3. Interest, Advances and Promissory Notes Payable

6 Months Ended

Jun. 30, 2012

Interest Advancesand Promissory Notes Payable

3. Interest, Advances and Promissory Notes Payable

On September 4, 2009, the Company received a Notice of Credit to Judgment from the Superior Court of the State of North Carolina, whereby the Company was ordered to pay two creditors holding promissory notes payable (the “plaintiffs”) an aggregate amount of $1,988,000 for principal, interest and legal fees incurred. Subsequent to the verdict, the Company, two directors, a relative of a director (the “Purchaser”) and the plaintiffs entered into a settlement agreement (the “Settlement Agreement”) whereby a relative of a director acquired $1,313,000 of debts from the plaintiffs in a private transaction. The remaining $675,000 due to the plaintiffs was exchanged for common shares of the Company as part of a separate debt for shares settlement (note 6). As part of the Settlement Agreement, a second director, not related to the Purchaser, assigned unsecured advances payable of the Company with no stated terms of interest, totalling $425,000, to the plaintiffs. As part of the Settlement Agreement, the Company agreed to the following repayment terms:

- $300,000 repayable at a rate of $25,000 per month (note 6); and

- $125,000 repayable in whole by January 15, 2011 (unpaid)

a) Interest payable

A summary of the interest payable activity is as follows:

Balance, December 31, 2010		$	1,426,294
	Interest incurred on promissory notes payable		505,568
	Transfer of balance to accounts payable		(1,167)
Balance, December 31, 2011			1,930,695
Interest incurred on promissory notes payable			252,785
Repayment			(6,500)
Balance, June 30, 2012		$	2,176,980

Interest payable is to the following:

		June 30		December 31
		2012		2011
Relatives of directors	$	1,294,029	$	1,140,916
Non-related parties		882,951		789,779
	$	2,176,980	$	1,930,695

Historically, all interest payable incurred is from interest incurred at the stated rate of promissory notes issued by the Company. The payment terms, security and any interest payable are based on the underlying promissory notes payable that the Company has outstanding.

b) Advances payable

A summary of the advances payable activity is as follows:

Balance, December 31, 2010	$	213,678
Advances accrued		234,600
Advances reclassified as accounts payable		(64,259)
Advances repaid from proceeds of line of credit		(283,492)
Balance, December 31, 2011	$	100,527
Advances accrued		5,000
Balance, June 30, 2012	$	105,527

Advances payable are to the following:

			June 30		December 31
			2012		2011
Advances payable to:
	Companies controlled by directors	$	65,527	$	65,527
	Current and former directors		40,000		35,000
		$	105,527	$	100,527

Advances payable are unsecured, have no stated terms of interest and are due on demand.

c) Promissory notes payable to related parties

A summary of the promissory notes payable activity is as follows:

Balance, December 31, 2011 and June 30, 2012

2,861,966

On December 14, 2010, a creditor demanded repayment of a promissory note of $200,000 and accumulated interest of approximately $365,000. To date, this amount has not been repaid.

On October 27, 2010, the Company had a default judgment ruled against them which results in being held legally liable for an additional $11,000 of costs. The Company has accrued the liability relating to this judgment as of June 30, 2012.

Promissory notes payable are to the following:

Relatives of Directors				June 30, 2012		December 31, 2011

Promissory notes payable to relatives of directors collateralized by a general security agreement on all the assets of the Company, due on demand:

	i.	Interest at 1% per month	$	845,619	$	845,619

	ii.	Interest at 1.25% per month		51,347		51,347

	iii.	Interest at the U.S. bank prime rate plus 1%		500,000		500,000

Promissory notes payable, unsecured, to relatives of a director, bearing interest at 1% per month, due on demand				1,465,000		1,465,000
			$	2,861,966	$	2,861,966

d)	Promissory notes payable to unrelated lenders

Balance, December 31, 2010		$	2,413,368
	Increase in promissory note payable		10,985
Balance, December 31, 2011 and June 30, 2012		$	2,424,353

Unrelated Lenders				June 30, 2012		December 31, 2011

Unsecured promissory notes payable to unrelated lenders:

	i.	Interest at 1% per month, repayable on March 31, 2009, due on demand	$	450,000	$	450,000

	ii.	Interest at 1% per month, with $50,000 repayable on December 31, 2004, $75,000 repayable on August 18, 2007, $75,000 repayable on November 19, 2007 and the balance due on demand. All are due on demand, accruing interest at the same rate.		887,455		887,455

	iii.	Interest at 0.625% per month, with $50,000 repayable on October 5, 2004, $40,000 repayable on December 31, 2004, and $60,000 repayable on July 28, 2006, all due on demand		150,000		150,000

	iv.	Non-interest-bearing, repayable on July 17, 2005, due on demand		270,912		270,912

	v.	Non-interest-bearing loan repayable at $25,000 per month beginning October 2009, none repaid to date		310,986		310,986

	vi.	Non-interest-bearing loan, due January 15, 2012		125,000		125,000

Promissory notes payable, secured by a guarantee from a director and relative of a director, bearing interest at 1% per month, with $200,000 repayable on July 31, 2003, all due on demand				230,000		230,000
			$	2,424,353	$	2,424,353

e) Interest expense

During the six months ended June 30, 2012, the Company incurred interest expense of $3,131,674 (2011: $2,400,713) substantially as follows:

-	$252,785 (2011: $252,783) incurred on promissory notes payables as shown in note 3(c);
-	$178,033 (2011: $82,635) incurred on lines of credit payable
-	$83,163 (2011: $91,828) incurred from the calculation of imputed interest on accounts payable outstanding for longer than one year, advances payable and promissory notes payable, which had no stated interest rate;
-	$2,616,602 (2011: $1,973,467) incurred in connection with stock options granted to creditors providing the lines of credit to the Company