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5. Convertible notes and warrants | 12 Months Ended
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Dec. 31, 2012
Convertible Debt [Abstract] |
Note 5. Convertible notes and warrants | From December 13, 2010 through July 23, 2012, the Company conducted private offerings of up to $10,000,000 aggregate face amount of its convertible notes. A total of $8,302,153 aggregate face amount of the notes were sold for an aggregate purchase price of $7,547,411. During the year ended December 31, 2011, the Company issued its convertible notes in the aggregate of $6,232,979 for a total cash consideration of $5,360,070, original issue discount of $566,634 and conversion of $306,275 of accounts payable. The notes does not bear any interest, however, the Company used an implied interest rate of 10%, are unsecured, will mature in one year and convertible to 24,931,916 shares of common stock at a conversion price of $0.25 per share. Furthermore, each of the investors in the offerings received, for no additional consideration, warrants to purchase a total of 24,931,916 shares of common stock. Each warrant is exercisable on a cash basis only at a price of $0.30 per share, and is exercisable immediately upon issuance and will expire within two (2) from the date of issuance. The aggregate relative fair value of the warrants issued in the 2011 offerings were valued at $2,970,311 using the Black-Scholes-Merton option valuation model with the following average assumptions: risk-free interest rate of .28%; dividend yield of 0%; volatility rate of 118% based upon the Company’s historical stock price; and an expected life of two (statutory term). The Company also determined that the notes contained a beneficial conversion feature of $2,696,034 since the market price of the Company’s common stock were higher than the conversion price of the notes when they were issued. The value of the 2011 Offering Warrants, the beneficial conversion feature and the original issue discount in the aggregate of $6,232,979 was considered as debt discount and was amortized over the term of the notes or in full upon the conversion of the corresponding notes.
During the year ended December 31, 2012, the Company issued its convertible notes in the aggregate of $2,069,174 for total cash consideration of $1,835,840, resulting in an original issue discount of $180,963 and conversion of $52,371 of accounts payable. The notes does not bear any interest, however, the Company used an implied interest rate of 10%, are unsecured, will mature in one year and convertible to 7,423,316 shares of common stock at a conversion price of $0.25 up to $0.40 per share. Furthermore, each of the investors in the offerings received, for no additional consideration, warrants to purchase a total of 7,423,316 shares of common stock. Each warrant is exercisable on a cash basis only at a price of $0.30 up to $0.40 per share, and is exercisable immediately upon issuance and will expire within two (2) to three (3) years from the date of issuance. The aggregate relative fair value of the warrants issued in the 2012 offerings were valued at $839,131 using the Black-Scholes-Merton option valuation model with the following average assumptions: risk-free interest rate of 0.26%; dividend yield of 0%; volatility rate of 111% based upon the Company’s historical stock price; and an expected life of two to three years (statutory term). The Company also determined that the notes contained a beneficial conversion feature of $1,049,080 since the market price of the Company’s common stock were higher than the conversion price of the notes when they were issued. The value of the 2012 Offering Warrants, the beneficial conversion feature and the original issue discount in the aggregate of $2,069,174 was considered as debt discount and was amortized over the term of the notes or in full upon the conversion of the corresponding notes. During the years ended December 31, 2012 and 2011, the Company converted $3,789,634 and $4,965,370 respectively of these notes to 14,305,159 and 19,861,478 shares of common stock (see Note 8) and amortized to interest expense $3,626,223 and $5,069,446 respectively of the corresponding note discount. As of December 31, 2012, all of the notes had been converted.

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