Notes payable to related parties

6 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Notes payable to related parties

6.  Notes payable to related parties

Notes payable to related party at June 30, 2011 and December 31, 2010 consisted of the following:

	June 30,		December 31,
Description	2011		2010
Unsecured note payable to an officer with a original face amount of $20,000 bearing no interest and payable on demand (D)	$	12,500	-
Unsecured note payable to an officer with a face amount of $20,000 bearing interest at 6% per annum and payable on demand (D)		20,000	-
Unsecured note payable to a director with a face amount of $75,000 bearing interest at 12% per annum and payable on demand (D)		75,000	-
Unsecured note payable to a director with a face amount of $10,000 bearing interest at 10% per annum and payable on demand (E)		10,000	-
Secured factoring loan agreement with a face amount of $26,668 bearing OID interest and payable on demand (F)		25,000		-
Unsecured note payable to a director with a face amount of $50,000 bearing interest, which is payable at maturity, at 10% per annum.  The note was originally payable on demand  but was amended to be payable on demand after December 31, 2010 (A) (B)		-	$	50,000
Unsecured non-interest bearing note payable to an officer with a face amount of $50,000 which was originally payable on demand, but was amended to be payable on demand after December 31, 2010 (B)		-		50,000
Unsecured note payable to a director with a face amount of $150,000 bearing interest, which is payable at maturity, at 10% per annum.  The note was originally scheduled to mature in June 2010, but was extended to January 12, 2011  (A)		-		150,000
Unsecured note payable to a director with a face amount of $300,000 bearing interest, which is payable maturity, at 15% per annum. The note was originally scheduled to mature in July 2010, but was extended to December 31, 2010 (A)		-		300,000
Unsecured non-interest bearing note payable to a director which was issued at an original issuance discount of $27,273. The note matures on the three month anniversary of its issuance date on December 21, 2010 but was later extended to January 21, 2011 (C)		-		227,273
Total notes payable to related parties	$	142,500	$	777,273

A) In connection with the issuance of the $300,000 unsecured note payable to a director, the Company agreed to amend the terms of the two previous outstanding notes payable to the director to provide the director with the option to convert the outstanding note balance to common stock at $0.35 per share, subject to a reset provision which contingently adjusts the conversion price in certain circumstances through July 19, 2010. The Company concluded that the addition of the embedded conversion option to the two previous outstanding notes qualified as modification resulted in extinguishment of the notes and the resulted loss was de minimis. The Company also determined that the embedded conversion option did not need to be bifurcated as a derivative instrument. However, since the embedded conversion option contained a beneficial conversion feature of $57,143 in intrinsic value, and the notes were either payable on demand or in default, the Company immediately recognized the intrinsic value in amortization of debt discount and deferred financing costs. This note was converted into Series K Preferred stock in January 2011.

In June 2010, the Company entered into a transaction which triggered the reset provision contained in the amended note terms resulting in a reduction of the conversion price to $0.30 per share. The $42,857 in incremental intrinsic value created by the reduction of the conversion price was immediately recognized in amortization of debt discount and deferred financing costs.

On January 21, 2011, $500,000 of these notes were converted into 20 units of Series K Preferred Shares and 1,666,667 warrants, which are described in Notes 7 and 9. At June 30, 2011, accrued interest of $57,500 was not converted in the January 21, 2011 transaction, and is included in accrued liabilities related party.

B) In August 2010, these notes were amended to be payable on demand after December 31, 2010. The holder did not receive any additional consideration for amending the note. The Company concluded that the modification of the note did not result in an extinguishment of debt and therefore did not record any gain (loss) on the modification of the note. This note was converted on January 21, 2011 into 2 units of Series K Preferred Stock and 166,667 Series Y warrants which are discussed in Note 9.

C) The note was issued in connection with the Company’s private placement of promissory notes and warrants in September 2010. The note was extended to January 21, 2011, as part of this extension the company issued 45,455 Common shares and reflected a charge of $7,500 as extinguishment of debt for the period ended March 31, 2011. On January 21, 2011, $235,294 of these notes were converted into 9.41 units of Series K Preferred shares and 3,137,255 warrants, which are described in Notes 7 and 9.

D) These notes were issued during the six months ended June 30, 2011 to provide short-term financing.

E) On June 30, 2011, the Company issued a $10,000 Demand 10% Promissory Note to O. Lee Tawes, a director of the Company. The note required a $5,000 repayment on July 7, 2011 which the holder converted to due on demand on the same day at no additional cost to the Company.

F) On June 15, 2011, the Company entered into a Secured Factoring Loan with a principal amount of $426,680 with lenders, a Director is a participant in this agreement. The total amount received on the Original Issue Discount Notes was $400,000 of which $25,000 was purchased by a director of the Company. These notes matured on August 20, 2011 and are secured by all of the Company assets, subject to subordinations of certain assets to present and future factoring facilities.

Interest expense in the six months ended June 30, 2011 and 2010 amounted to $11,847 and $7,500, respectively. The weighted average interest rate for all short term borrowings, excluding the amortization of debt discount was 5.2% for six months ended 2011 and 12% in 2010.

The following is a schedule of principal maturities for the next five years and the total amount thereafter on these related party notes as of June 30, 2011:

Year Ending December 31,	Principal Maturities
2011	$	142,500
2012		-
2013		-
2014		-
2015		-
Total	$	142,500