices, fluctuations in the trading market price of our common stock may result in significant variations to the calculated conversion price. For each debenture, we analyze the ratio of the conversion price (as calculated based on the percentage of VWAP for the appropriate look-back period) to the trading market price for a period of time equal to the term of the debenture to determine the average ratio for the term of the note. Each quarter, the ratio in effect on the date of the valuation is compared with the average ratio over the term of the debenture to determine if the calculated conversion price is representative of past trends or if it is considered unrepresentative due to a large fluctuation in the Common Stock price over a short period of time. If the calculated conversion price results in a ratio that deviates significantly from the average ratio over the term of the agreement, the average ratio of the conversion price to the trading market price is then multiplied by the current trading market price to determine the variable conversion price for use in the fair value calculations. This variable conversion price is then compared with the fixed conversion price and, as required by the terms of the debentures, the lower of the two amounts is used as the conversion price in the Monte Carlo Simulation model used for valuation purposes. On September 30, 2012, the fixed conversion price for each of the debentures was equal to or higher than the calculated variable conversion price. Accordingly, the variable conversion price was used in the Monte Carlo Simulation model. This analysis is performed each quarter to determine if the calculated conversion price is reasonable for purposes of determining the fair value of the embedded conversion features (for instruments recorded under FASB ASC 815-15-25-1) or the fair value of the hybrid instrument (for instruments recorded under FASB ASC 815-15-25-4).

The following table reflects the face value of the instruments, their amortized carrying value and the fair value of the separately-recognized compound embedded derivative, as well the number of common shares into which the instruments are convertible as of September 30, 2012 and December 31, 2011.

September 30, 2012							Embedded		Common
	Face		Carrying		Accrued		Conversion		Stock
	Value		Value		Interest		Feature		Shares
	(in thousands)
Series C preferred stock	$	4,840	$	4,840	$	-	$	2,206		923,953
Series D preferred stock	$	348	$	348	$	-		159		66,457
Debentures:
2006	$	53	$	53	$	10		8		11,871
Total	$	53	$	53	$	10	$	2,373		1,002,281

December 31, 2011							Embedded		Common
	Face		Carrying		Accrued		Conversion		Stock
	Value		Value		Interest		Feature		Shares
	(in thousands)
Series C preferred stock	$	5,086	$	5,086	$	-	$	554		499,084
Series D preferred stock	$	1,395	$	1,395	$	-		152		136,899
Debentures:
2006	$	7,061	$	7,061	$	3,550		1,554		1,128,515
2008		4,788		4,788		2,226		932		712,474
2009		1,983		1,965		736		370		278,427
2010		3,881		1,426		770		2,692		470,718
2011		4,725		1,077		376		2,917		436,730
Total	$	22,438	$	16,317	$	7,658	$	9,171		3,662,847

The terms of the embedded conversion features in the convertible instruments presented above provide for variable conversion rates that are indexed to our quoted common stock price. As a result, the number of indexed shares is subject to continuous fluctuation. For presentation purposes, the number of shares of common stock into which the embedded conversion feature of the Series C and Series D preferred stock was convertible as of September 30, 2012 and December 31, 2011 was calculated as face value plus assumed dividends (if declared), divided by the lesser of the fixed rate or the calculated variable conversion price using the 125 day look-back period. The number of shares of common stock into which the embedded conversion feature in the convertible debentures was convertible as of September 30, 2012 and December 31, 2011 was calculated as the face value of each instrument divided by the variable conversion price using the appropriate look-back period.

As discussed above, on May 25, 2012, the terms of the debentures held by YA Global were modified to extend the stated maturity dates to August 1, 2013 and those debentures are now accounted for as hybrid instruments and are carried in their entirety at fair value. The debentures outstanding at September 30, 2012 of $53,000 shown above represent a portion of the debentures issued to YA Global which had previously been transferred by YA Global to other parties. These debentures were not modified and continued to mature on July 29, 2012. At September 30, 2012 the debentures had not yet been converted or repaid.

Changes in the fair value of derivative instrument liabilities related to the bifurcated embedded derivative features of convertible instruments not carried at fair value are reported as “Gain (loss) from change in fair value of derivative liability – Series C and Series D preferred stock and debentures” in the accompanying consolidated statements of operations.

	Three months ended September 30,					Nine months ended September 30,
	2012		2011			2012			2011
	(in thousands)					(in thousands)
Series C preferred stock	$	918	$	8,089		$	(2,284	)	$	244
Series D preferred stock		44		3,518			(1,302	)		1,257
Debentures:
2006		74		11,798			(2,996	)		4,785
2008		-		7,404			(1,350	)		3,139
2009		-		3,065			(486	)		1,194
2010		-		5,877			(34	)		1,810
2011		-		5,360			(4,825	)		2,593
2012		-		-			15			-
		1,036		45,111			(13,262	)		15,022
Less: Day-one loss from debenture financings		-		(1,384	)		-			(2,565	)
Gain (loss) from change in fair value of derivative liability	$	1,036	$	43,727		$	(13,262	)	$	12,457

Hybrid Financial Instruments Carried at Fair Value –- Since inception, the March 2007, August 2007, April 2008, May 2008 and April 2012 convertible debentures have been recorded in their entirety at fair value as hybrid instruments in accordance with FASB ASC 815-15-25-4 with subsequent changes in fair value charged or credited to income each period. As of May 25, 2012, we elected the fair value option for all other convertible debentures held by YA Global upon a re-measurement date that was triggered by significant modifications of the financial instruments.

Because these debentures are carried in their entirety at fair value, the value of the embedded conversion feature is embodied in those fair values. At inception, the March 2007, August 2007, April 2008 and May 2008 debentures were valued using the common stock equivalent approach. For the April 26, 2012 debenture and, effective May 25, 2012 for all other debentures, the Company changed its method of estimating the fair value of the hybrid instrument to consider the present value of the cash flows of the instrument, using a risk-adjusted interest rate, enhanced by the value of the conversion option, valued using a Monte Carlo model. This method was considered by our management to be the most appropriate method of encompassing the credit risk and exercise behavior that a market participant would consider when valuing the hybrid financial instrument. Inputs used to value the hybrid instruments as of September 30, 2012 included: (i) present value of future cash flows for the debenture using a risk adjusted interest rate of 6.92%, (ii) remaining term of 0.84 years, (iii) equivalent volatility of 133%, equivalent interest rate of 9.5%, equivalent credit-risk adjusted rate of 6.92% and anti-dilution adjusted conversion prices ranging from $0.00432- $0.00513.

The following table reflects the face value of the financial instruments, the fair value of the hybrid financial instrument and the number of common shares into which the instruments are convertible as of September 30, 2012 and December 31, 2011.

September 30, 2012					Common
	Face		Fair		Stock
	Value		Value		Shares
	(in thousands)
Debentures:
2006	$	6,087	$	15,608		2,082,642
2007		6,900		16,965		2,294,358
2008		6,468		15,680		2,113,474
2009		1,778		4,000		526,699
2010		3,806		7,341		972,013
2011		2,129		3,465		391,105
2012		2,525		3,964		509,054
Total	$	29,693	$	67,023		8,889,345

December 31, 2011					Common
	Face		Fair		Stock
	Value		Value		Shares
	(in thousands)
Debentures:
2007	$	7,682	$	13,115		836,428
2008		1,680		3,343		200,001
Total	$	9,362	$	16,458		1,036,429

Changes in the fair value of convertible instruments that are carried in their entirety at fair value are reported as “Gain (loss) from change in fair value of hybrid financial instruments” in the accompanying consolidated statements of operations. The changes in fair value of these hybrid financial instruments were as follows:

	Three months ended September 30,					Nine months ended September 30,
	2012			2011		2012			2011
	(in thousands)					(in thousands)
2006	$	902		$	-	$	2,637		$	-
2007		1,994			13,120		1,005			3,088
2008		1,914			4,511		5,465			1,115
2009		477			-		912			-
2010		799			-		1,695			-
2011		155			-		666			-
2012		427			-		740			-
		6,668			17,631		13,120			4,203
Less: Day-one loss from debenture financings		(315	)		-		(1,162	)		-
Gain (loss) from changes in fair value of hybrid instruments	$	6,353		$	17,631	$	11,958		$	4,203

Warrants - The following table summarizes the warrants outstanding, their fair value and their exercise price after adjustment for anti-dilution provisions:

			September 30, 2012						December 31, 2011
			Anti-Dilution						Anti-Dilution
			Adjusted						Adjusted
	Expiration		Exercise				Fair		Exercise				Fair
	Year		Price		Warrants		Value		Price		Warrants		Value
Warrants issued with preferred stock:					(in thousands)						(in thousands)
Series D preferred stock		2017		0.006840		328,947	$	1,739		0.00998		225,564	$	2,535
Warrants issued with debentures:
2007		2012		0.006840		-		-		0.00998		401,002		1,510
2008		2015		0.006840		896,382		4,217		0.00998		614,662		6,876
2010		2015		0.006840		306,287		1,435		0.00998		210,025		2,335
2011		2016		0.006840		219,298		1,120		0.00998		150,376		1,686
2012		2017		0.006840		131,579		705		n/a		—		—
Total						1,882,493	$	9,216				1,601,629	$	14,942

The warrants are valued using a binomial lattice option valuation methodology because that model embodies all of the significant relevant assumptions that address the features underlying these instruments. Significant assumptions used in this model as of September 30, 2012 included an expected life equal to the remaining term of the warrants, an expected dividend yield of zero, estimated volatility ranging from 99% to 186%, and risk-free rates of return of 0.10% to 0.62%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants and volatility is based upon our expected Common Stock price volatility over the remaining term of the warrants. As a result of the anti-dilution provisions, the fixed exercise price of the warrants has been reset equal to the lowest price of any subsequently issued common share indexed instruments with a conversion price below the previously stated exercise price of the warrant.

Changes in the fair value of the warrants are reported as "(Gain) loss from change in fair value of derivative liability - warrants" in the accompanying consolidated statement of operations. The changes in the fair value of the warrants were as follows:

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012			2011
	(in thousands)				(in thousands)
Warrants issued with preferred stock:
Series C preferred stock	$	-	$	-	$	-		$	53
Series D preferred stock		847		42		795			220
Warrants issued with debentures:
2006		-		54		-			181
2007		492		40		1,511			169
2008		2,107		95		2,657			478
2010		718		163		901			831
2011		565		174		566			331
2012		168		-		(612	)		-
Total	$	4,897	$	568	$	5,818		$	2,263

Reconciliation of changes in fair value – Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value using Level 3 inputs and changes in the fair value of hybrid instruments carried at fair value during the nine months ended September 30, 2012:

	Compound
	Embedded			Warrant			Hybrid
	Derivatives			Derivatives			Instruments			Total
Beginning balance, December 31, 2011:	$	9,171		$	14,942		$	16,458		$	40,571
Issuances:
January 11, 2012		289			13			-			302
February 6, 2012		176			9			-			185
March 26, 2012		287			42			-			329
April 26, 2012		-			11			878			889
June 1, 2012		-			9			799			808
July 20, 2012		-			8			732			740
Fair value adjustments:
Compound embedded derivatives		13,262			-			-			13,262
Warrant derivatives		-			(5,818	)		-			(5,818	)
Hybrid instruments		-			-			(11,958	)		(11,958	)
Change to fair value option related to compound embedded derivative		(29,656	)		-			29,656			-
Change to fair value option related to debenture carrying value		-			-			26,809			26,809
Day-one loss from derivative financings		-			-			(1,162	)		(1,162	)
Extinguished		17,787						9,692			27,479
Conversions:
Series C preferred stock		(632	)		-			-			(632	)
Series D preferred stock		(1,295	)		-			-			(1,295	)
August 24, 2006 financing		(740	)		-			(276	)		(1,016	)
December 29, 2006 financing		(176	)		-			(516	)		(692	)
March 27, 2007 financing		-			-			(1,047	)		(1,047	)
August 24, 2007 financing		-			-			(831	)		(831	)
October 28, 2008 financing		-			-			(162	)		(162	)
May 1, 2009 financing		(21	)		-			-			(21	)
December 15, 2010 financing		-			-			(215	)		(215	)
January 10, 2011 financing		-			-			(267	)		(267	)
February 8, 2011 financing		-			-			(180	)		(180	)
March 11, 2011 financing					-			(788	)		(788	)
April 13, 2011 financing		(226	)		-			(210	)		(436	)
May 31, 2011 financing		(885	)		-			-			(885	)
June 28, 2011  financing		(414	)		-			(53	)		(467	)
July 13, 2011 financing		(1,656	)		-			-			(1,656	)
August 15, 2011 financing		(1,440	)		-			-			(1,440	)
September 15, 2011 financing		(1,458	)		-			-			(1,458	)
October 25, 2011 financing		-			-			(141	)		(141	)
January 11, 2012 financing		-			-			(195	)		(195	)
Ending balance, September 30, 2012	$	2,373		$	9,216		$	67,023		$	78,612

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, valuation techniques are sensitive to changes in the trading market price of our common stock, which has a high estimated historical volatility. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Subsequent events

Subsequent to September 30, 2012, holders of convertible debentures have converted $469,940 of principal and accrued interest on those debentures into 96,835,097 shares of our common stock.

We obtained two short term loans for operating capital during the three months ended September 30, 2012 for a total of $110,421 from YA Global, which are included in Notes payable at September 30, 2012. These loans were repaid in full on October 1, 2012.

We repaid a total of $565,000 of principal and interest of our Debenture Obligations to YA Global during October and November of 2012 out of operating cash flow.