Related Party Transactions

12 Months Ended

Dec. 31, 2012

Related Party Transactions [Abstract]

Related Party Transactions

Note 14 - Related Party Transactions

Perry Jacobson

Perry Jacobson was appointed to our board of directors on September 20, 2010.

10% Convertible Redeemable Preferred Stock. During the year ended December 31, 2011, we sold to Mr. Jacobson 12,500 shares of our 10% convertible redeemable preferred stock (the “Preferred Stock”) for $125,000. The Preferred Stock may be converted into shares of our common stock at any time by Mr. Jacobson at a conversion price of $1.00 per share, as adjusted. Mr. Jacobson is entitled to receive dividends at the rate of 10% per annum payable quarterly, at our option, in cash, or in additional shares of common stock, and has the right to vote the Preferred Stock with our common stockholders on any matter. The Preferred Stock is redeemable for cash by Mr. Jacobson any time after the three-year anniversary from the initial purchase. Since certain revenue targets for the twelve months ended December 31, 2011 were not achieved, in addition to the adjustment of the conversion price to $1.00, Mr. Jacobson received a warrant to purchase 62,500 shares of our common stock which expires December 31, 2015, has an initial exercise price of $1.00 per share and provides for cashless exercise at any time the underlying shares of common stock have not been registered for resale under the Securities Act of 1933, as amended (the “Securities Act”) or are issuable without restriction pursuant to Rule 144 of the Securities Act. As of December 31, 2012, Mr. Jacobson has received an aggregate of 37,805 shares of common stock as dividend payments on the Preferred Stock held by him.

Samuel G. Rose and Julie Walters

Samuel G. Rose and Julie Walters beneficially own in excess of 5% of our outstanding stock.

10% Convertible Redeemable Preferred Stock. During the year ended December 31, 2011, we sold to Mr. Rose 100,000 shares of our Preferred Stock for $1,000,000 million. The Preferred Stock may be converted into shares of our common stock at any time by Mr. Rose at a conversion price of $1.00 per share, as adjusted. Mr. Rose is entitled to receive dividends at the rate of 10% per annum payable quarterly, at our option, in cash, or in additional shares of common stock, and has the right to vote the Preferred Stock with our common stockholders on any matter. The Preferred Stock is redeemable for cash by Mr. Rose any time after the three-year anniversary from the initial purchase. Since certain revenue targets for the twelve months ended December 31, 2011 were not achieved, in addition to the adjustment of the conversion price to $1.00, Mr. Rose received a warrant to purchase 500,000 shares of our common stock which expires December 31, 2015, has an initial exercise price of $1.00 per share and provides for cashless exercise at any time the underlying shares of common stock have not been registered for resale under the Securities Act or are issuable without restriction pursuant to Rule 144 of the Securities Act. As of December 31, 2012, Mr. Rose has received an aggregate of 302,417 shares of common stock as dividend payments on the Preferred Stock held by them.

12% Convertible Revolving Credit Agreement. During the year ended December 31, 2011, we entered into a convertible revolving credit agreement (the “Loan Agreement”) with Mr. Rose. Under the terms of the Loan Agreement, Mr. Rose agreed to lend us up to $2,000,000 on a revolving basis (the “Loan”). The Loan carried interest at 12% per annum on the outstanding principal amount. The Loan had an original maturity date of September 30, 2012. In consideration for the Loan, we paid all legal and accounting costs associated with the documentation of the Loan and issued to Mr. Rose 250,000 shares of our restricted common stock. We granted Mr. Rose a security interest in our inventory and accounts receivable pursuant to terms of a security agreement. During the year ended December 31, 2011, we borrowed $466,000 under the Loan Agreement. During the year ended December 31, 2012 we repaid the outstanding principal and accrued interest and the Loan Agreement was cancelled.

8% Convertible Promissory Notes. Effective April 25, 2012, we entered into a Memorandum of Understanding (the “MOU”) with Mr. Rose and several other investors. Pursuant to the MOU, we issued to Mr. Rose a demand promissory note (the “Rose Demand Note”) in the principal amount of $1,666,667.  Interest accrued on the unpaid principal balance of the Rose Demand Note at a rate of 8.0% per annum. On August 24, 2012, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Mr. Rose, MLTM Lending, LLC, Allen Kronstadt, the Judy Lenkin Lerner Revocable Trust and certain other investors (the “Note Purchase Agreement Investors”), pursuant to which, as of December 31, 2012, we have issued and sold to Mr. Rose and Ms. Walters an aggregate principal amount of $2,542,593 of our 8.0% convertible promissory notes (the “8% 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 8% Notes, and associated warrants (the “8% Note Warrants”) to purchase, in the aggregate, 6,356,483 shares of common stock, subject to adjustment as provided on the terms of the 8% Note Warrants. At the initial closing under the Purchase Agreement, in consideration for the issuance of the 8% Notes and the 8% Note Warrants issued at such closing, Mr. Rose converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under the Rose Demand Note and paid us in cash for the balance. As of December 31, 2012, Mr. Rose and Ms. Walters have received an aggregate of 159,678 shares of common stock as interest payments under the 8% Notes held by them.

The 8% 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 8% Notes). We may prepay the 8% Notes, in whole or in part, upon 60 calendar days prior written notice to the holders thereof. Interest accrues on the 8% Notes at a rate of 8.0% per annum, payable during the first three years that the 8% 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 8% Notes. During the fourth and fifth years that the 8% Notes are outstanding, interest that accrues under the 8% Notes shall be payable in cash.

The 8% Note 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 8% Notes to which the applicable 8% Note Warrant is related has been repaid in full.

In connection with the entry into the Purchase Agreement, pursuant to the terms thereof, on August 24, 2012, we granted to the Note Purchase Agreement Investors (i) 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) a security interest and lien in all of our assets and rights to secure our obligations under the 8% Notes.

TM Investments, LP

TM Investments, LP beneficially owns in excess of 5% of our outstanding stock.

10% Convertible Redeemable Preferred Stock. During the year ended December 31, 2011, we sold to TM Investments, LP, 150,000 shares of our Preferred Stock for $1,500,000. The Preferred Stock may be converted into shares of our common stock at any time by TM Investments, LP at conversion price of $1.00 per share, as adjusted. TM Investments, LP is entitled to receive dividends at the rate of 10% per annum payable quarterly, at our option, in cashor in additional shares of common stock, and has the right to vote the Preferred Stock with our common stockholders on any matter. The Preferred Stock is redeemable for cash by TM Investments, LP any time after the three-year anniversary from the initial purchase. Since certain revenue targets for the twelve months ended December 31, 2011 were not achieved, in addition to the adjustment of the conversion price to $1.00, TM Investments, LP received a warrant to purchase 500,000 shares of our common stock which expires December 31, 2015, has an initial exercise price of $1.00 per share and provides for cashless exercise at any time the underlying shares of common stock have not been registered for resale under the Securities Act or are issuable without restriction pursuant to Rule 144 of the Securities Act. As of December 31, 2012, TM Investments, LP has received an aggregate of 449,420 shares of common stock as dividend payments on the Preferred Stock that it holds.

MLTM Lending, LLC and the ML Dynasty Trust

MLTM Lending, LLC and the ML Dynasty Trust beneficially own in excess of 5% of our outstanding stock. Pursuant to the Schedule 13D filings made by MLTM Lending, LLC and the ML Dynasty Trust, the ML Dynasty Trust shares with MLTM the power to vote or direct the vote of, and to dispose or direct the disposition of, greater than 5% of our outstanding stock. Thomas Bowersox, a member of our board of directors, is a trustee of the ML Dynasty Trust.

8% Convertible Promissory Notes. Pursuant to the MOU, we issued to MLTM Lending, LLC a Demand Note (the “MLTM Demand Note”) in the principal amount of $1,426,667. Interest accrued on the unpaid principal balance of the MLTM Demand Note at a rate of 8.0% per annum. Pursuant to the Purchase Agreement, as of December 31, 2012, we have issued and sold to MLTM Lending, LLC an aggregate principal amount of $2,246,777 of our 8% Notes and associated 8% Note Warrants to purchase, in the aggregate, 5,616,944 shares of common stock, subject to adjustment as provided on the terms of the 8% Note Warrants. In consideration for the issuance of the 8% Notes and the 8% Note Warrants, MLTM Lending, LLC converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under the MLTM Demand Note and paid us in cash for the balance. As of December 31, 2012, MLTM Lending, LLC has received an aggregate of 147,031 shares of common stock as interest payments under the 8% Notes that it holds.

The terms of the 8% Notes and the 8% Note Warrants are described above.

Judy Lenkin Lerner Revocable Trust

The Judy Lenkin Lerner Revocable Trust beneficially owns in excess of 5% of our outstanding stock.

10% Convertible Redeemable Preferred Stock. During the year ended December 31, 2011, we sold to the Judy Lenkin Lerner Revocable Trust (the “Lerner Trust”) 25,000 shares of our Preferred Stock for $250,000. The Preferred Stock may be converted into shares of our common stock at any time by Ms. Lerner at a conversion price of $1.00 per share, as adjusted. The Lerner Trust is entitled to receive dividends at the rate of 10% percent per annum payable quarterly, at our option, in cash, or in additional shares of common stock, and has the right to vote the Preferred Stock with our common stockholders on any matter. The Preferred Stock is redeemable for cash by the Lerner Trust any time after the three-year anniversary from the initial purchase. Since certain revenue targets for the twelve months ended December 31, 2011 were not achieved, in addition to the adjustment of the conversion price to $1.00, the Lerner Trust received a warrant to purchase 125,000 shares of our common stock which expires December 31, 2015, has an initial exercise price of $1.00 per share and provides for cashless exercise at any time the underlying shares of common stock have not been registered for resale under the Securities Act or are issuable without restriction pursuant to Rule 144 of the Securities Act. As of December 31, 2012, the Lerner Trust has received an aggregate of 74,905 shares of common stock as dividend payments on the Preferred Stock that it holds.

8% Convertible Promissory Notes. Pursuant to the MOU, we issued to the Lerner Trust a Demand Note (the “Lerner Trust Demand Note”) in the principal amount of $100,000. Interest accrued on the unpaid principal balance of the Lerner Trust Demand Note at a rate of 8.0% per annum. Pursuant to the Purchase Agreement, as of December 31, 2012, we have issued and sold to the Lerner Trust an aggregate principal amount of $152,578 of our 8% Notes and associated 8% Note Warrants to purchase, in the aggregate, 381,445 shares of common stock, subject to adjustment as provided on the terms of the 8% Note Warrants. In consideration for the issuance of the 8% Notes and the 8% Note Warrants, the Lerner Trust converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under the Lerner Trust Demand Notes and paid us in cash for the balance. As of December 31, 2012, the Lerner Trust has received an aggregate of 9,858 shares of common stock as interest payments under the 8% Notes that it holds.

The terms of the 8% Notes and the 8% Note Warrants are described above.

Allen Kronstadt

Allen Kronstadt beneficially owns in excess of 5% of our outstanding stock, and was appointed to our board of directors on September 11, 2012 pursuant to the terms of the Purchase Agreement.

8% Convertible Promissory Notes. Pursuant to the MOU, we issued to Mr. Kronstadt a demand promissory note (the “Kronstadt Demand Note”) in the principal amount of $1,666,667.  Interest accrued on the unpaid principal balance of the Kronstadt Demand Note at a rate of 8.0% per annum. Pursuant to the Purchase Agreement, as of December 31, 2012, we have issued and sold to Mr. Kronstadt an aggregate principal amount of $2,042,630 of our 8% Notes and 8% Note Warrants to purchase, in the aggregate, 5,106,575 shares of common stock, subject to adjustment as provided on the terms of the 8% Note Warrants. At the initial closing under the Purchase Agreement, in consideration for the issuance of the 8% Notes and the 8% Note Warrants at such closing, Mr. Kronstadt converted the aggregate principal amount outstanding, together with all accrued and unpaid interest, under the Kronstadt Demand Note and paid us in cash for the balance. As of December 31, 2012, Mr. Kronstadt has received an aggregate of 146,770 shares of common stock as interest payments under the 8% Notes that it holds.

The terms of the 8% Notes and the 8% Note Warrants are described above..

Michael Dodd

Mr. Dodd, who was a member of our board of directors from September 2010 until his resignation in August 2012, was also serving as the Chief Executive Officer of 3D Global Solutions Inc. (3D).  3D provided professional program management services to governments, corporations and global organizations. During the year ended December 31, 2011, 3D purchased approximately $102,200 of our composite rail ties on terms similar to our other customers and which remains uncollected at September 30, 2012 and we have provided an allowance due to its prospect for collectability. We have initiated legal action in an effort to collect the balance due.