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Notes Payable
 3 Months Ended
Mar. 31, 2012
Debt Disclosure [Abstract]  
Debt Disclosure [Text Block]

7. Notes Payable 

 

On March 24, 2004, the Company issued a note payable to a bank for $201,024, bearing a current interest rate of 6.25% per annum (the “Bank Loan”). Monthly principal and interest payments are $3,826 each with the final payment due on April 30, 2014. The note is secured by the personal guarantees of the Company’s founders, as well as by a third party. The guarantee by the third party is secured by the pledge of the third party’s certificate of deposit in the amount of $200,000. In addition, the note is secured by a senior secured interest on all business assets of the Company. The obligation is subject to certain covenants, which require that the Company maintain continuity of operations and which include limitations regarding the Company’s indebtedness. In addition, the bank is a party to an intercreditor agreement involving Authority Loan No. 1 and Authority Loan No. 2 (together, the “Authority Loans”), as discussed and defined below, which provides for cross notifications between the lenders.

 

On July 17, 2009, the Company issued a note payable to the Ohio state development authority in the amount of $1,012,500, bearing interest at a rate of 6.00% per annum (“Authority Loan No. 1”). This loan was funded to the Company in tranches, with $742,479 received during 2009 and $270,021 received during 2010. Pursuant to the terms of the loan, the Company was required to pay only interest through September 30, 2010 and then monthly principal and interest payments of $23,779 each through September 30, 2015. The note is secured by a senior secured interest on all business assets financed with loan proceeds, as well as a second secured interest in all business assets. Upon maturity, by acceleration or otherwise, the Company shall pay a loan participation fee of $101,250, which is accounted for as a loan premium, accreted monthly, utilizing the interest method, over the term of the loan.

 

On February 11, 2011 the Company issued a note payable to an advisor of the Company in the amount of $200,000, bearing interest at 5.00% per annum. The principal amount due under the note was increased to $235,000, pursuant to an amendment to the note, dated June 21, 2011. The note was paid in full on July 18, 2011.

  

On June 3, 2011, the Company issued a note payable to the Ohio state development authority in the amount of $750,000, bearing interest at a rate of 1% per annum for the first 12 months, then interest at rate of 7% per annum for the second 12 months (“Authority Loan No. 2”). The Company is not obligated to remit payments of principal until the beginning of the third year of the loan. The monthly principal and interest payments, beginning on the third anniversary of the loan origination, are $14,860 and are payable on a monthly basis through July 13, 2017. The note is secured by a senior secured interest on all business assets financed with loan proceeds, as well as a second secured interest in all business assets. Upon maturity, by acceleration or otherwise, the Company shall pay a loan participation fee of $75,000, which is accounted for as a loan premium, accreted monthly utilizing the interest method, over the term of the loan. The interest rate of 1% during the first 12 months of this loan was considered to be below market for that period. The Company further determined that over the life of the loan, the effective interest rate was 5.6% per annum. Accordingly, during the first 12 months of the loan, the Company shall record interest expense at the 5.6% rate per annum. The difference between the interest expense accrual at 5.6% and the stated rate of 1% over the first 12 months is credited to deferred interest. The deferred interest amount that is accumulated over the first 12 months of the loan term will be amortized as a reduction to interest expense over the remaining term of the loan. At March 31, 2012 and December 31, 2011, deferred interest of $25,813 and $17,063, respectively, was reflected within other assets on the accompanying balance sheet.

 

As of December 31, 2011, the Company had issued notes payable to an advisor totaling $472,500. During the three months ended March 31, 2012, the Company issued notes payable to an advisor totaling $356,556. These advisor notes are unsecured and bear interest at 3.25% per annum, with principal and interest due 180 days from the date of issuance. On, March 6, 2012 the Company and the lender agreed to extend the maturity of the note in the amount of $17,500 to September 2, 2012 with only a change in the maturity date. On May 7, 2012 the Company and the lender agreed to extend the maturity of the notes in the amounts of $7,500, $7,500, and $300,000 to July 2, 2012, July 28, 2012, and August 11, 2012, respectively, with only a change in the maturity date.

 

The Authority Loans were granted to the Company in connection with the State of Ohio’s economic development programs. The proceeds from these loans were used by the Company to support its efforts in developing software solutions for its customers.

 

These Authority Loans are subject to certain covenants and reporting requirements. The Company is required to provide quarterly financial information and certain management certifications. The Company was not in compliance with certain covenants for the Authority Loans through December 31, 2011. On February 10, 2012, the Company requested and received a waiver of non-compliance items relating to the Authority Loans. The Company is further required to maintain its principal office in the State of Ohio and within three years of the respective loan origination dates of each of the Authority Loans, to have created and/or retained an aggregate of 25 full time jobs in the State of Ohio. Should the Company not have attained these employment levels by the respective dates, then the interest rates on the Authority Loans shall increase to 10% per annum. The Authority Loans are the subject of an intercreditor agreement involving the Bank Loan, which provides for cross notifications between the lenders.

  

From January 17, 2012 to February 3, 2012, the Company issued a total of $130,000 in contingently convertible notes to certain of its employees and friends and family of its officers and directors. Of the $130,000 aggregate value of contingently convertible notes issued, $50,000 of these notes were issued to relatives of the Company’s founders and officers (See Note 8 – Notes Payable – Related Parties). Interest is charged on the convertible notes at an interest rate of 10% per annum. Each of the contingently convertible notes shall be due and payable on June 1, 2012 (“Maturity Date”). Provided the Company’s common stock has traded for the 10 days immediately prior to the Maturity Date, the contingently convertible notes may be converted into newly issued shares of the Company’s common stock at the holder’s discretion (subject to a 12-month holding period pursuant to Rule 144 under the Securities Act of 1933, as amended) at a price equal to a 50% discount to the average closing price of the common stock as published on the Over-the-Counter Quote Board during the 90 trading days immediately preceding the Maturity Date, or such shorter number of trading days as the common stock has been publicly traded, as applicable. Otherwise, the contingently convertible notes shall be paid in immediately available funds on the Maturity date.

 

Notes payable consist of the following:

 

 

    March 31,     December 31,  
    2012     2011  
Bank Loan, due April 30, 2014   $ 88,135     $ 98,122  
Authority Loan No. 1, due August 19, 2015     898,791       956,071  
Authority Loan No. 2, due July 13, 2017     750,000       750,000  
Note payable to advisor, due September 2, 2012 (on March 6, 2012 maturity extended an additional 180 days)     17,500       17,500  
Note payable to advisor, due July 2, 2012 (on May 7, 2012 maturity extended an additional 90 days)     7,500       7,500  
Note payable to advisor, due July 28, 2012  (on May 7, 2012 maturity extended an additional 90 days)     7,500       7,500  
Note payable to advisor, due August 11, 2012 (on May 7, 2012 maturity extended an additional 90 days)     300,000       300,000  
Note payable to advisor, due May 19, 2012     37,500       37,500  
Note payable to advisor, due May 29, 2012     7,500       7,500  
Note payable to advisor, due June 4, 2012     80,000       80,000  
Note payable to advisor, due June 6, 2012     15,000       15,000  
Note payable to advisor, due July 2, 2012     13,556       -  
Note payable to advisor, due July 7, 2012     10,000       -  
Note payable to advisor, due July 17, 2012     50,000       -  
Note payable to advisor, due July 25, 2012     5,000       -  
Note payable to advisor, due July 29, 2012     35,000       -  
Note payable to advisor, due August 8, 2012     85,000       -  
Note payable to advisor, due August 12, 2012     10,000       -  
Note payable to advisor, due August 13, 2012     15,000       -  
Note payable to advisor, due August 18, 2012     7,500       -  
Note payable to advisor, due September 5, 2012     104,000       -  
Note payable to advisor, due September 10, 2012     15,000       -  
Note payable to advisor, due September 11, 2012     6,500       -  
Contingently convertible notes payable June 1, 2012     80,000       -  
Total notes payable     2,645,982       2,276,693  
Less current portion     (1,188,510 )     (747,778 )
Long-term portion of notes payable   $ 1,457,472     $ 1,528,915  

  

Future minimum principal payments of these notes payable are as follows:

 

For the Twelve Month
Period Ended March 31,		     Amount  
2013       1,188,510  
2014       367,634  
2015       409,475  
2016       285,201  
2017       155,475  
thereafter       239,687  
           
Total     $ 2,645,982
             

 As of March 31, 2012 and December 31, 2011, accrued interest for these notes payable was $49,896 and $69,930, respectively, and was reflected within accounts payable and accrued expenses on the balance sheet. As of March 31, 2012 and December 31, 2011, accrued loan participation fees were $76,719 and 66,682, respectively, and reflected within accounts payable and accrued expenses on the balance sheet. As of March 31, 2012 and December 31, 2011, deferred financing costs were $33,617 and $36,119, respectively, and were reflected within other assets on the balance sheet.

 

Included within interest expense for the three months ended March 31, 2012 and 2011 was $10,037 and $9,798, respectively, of accrued loan participation fees and $1,551 and $1,371, respectively, of amortized deferred financing costs. Deferred financing costs are amortized over the lives of the respective loans.

 

For the three months ended March 31, 2012 and 2011, interest expense, including the amortization of deferred financing costs, accrued loan participation fees and deferred interest and related fees, in connection with notes payable, was $48,582 and $33,105, respectively.

 

See Note 15 – Subsequent Event for additional notes issued.