NOTES PAYABLE

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Note 5 - NOTES PAYABLE

Notes payable consist of the following:

($ in thousands)	September 30,			December 31,
	2012			2011
Notes payable to related parties:
7% convertible promissory notes, face value of notes $65 at September 30, 2012 and $110 at December 31, 2011. Discount on notes is $0 at September 30, 2012 and $0 at December 31, 2011. Notes were due January 2010.  The Company is currently seeking a waiver of default.		65			110
Total notes payable to related parties		65			110
Total notes payable		65			110
Less current portion		(65	)		(110	)
Long-term notes payable	$	-		$	-

 7% Convertible Promissory Notes to Related Parties

 On November 14, 2008, the Company entered into a series of convertible promissory notes (the "Related-Party Convertible Notes"), in the principal aggregate amount of $110,000, with certain officers and members of the Company’s Board of Directors. The Related-Party Convertible Notes bear interest at 7.0% per annum and were due February 14, 2009. The principal amount of the Related-Party Convertible Notes plus accrued but unpaid interest is convertible at the option of the holder into common stock of the Company. The number of shares into which the Related-Party Convertible Notes are convertible shall be calculated by dividing the outstanding principal and accrued but unpaid interest by $0.50 (the “Conversion Price”).

 In conjunction with the issuance of the Related-Party Convertible Notes, the Company issued an aggregate of 149,996 warrants to the note holders to purchase common stock of the Company. The warrants have an exercise price of $0.50 per share and may be exercised at any time from November 14, 2008 until November 14, 2013. 

 The Company, in 2008, initially recorded the Related-Party Convertible Notes net of a discount equal to the fair value allocated to the warrants of approximately $13,000. The Company estimated the fair value of the warrants using the Black-Scholes option pricing model using the following assumptions: term of 5 years, a risk free interest rate of 2.53%, a dividend yield of 0%, and volatility of 96%. The Related-Party Convertible Notes also contained a beneficial conversion feature, in an additional debt discount of $12,000. The beneficial conversion amount was measured using the accounting intrinsic value, i.e. the excess of the aggregate fair value of the common stock into which the debt is convertible over the proceeds allocated to the security. The Company has accreted the beneficial conversion feature over the life of the Related-Party Convertible Note. 

 The Company did not repay the Related-Party Convertible Notes on the due date. In August 2009, the Company received from the Related-Party Convertible Note holders a waiver of default and extension of the Maturity Date to January 31, 2010. As consideration for the waiver and note extension, the Company issued to the Related-Party Convertible Note holders warrants to purchase an aggregate of 150,000 shares of the Company’s common stock. The warrants have an exercise price of $0.50 per share and expire on August 25, 2014.

 The Company did not repay the notes on January 31, 2010.  During the nine months ended September 30, 2012, the Company repaid $45,000 in principal to certain holders of the Related-Party Convertible Notes.  The Company is currently seeking an additional waiver of default from the holders of the Related-Party Convertible Notes.