Notes Payable

3 Months Ended

Mar. 31, 2013

Notes Payable [Abstract]

NOTES PAYABLE

NOTE 3 – NOTES PAYABLE

In January 2013, a 14%, $100,000 convertible promissory note matured and was renewed on the same terms until April 30, 2013 at which time the note was again renewed. The new note utilizes the same terms as the previous note and has a maturity date of July 31, 2013.

In February 2013, a zero coupon promissory note in the amount of $230,000 matured and was replaced by a new note of similar terms with a face value of $230,000 and a maturity date of May 31, 2012.

In March 2013, we renewed a 10% promissory note in the amount of $100,000 and a 7% promissory note in the amount of $50,000, each for additional one-year terms. One of the note holders was issued a three-year warrant to purchase 25,000 shares of our common stock at an exercise price of $0.15.

On March 15, 2013, we executed an agreement with a creditor to modify the terms of a previously matured but unpaid promissory note in the amount of $1.4 million. Under the modified terms of the note, the maturity date was extended from February 28, 2013 to January 31, 2014 and the conversion price at which the note may be converted into our common stock was reduced to $0.125 from $0.25. In addition, the exercise price of a warrant to purchase our common stock issued in conjunction with the note was reset from $0.44 to $0.22. We also assigned certain receivables (see Note 2 “Accounts Receivable”) and a potential arbitration recovery to the creditor as a source of future repayment of a second loan from the creditor in the amount of $625,000 maturing May 14, 2013 and a $75,000 loan from an individual related to the creditor also due on May 14, 2013. Any proceeds remaining from the assigned receivables and potential recovery after repayment of the aforementioned loans will be used to reduce the principal of the $1.4 million loan, but not in excess of $300,000. The modification was accounted for as a troubled debt restructuring, but we recognized no gain because the effective interest rate of the modified promissory note was less than the effective interest rate of the original promissory note.

We were unable to repay our 14% senior promissory notes in the amount of approximately $1.8 million on the maturity date of April 15, 2013. We are currently in negotiations with the holders to resolve the default. We completed an agreement to extend the maturity date for approximately $1.3 million of the notes on May 13, 2013. See Note 4 “Long Term Debt.” In addition, we were not able to repay a $1 million loan due May 8, 2013.

On May 8, 2013, we executed an agreement with a creditor to modify the terms of a promissory note in the amount of $625,000. Under the modified terms of the note, the maturity date was extended from May 14, 2013 to July 15, 2013 and the conversion price at which the note may be converted into our common stock was reduced to $0.125 from $0.25. In addition, the exercise price of a warrant to purchase our common stock issued in conjunction with the note was reset from $0.44 to $0.22.