Note Payable

6 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Note Payable

NOTE 5- Notes Payable

The following is a summary of the notes payable on the balance sheet at June 30, 2011 and December 31, 2010.

	June 30,		December 31,
	2011		2010
Note payable to bank	$	321,907	$	321,907
Notes payable to others		55,000		55,000
Callable Secured Convertible Notes (net of unamortized debt discount of $60,246 at June 30, 2011)		2,515,268		2,363,785
2009 Convertible Notes (net of unamortized debt discount of $249,669 at June 30, 2011)		605,931		518,968
2010 Convertible Notes (net of unamortized debt discount of $33,014 at June 30, 2011)		16,986		11,242
Convertible Notes (net of unamortized debt discount of $619,528 at June 30, 2011)		1,022,308		930,168
Fixed Price Convertible Notes (net of unamortized debt discount of $593,349 at June 30, 2011)		233,918		175,969
		4,771,318		4,377,039
Less current portion		3,708,748		2,929,342
	$	1,062,570	$	1,447,697

 A subsidiary of the Company had a bank line of credit of approximately $300,250 which does not include an outstanding interest balance of approximately $21,750, all of which was outstanding at December 31, 2007 at an interest rate of 7.75% with a maturity on June 6, 2008. The obligation to the bank has not been repaid and remains payable at June 30, 2011.

Callable Secured Convertible Notes. The Company entered into a series of Securities Purchase Agreements with New Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC (collectively referred to hereinafter as “NIR Group”) starting in December 28, 2005, with the last financing for $50,000 occurring on March 11, 2009. Various Callable Secured Convertible Notes (the “Callable Notes”) initially bore interest at a rate of 8% with the right to convert into shares of Common Stock at an initial discount of 65% based upon the average of the three lowest intraday trading prices for the Common Stock for the 20 trading days before, but not including, the conversion date. As a result of various adjustments and the receipt of additional financing from NIR Group, the interest rate on all of the Callable Notes was adjusted to rates of 12% or 15%. Furthermore, the discount conversion rate was increased from 65% to 72% on a majority of the Callable Notes. In connection with the Callable Notes the NIR Group also received warrants to purchase a total of 500,230 shares of Common Stock, as adjusted for reverse stock splits, of the Company at exercise prices ranging from $.50 to $13,000 per share and expire on dates through December 2015 (see footnote 6). In addition, on January 31, 2008 and November 10, 2008 the NIR Group agreed to convert an aggregate of $338,642 of accrued interest into Callable Notes. The total principal outstanding relating to all of the Callable Notes at June 30, 2011 was $2,575,515, all of which is classified as a current liability in the accompanying condensed consolidated balance sheet. (See Litigation in Footnote 8)

In addition, the conversion price of the Callable Notes and the exercise price of the warrants will be adjusted in the event that we issue Common Stock at a price below the fixed conversion price, below market price, with the exception of any securities issued in connection with the Securities Purchase Agreement. The conversion price of the Callable Notes and the exercise price of the warrants may be adjusted in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of Common Stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the selling stockholder's position. The selling stockholders have contractually agreed to restrict their ability to convert or exercise their warrants and receive shares of our Common Stock such that the number of shares of Common Stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of Common Stock.

2009 Convertible Notes. On May 11, 2009 the Company entered into a financing agreement with JMJ Financial (“JMJ”). The Company issued a Convertible Promissory Note to JMJ (the “JMJ Note”) in the amount of $825,000 with an interest rate of 12% and JMJ issued a Secured & Collateralized Promissory Note to the Company in the amount of $750,000 with an interest rate of 13.2%. Both notes mature three years from the effective date. The interest on both notes was incurred as a one-time charge on the effective date of the notes and is equal to $99,000 on each note. As of September 30, 2009 the Company had received $145,000 toward the satisfaction of the Secured & Collateralized Promissory Note from JMJ. The JMJ Note is convertible into the Common Stock of the Company at a conversion price based on 70% of the lowest trade price in the 20 trading days prior to the conversion.  Any conversions by JMJ are limited to the JMJ remaining under 4.99% ownership of the outstanding Common Stock of the Company.  Pursuant to the terms of the note, the Company is not permitted to prepay the note unless approved by JMJ.

On August 20, 2009, the Company entered into a $50,000 convertible note with Redwood Management LLC. (“Redwood Note-I”) The Redwood Note-I has a three year term, bears interest at 10% and is convertible into Common Stock at an exercise price equal to 75% of the lowest closing bid price for the 10 trading days prior to conversion. Pursuant to the terms of the Redwood Note-I, the Company may prepay the note in whole or in part at 125% of the amount to be prepaid upon seven (7) days notice prior to redemption. As of June 30, 2011 $18,100 of the Redwood Note-I was outstanding.

On October 19, 2009, the Company entered into a $12,500 convertible note with Redwood Management LLC. (“Redwood Note-II”) The Redwood Note-II has a three year term, bears interest at 10% and is convertible into Common Stock at an exercise price equal to 40% of the lowest closing bid price for the 10 trading days prior to conversion. Pursuant to the terms of the Redwood Note-II, the Company may prepay the note in whole or in part at 125% of the amount to be prepaid upon seven (7) days notice prior to redemption. As of June 30, 2011 the Redwood Note-II was outstanding.

The JMJ Note together with the Redwood Note-I and the Redwood Note-II are collectively referred to as the 2009 Convertible Notes. As of June 30, 2011 $875,000 of the 2009 Convertible Notes is classified as a current liability in the accompanying condensed consolidated balance sheet and $30,600 is classified as a long term liability in the accompanying condensed consolidated balance sheet.

2010 Convertible Notes. On June 23, 2010, the Company entered into a $50,000 convertible note with Redwood Management LLC. (“Redwood Note-III”) The Redwood Note-III has a three year term, bears interest at 7% and is convertible into common stock at an exercise price equal to 50% of the lowest closing bid price for the 10 trading days prior to conversion. Pursuant to the terms of the Redwood Note-III, the Company may prepay the note in whole or in part at 125% of the amount to be prepaid upon seven (7) days notice prior to redemption.

On July 14, 2010 Redwood Management LLC acquired an outstanding Convertible Note in the amount of $30,000 (“Redwood Note IV”) from a holder of a Convertible Note. The Redwood Notes IV has a three year term, bears interest at 12% and is convertible into common stock at an exercise price equal to 75% of the lowest closing bid price for the 10 trading days prior to conversion. Pursuant to the terms of the Redwood Note-III, the Company may prepay the note in whole or in part at 150% of the amount to be prepaid upon seven (7) days notice prior to redemption. As of June 30, 2011 this note has been fully converted into common stock.

The outstanding 2010 Convertible Notes totaling $50,000 are all classified as a long term liability in the accompanying condensed consolidated balance sheet.

Convertible Notes. The Company has entered into a series of convertible notes (the “Convertible Notes”) in exchange for cash proceeds, goods or services, and current liabilities. The Convertible Notes have maturities ranging from two to seven years and accrue interest at rates ranging from 2% to 36%. The Convertible Notes are generally convertible into Common Stock of the Company at an exercise price equal to the lowest closing bid price for the 10 trading days prior to conversion. During the six month period ended June 30, 2011 the Company issued a total of $83,197 of Convertible Notes. In addition, holders of $203,000 of Convertible Notes transferred their interest to holders of Fixed Price Convertible Notes. At June 30, 2011 the Convertible Notes had an outstanding principal balance of approximately $1,641,837 of which approximately $421,000, net of debt discount, is classified as a current liability in the accompanying condensed consolidated balance sheet.

Fixed Price Convertible Notes. Commencing in the fourth quarter of 2010 the Company entered into a series of convertible notes with fixed conversion prices (the “Fixed Price Convertible Notes”). These notes are convertible into Common Stock of the Company at fixed conversion prices, bear interest at rates from 7% to 19.1% and mature between six months and three years from the date of issuance. At June 30, 2011 the Fixed Price Convertible Notes totaled approximately $827,000 of which approximately $178,000, net of debt discount, is classified as a current liability in the accompanying condensed consolidated balance sheet. In accordance with the provisions of Topic 470-20, the Company has computed the Fair Market Value of the Beneficial Conversion Feature of these notes, which has been charged Additional Paid In Capital in the accompanying consolidated financial statements. During the six month period ended June 30, 2011 the Company issued $239,310 of new Fixed Price Convertible Notes. In addition, during the six month period ended June 30, 2011 holders of $203,000 of Convertible Notes transferred their interest to holders of Fixed Price Convertible Notes. These notes mature in three years from the date of issuance, bear interest at the rate of 14% and have fixed conversion prices. For the six months ended June 30, 2011 the Beneficial Conversion Feature relating to Fixed Price Convertible Notes entered into during the period totaled approximately $418,767. The Company has also recorded the same amount as debt discount, which will be accreted and charged to operations over the life of the Fixed Price Convertible Notes.

Due to the indeterminate number of shares which might be issued under the outstanding convertible conversion feature of the Callable Notes, the 2009 Convertible Notes, the 2010 Convertible Notes and the Convertible Notes, the Company is required to record a liability relating to both the detachable warrants and embedded convertible feature of the convertible debentures payable which is included in the liabilities in the accompanying consolidated balance sheets as a “derivative liability”.

The accompanying condensed consolidated financial statements comply with current requirements relating to warrants and embedded derivatives as follows:

a. The Company treats the full fair market value of the derivative and warrant liability on the convertible secured debentures as a discount on the debentures (limited to their face value). The excess, if any, is recorded as an increase in the derivative liability and warrant liability with a corresponding increase in loss on adjustment of the derivative and warrant liability to fair value.

b. Subsequent to the initial recording, the change in the fair value of the detachable warrants, determined under the Black-Scholes option pricing formula and the change in the fair value of the embedded derivative (utilizing the Black-Scholes option pricing formula) in the conversion feature of the convertible debentures are recorded as adjustments to the liabilities as of each balance sheet date with a corresponding change in Loss on adjustment of the derivative and warrant liability to fair value.

c. The expense relating to the change in the fair value of the Company’s stock reflected in the change in the fair value of the warrants and derivatives (noted above) is included in other income in the accompanying consolidated statements of operations.