Convertible Debt

12 Months Ended

Dec. 31, 2012

Convertible Debt [Abstract]

Convertible Debt

Note 7 - Convertible Debt

The components of our convertible debt are summarized as follows:

	Due		December 31, 2012			December 31, 2011 (Restated)
8% convertible promissory notes		Beginning August 2017	$	7,128,187		$	-
12% convertible revolving credit agreement		September 2012		-			466,000
10% convertible debentures		June 2012		-			600,000
8.75% convertible debentures		January 2012		-			172,500
Subtotal - principal			$	7,128,187		$	1,238,500
Less debt discount				(1,457,025	)		(305,206	)
Subtotal – net of debt discount				5,671,162			933,294
Less current portion				-			(933,294	)
Total – long term debt			$	5,671,162		$	-

8% Convertible Promissory Notes

During the year ended December 31, 2012 we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Melvin Lenkin, Samuel Rose and others (collectively the “Investors”, see Note 14 regarding related party transactions), pursuant to which, we issued and sold to the Investors (i) an aggregate principal amount of $7,128,187 of our 8.0% convertible promissory notes over several dates (the “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, 17,820,470 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.

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.

In connection with the entry into the Purchase Agreement, pursuant to the terms thereof, (i) we granted to the Investors certain demand and piggyback registration rights with respect to the registration of certain Company securities under the Securities Act and the rules and regulations promulgated thereunder, and (ii) we granted a security interest and lien in all of our assets and rights to the Investors to secure our obligations under the Notes.

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 year ended December 31, 2012, we amortized approximately $136,700 of the discount to other expenses in our statement of operations. See Note 6 for further discussion of these derivative liabilities.

12% Convertible Revolving Credit Agreement

During the year ended December 31, 2011, we entered into a convertible revolving credit agreement (the “Revolving Agreement”) with Samuel Rose (“Lender”) and borrowed $466,000. Under the terms of the Revolving Agreement, Lender had agreed to lend us up to $2,000,000 on a revolving basis (the “Loan”). The Loan carried interest at 12% per annum on any outstanding principal amount. In consideration for the Loan, we issued to Lender 250,000 shares of our restricted common stock and initially accounted for this redeemable common stock outside of permanent equity at redemption value.

The fair value at issuance of the shares given as consideration of approximately $242,500 and the fair value of the conversion option derivative liability of approximately $118,700 were both recorded as a discount to the outstanding Loan, with the discount of approximately $361,200 initially amortized over the contractual term of the Revolving Agreement through September 30, 2012. Since we repaid the outstanding principal and terminated the Revolving Agreement prior to the scheduled maturity date, we expensed the remaining discounts during the year ended December 31, 2012. During the years ended December 31, 2012 and 2011, we amortized approximately $305,200 and $56,000, respectively of the discount to other expenses in our statement of operations. . See Note 6 for further discussion of the conversion option derivative liability.

Upon termination of the Agreement during the three months ended June 30, 2012, the 250,000 shares of common stock were reclassified to permanent equity.

10% Convertible Debentures

Our 10% convertible debentures (the “Debentures”) were issued under purchase agreements during the fiscal year ended September 30, 2009, together with warrants, for aggregate proceeds of $600,000. The total of the fair value of the warrants, as determined using the Black-Scholes pricing model, and the value of the beneficial conversion options contained in the debentures, representing the difference between the fair value of common stock issuable upon conversion at the date of purchase and the amount of proceeds allocated to the note, exceeded the proceeds received.  Accordingly, we recorded a discount on the Debentures equal to the principal amount of the Debentures.  This recorded discount on these Debentures was initially amortized to interest expense on the interest method through their originally scheduled maturity dates in February and March 2011.

Effective January 14, 2011, the holders of our Debentures, agreed to extend the maturity dates to June 30, 2012 and to the elimination of the prohibition of paying dividends or distributions on any of our equity securities. We agreed to amend the interest rate to 15% if paid in cash and to 18% (from 12%) if paid with shares of our common stock at the rate of one share of common stock for each $0.60 (from $0.90) of interest. We also agreed to reduce the conversion price, as defined, to $0.60, from $0.90 and to amend the volume weighted average trading price at which we could force conversion to $2.50 from $2.00. In addition, for each calendar month after February or March 2011 that these Debentures remained outstanding, we agreed to issue a bonus warrant exercisable for three years for a number of shares of our common stock equal to the 5% of the outstanding principal, divided by $0.90. These bonus warrants are exercisable at $0.90 per share.

Even though these modifications to our Debentures resulted in less than a ten percent difference in the present value of cash flows between the original terms and the modified terms, the fair value of the conversion options was substantially greater than ten percent. We have therefore, accounted for the modification of these Debentures as an extinguishment of the original debt and the establishment of new debt. The difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt was $1.4 million and was recognized as a loss in our statement of operations during the year ended December 31, 2011, the period of amendment.

In addition, since it was probable that we would issue the bonus warrants which were part of the reacquisition costs of the new debt, at each month-end through the amended maturity date, we calculated the fair value of the bonus warrants using the Black-Scholes pricing model and recorded a derivative liability of approximately $797,000 on the date of amendment and recognized the amount as a loss in our statement of operations during the year ended December 31, 2011, the period of amendment. See Note 6 for further discussion of these derivative liabilities.

The principal of $600,000 and accrued interest were repaid during the year ended December 31, 2012, upon maturity.

8.75% Convertible Debenture

At maturity on January 31, 2012, we repaid the full principal of $172,500 plus accrued interest on our 8.75% convertible debenture.