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Notes Payable
 6 Months Ended
Jun. 30, 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 a director of the Company. The guarantee by the director is secured by the pledge of the director’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 a 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 September 1, 2013. The monthly principal and interest payments, beginning on the third anniversary of the loan origination, are $14,850 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 recorded 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 June 30, 2012 and December 31, 2011, deferred interest of $34,564 and $17,063, respectively, was reflected within long-term liabilities on the accompanying condensed consolidated balance sheets.

 

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 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 in an event of a default.

 

As of June 30, 2012, the Company had notes payable to an advisor and shareholder, in varying amounts totaling $1,003,556 (the “Notes Totaling $1,003,556”). All of the Notes Totaling $1,003,556 are unsecured and bear interest at 3.25% per annum. Of the Notes Totaling $1,003,556, $472,500 (the “Notes Totaling $472,500”) were issued as of December 31, 2011, and $531,056 (the “Notes Totaling $531,056”) were issued as of June 30, 2012, respectively. The varying amounts of the Notes Totaling $1,003,556 are indicated in the table below reflecting all notes payable except related party notes, at June 30, 2012 and December 31, 2011, respectively.

 

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. See Note 15 – Subsequent Event for the treatment of the notes issued to certain employees and friends and family of the Company’s officers and directors, incorporated herein by reference.

 

On June 6, 2012 the Company issued an unsecured note payable to an unrelated third party in the amount of $50,000, bearing interest at 10.00% per annum. The principal and interest is due in full on September 4, 2012.

 

The table below reflects all notes payable at June 30, 2012 and December 31, 2011, respectively, including the notes comprising the Notes Totaling $472,500 and the Notes Totaling $531,056, with the exception of Note 8 - Notes Payable - Related Parties.

    June 30,     December 31,  
    2012     2011  
Bank Loan, due April 30, 2014   $ 78,030     $ 98,122  
Authority Loan No. 1, due August 19, 2015     840,646       956,071  
Authority Loan No. 2, due July 13, 2017     750,000       750,000  
Note payable dated September 8, 2011 to advisor, due September 2, 2012 (on March 6, 2012 maturity extended an additional 180 days)     17,500       17,500  
Note payable dated October 7, 2011 to advisor, due August 19, 2012 (on July 2, 2012 maturity extended an additional 45 days)     7,500       7,500  
Note payable dated November 1, 2011 to advisor, due September 11, 2012 (on May 7, 2012 maturity extended an additional 90 days and July 27, 2012 maturity extended an additional 45 days)     7,500       7,500  
Note payable dated November 15, 2011 to advisor, due July 1, 2013 (on May 7, 2012 maturity extended an additional 90 days and August 10, 2012 maturity extended to July 1, 2013)     300,000       300,000  
Note payable dated November 21, 2011 to advisor, due August 17, 2012 (on May 13, 2012 maturity extended an additional 90 days)     37,500       37,500  
Note payable dated December 1, 2011 to advisor, due August 27, 2012 (on May 29, 2012 maturity extended an additional 90 days)     7,500       7,500  
Note payable dated December 7, 2011 to advisor, due September 2, 2012 (on June 29, 2012 maturity extended an additional 90 days)     80,000       80,000  
Note payable dated December 9, 2011 to advisor, due September 4, 2012 (on June 29, 2012 maturity extended an additional 90 days)     15,000       15,000  
Note payable dated January 4, 2012 to advisor, due August 16, 2012 (on July 1, 2012 maturity extended an additional 45 days)     13,556       -  
Note payable dated January 9, 2012 to advisor, due August 21 2012 (on July 6, 2012 maturity extended an additional 90 days)     10,000       -  
Note payable dated January 19, 2012 to advisor, due August 31, 2012 (on July 16, 2012 maturity extended an additional 45 days)     50,000       -  
Note payable dated January 27, 2012 to advisor, due September 8, 2012 (on July 24, 2012 maturity extended an additional 45 days)     5,000       -  
Note payable dated January 31, 2012 to advisor, due September 12, 2012 (on July 28, 2012, maturity extended an additional 45 days)     35,000       -  
Note payable dated February 10, 2012 to advisor, due September 22 , 2012 (on August 7, 2012 maturity extended an additional 45 days)     85,000       -  
Note payable dated February 14, 2012 to advisor, due September 26, 2012 (on August 11, 2012 maturity extended an additional 45 days)     10,000       -  

  

    June 30, 2012     December 31, 2011  
             
Note payable dated February 15, 2012 to advisor, due  September 27, 2012 (on August 12, 2012 maturity extended an additional 45 days)     15,000       -  
Note payable dated February 20, 2012 to advisor, due August 18, 2012     7,500       -  
Note payable dated March 9, 2012 to advisor, due September 5, 2012     104,000       -  
Note payable dated March 14, 2012 to advisor, due September 10, 2012     15,000       -  
Note payable dated March 15, 2012 to advisor, due September 11, 2012     6,500       -  
Note payable dated April 17, 2012 to advisor, due October 14, 2012     7,500       -  
Note payable dated April 24, 2012 to advisor, due October 21, 2012     24,000       -  
Note payable dated May 10, 2012 to advisor, due November 6, 2012     55,000       -  
Note payable dated May 21, 2012 to advisor, due November 17, 2012     50,000       -  
Note payable dated June 13, 2012 to advisor, due December 10, 2012     38,000       -  
Note payable dated June 6, 2012 to an unrelated third-party, due September 4, 2012     50,000       -  
Contingently convertible notes payable June 1, 2012     80,000       -  
Total notes payable     2,802,232       2,276,693  
Less current portion     (1,417,203 )     (747,778 )
Long-term portion of notes payable   $ 1,385,029     $ 1,528,915  

 

Future minimum principal payments of all notes payable with the exception of the related party notes in Note 8 - Notes Payable - Related Parties, as described in this Note 7 are as follows:

 

For the Twelve-Month
Period Ended June 30,		   Amount  
2013   $ 1,417,203  
2014     399,774  
2015     409,777  
2016     218,173  
2017     158,212  
thereafter     199,093  
         
Total   $ 2,802,232  

 

As of June 30, 2012 and December 31, 2011, accrued interest for all notes payable with the exception of the related party notes in Note 8 - Notes Payable - Related Parties, was $95,345 and $67,451, respectively, and was reflected within accrued expenses in the accompanying condensed consolidated balance sheets. As of June 30, 2012 and December 31, 2011, accrued loan participation fees were $86,330 and $66,682, respectively, and reflected within accrued expenses in the accompanying condensed consolidated balance sheets. As of June 30, 2012 and December 31, 2011, deferred financing costs were $31,115 and $36,119, respectively, and were reflected within other assets in the accompanying condensed consolidated balance sheets.

 

Included within interest expense for the three and the six months ended June 30, 2012 and 2011 was $9,611 and $19,648 and $6,803 and $13,606, respectively, of accrued loan participation fees and $2,501 and $4,051 and $843 and $1,405, respectively, of amortized deferred financing costs. Deferred financing costs are amortized over the lives of the respective loans.

 

For the three and the six months ended June 30, 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 all notes payable with the exception of the related party notes in Note 8 - Notes Payable - Related Parties, described in this Note 7, was $51,100 and $99,665 and $27,311 and $58,497, respectively.

 

See Note 15 – Subsequent Event for extension of the term of certain notes referenced in this Note 7, additional notes issued, and the treatment of the notes issued to certain employees and friends and family of the Company’s officers and directors.