Debt

6 Months Ended

Jun. 30, 2012

Note 5 Debt

Debt consists of the following:

	June 30, 2012			December 31, 2011
A. Convertible debt - Secured	$	500,000		$	-
Less: debt discount		(206,014	)		-
Convertible debt - net		293,986			-

B. Convertible debt - Unsecured		150,000			150,000
C. Note - Secured		29,920			-
D. Notes – Unsecured		74,118			161,096
Total debt	$	548,024		$	311,096

Current portion	$	398,024		$	161,096
Long term portion	$	150,000		$	150,000

The corresponding debts above are more fully discussed below:

(A) Convertible Debt – Secured

During the six months ended June 30, 2012 the Company issued a secured convertible note for $500,000. The note bears interest of 12%, 6% of which is charged monthly and 6% of which is accrued and due in a balloon payment at maturity. The note has a default interest rate of 18%, a maturity date of April 30, 2013 and is secured by all of the assets of the Company and its subsidiaries. The debt holder is entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock. The note is convertible at 95% of the volume weighted average price of the Company’s common stock for the 5 days preceding conversion. The embedded conversion feature within this note classifies it as a derivative liability. See Note 6.

The Company incurred debt issue costs of $152,500 in connection with the note; of which $100,000 was in stock (196,708 shares @ $0.51 per share) and the remaining $52,500 in cash. See Note 5(E).

(B) Convertible Debt – Unsecured

On November 28, 2011, the Company entered into a $150,000 3-year 8% convertible note with an investor. Under the terms of the note, the investor has the option to convert their note into shares of the Company’s common stock at an exercise price of $0.40/share. In connection with this note, the Company paid debt issue costs of $18,000 and issued 15,000, 3-year warrants exercisable at $0.40 per share, having a fair market value of $4,895, as calculated using the Black Scholes valuation method. The warrants vested on the date of issuance and expire November 27, 2014. See Note 7 – Stock Warrants.

The Company has a one year secured note with a DME vendor that bears no interest and matures on January 15, 2013. The note is secured by only the DME equipment to which the note appertains. Secured notes consist of the following:

Balance, December 31, 2011	$	-
Reclassification from accounts payable to notes payable		51,290
Repayments		(21,370	)
Balance, June 30, 2012	$	29,920

(D) Notes - Unsecured

The Company has two short term note with vendors that bear no interest. Unsecured Notes consists of the following:

Balance, December 31, 2011	$	161,0966
Reclassification from accounts payable to notes payable		70,8866
Additional borrowings		40,000
Repayments		(61,7688	)
Debt forgiveness		(62,7677	)
Debt forgiveness – related party		(73,3299	)
Balance, June 30, 2012	$	74,1188

During the quarter ended June 30, 2012, a party related to a principal shareholder in the Company, agreed to forgive debt of $73,329 (see above) and accrued interest of $27,661 (totalling $100,990), which was charged to addition to paid-in capital. The Company does not record gains or losses on related party transactions.

(E) Debt Issue Costs

The Company paid debt issue costs in connection with raising funds through the issuance of convertible debt. These costs are being amortized over the life of the debt and recorded as interest expense. If a conversion of the underlying debt occurs, the proportionate share of the unamortized amounts will be immediately expensed.

For the six months ended June 30, 2012 the Company incurred debt issue costs and amortization expense of $152,500 and $29,346, respectively. For the six months ended June 30, 2011 the Company paid no debt issue costs and incurred no amortization expense.

The following is a summary of the Company’s debt issue costs.

	June 30, 2012			December 31, 2011
Debt issue costs	$	175,395		$	22,895
Accumulated amortization of debt issue costs		(29,982	)		(636	)
Debt issue costs – net	$	145,413		$	22,259

Future amortization of debt issue costs for the fiscal years 2012 through 2014 are as follows:

Year	Amount
2012 (6 months remaining)	$	80,724
2013		57,769
2014		6,920
	$	145,413

(E) Debt Discount

The Company recorded debt discounts in connection with the issuance of convertible debt that contains an embedded conversion option. These costs are amortized over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts will be immediately expensed.

The following is a summary of the Company’s debt discount.

	June 30, 2012			June 30, 2012
Debt discount	$	244,153		$	-
Accumulated amortization of debt discounts		(38,139	)		-
Debt discount – net	$	206,014		$	-

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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