Quarterly report pursuant to sections 13 or 15(d)

7. Notes Payable

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7. Notes Payable
6 Months Ended
Jun. 30, 2012
Notes to Financial Statements  
7. Notes Payable

At June 30, 2012 and December 31, 2011, components of the Company’s notes payable are comprised of the following: 

 

   

June 30,

2012

   

December 31,

2011

 
    (unaudited)        
                 
Promissory notes payable - related parties   $ 4,898,364     $ 4,922,364  
Promissory notes payable - non-related parties     468,966       292,039  
Total promissory notes payable     5,367,330       5,214,403  
Less:                
  Current portion of notes payable - related parties     (4,898,364 )     (4,922,364 )
  Current portion of notes payable - non-related parties     (468,966 )     (292,039 )
Non-current portion of promissory notes payable   $ -     $ -  

 

Promissory notes payable – related parties

 

Promissory notes payable – related parties at June 30, 2012 and December 31, 2011 consist of notes payable to Marvin Rosen, the Company’s Chairman of the Board of Directors, and to an affiliate of Mr. Rosen.  These notes bear interest at rates ranging from 3% to 10% per annum.  All of the promissory notes grant the lender a subordinated security interest, pari passu with other lenders, in the Company’s accounts receivable and are payable in full upon ten days’ notice from the lender.  To date, the Company has not received a demand for payment.

 

During the six months ended June 30, 2012, Mr. Rosen converted $125,000 of previously issued loans evidenced by promissory notes into 925,927 shares of the Company’s common stock and five-year warrants to purchase 277,779 shares of common stock.  The warrants are exercisable at approximately 112% of the average closing price of the Company’s common stock for the five trading days prior to the conversion.  Also during the six months ended June 30, 2012, the Company received $161,000 of new loans from Mr. Rosen, $60,000 of which was repaid during the period.  The new loans are evidenced by four promissory notes bearing interest at a rate of 3% per annum.  The notes grant the lender a subordinated security interest, pari passu with other lenders, in the Company’s accounts receivable and are payable in full upon ten days’ notice from the lender.  As of June 30, 2012, the Company had an aggregate principal amount of outstanding demand notes payable to Mr. Rosen and his affiliates in the amount of $4,898,364.

 

Promissory notes payable – non-related parties

 

On September 19, 2011, the Company received an advance of approximately $208,000 from the purchaser of its accounts receivable in connection with the agreement for the sale of certain of the Company’s accounts receivable.  At December 31, 2011, the outstanding balance on this advance was $103,073, which was paid in full during the six months ended June 30, 2012.  The Company’s accounts receivable continue to be secured by a first priority lien in favor of the purchaser.

 

On October 27, 2011, the landlord over premises leased by the Company exercised its right under the lease to draw down the full amount of a letter of credit in the approximate amount of $429,000 that the Company had posted as security under the terms of the lease.  The letter of credit was issued for the benefit of the Company by a third party lending institution and the Company had partially collateralized the letter of credit in the approximate amount of $240,000 by depositing this amount in a money market account with the lending institution.  As a result of the drawdown of the letter of credit, the Company is required to pay the issuer of the letter of credit the difference between the full amount of the letter of credit and the amount of the collateral, which difference is approximately $189,000 as of December 31, 2011.

 

On April 6, 2012, the Company and the lending institution entered into a forbearance and settlement agreement which, among other things, set forth payment terms for the outstanding amount due to the lender.  Under the terms of the forbearance and settlement agreement, which provides for interest on the outstanding amount at the rate of 5.25% per annum, the lender agreed to forbear from exercising its rights and remedies under the letter of credit agreement until July 27, 2013, and the Company is required to make principal payments in the amount of $5,000 per month plus accrued interest from March 27, 2012 through August 27, 2012, $50,000 plus accrued interest on each of September 27, 2012, December 27, 2012 and March 27, 2013 and approximately $9,000 on June 27, 2013.  In the event the Company fails to comply with the forbearance and settlement agreement, as and when required thereunder, the lender may enforce the rights and remedies provided to it under the provisions of the original letter of credit agreement, and may enforce a confession of judgment for the entire amount due under the forbearance and settlement agreement, plus a $2,500 forbearance fee and payment of the lender’s partial attorney fees, which are payable on July 27, 2013.  The forbearance and settlement agreement also contains covenants limiting the Company’s ability to, among other things and with certain exceptions, incur additional debt, grant additional security interests and/or grant confessions of judgment to third parties.  As of June 30, 2012, the outstanding balance due under the forbearance agreement was $168,966 and is reflected in Promissory notes payable – non-related parties in the Company’s consolidated balance sheet.  

 

On June 22, 2012, the Company received a loan of $300,000 from a third party lending institution.  The loan bears interest at a rate of 3.25% per annum and was set to mature on August 6, 2012.  The term of the loan has since been extended such that it is currently set to mature on August 20, 2012. The proceeds from the loan were used for general corporate purposes and to repay $60,000 of indebtedness to Marvin Rosen.  Repayment of the loan is guaranteed by Mr. Rosen.