NOTES PAYABLE

3 Months Ended

Mar. 31, 2014

Debt Disclosure [Abstract]

NOTES PAYABLE

NOTE 7 - NOTES PAYABLE

During the fourth quarter of 2013, all of the $561,000 of unsecured notes payable, less $9,914 of unamortized discount, plus accrued interest of $83,715 was converted into 4,473,333 shares of common stock plus a cash repayment of $150,000.  Since this conversion was with a related party it was treated as a capital transaction in accordance with FASB ASC 470-50-40-3.

Private Placement of 25% Notes Payable

In 2010, the Company issued $400,000 in notes payable in order to finance a patent infringement lawsuit (see Note 15 - Contingencies to these consolidated financial statements). The notes payable accrue interest at 25% per annum and mature upon the earlier of September 1, 2013 or the date on which the Company receives net proceeds from the patent infringement claim. In addition to the base interest of 25% per annum, the lenders are entitled to Bonus Interest equal to the following:

a. First monies realized by the Company from its share of the net proceeds of the lawsuit shall be allocated and paid to the Lender until the principal and base interest accruing has been fully paid.

b. The next monies from the net proceeds of the litigation settlement will be paid to the Company to reimburse for out-of-pocket legal costs related to the lawsuit.

c. The next $825,000 of proceeds will be split 50%/50% between the Company and the Lenders.

d. The next $1,000,000 realized by the Company shall be allocated 90% to the Company and 10% to the Lenders.

e. The next $1,000,000 realized by Company shall be allocated 85% to Company and 15% to Lenders.

f. All remaining proceeds realized by Company shall be allocated 80% to Company and 20% to Lenders.

The Lenders have a security interest in the Company’s patent infringement claim in which the Lender has the right to the net proceeds of this lawsuit to satisfy outstanding principal and interest under the notes.

As part of the private placement of the 25% notes payable, the Company incurred debt placement fees of $34,500 in 2010. These debt placement fees have been treated as deferred finance charges and were being amortized to interest expense over two years.  The remainder of amortization $13,625 was recorded the years ended December 31, 2012.

In December 2012, 250,000 of these notes payable and accrued interest of $122,397 were converted into 8,219,911 shares of the Company’s common stock. In March 2013, the remaining $150,000 of the notes payable and accrued interest of $70,000 were converted into 3,000,000 shares of the Company’s common stock. Accrued interest of $13,895 was paid in cash.

Notes payable consists of the following:
 

	March 31, 2014		December 31, 2013
Unsecured notes payable due to related parties; interest at 10% per annum; principal and accrued interest due at maturity in September 2015	$	330,000	$	330,000
Series A notes payable; interest at 8% per annum; principal and accrued interest due at maturity in October 2011 (past due)		50,000		50,000
		380,000		380,000
Less: Current portion		50,000		50,000
Long-term portion	$	330,000	$	330,000

At March 31, 2014 and December 31, 2013, accrued interest on notes payable was $328,251 and $317,344, respectively.  Interest expense was $10,907 and $41,241 for the three months ended March 31, 2014 and 2013, respectively.