DEBT

12 Months Ended

Dec. 31, 2013

Debt

DEBT

Note Offering

On June 20, 2013 the Company commenced a private offering of: (i) Notes in the aggregate principal amount of up to $3.3 million; and (ii) and Warrants to certain accredited investors (the “Note Offering”).  During the year ended December 31, 2013, the Company issued Notes in the aggregate principal amount of $3,126,000, which amount included $600,000 issued as consideration for the exchange of the outstanding principal and accrued interest of certain promissory notes previously issued by the Company.  As additional consideration to investors and as consideration for offering costs, the Company issued 2,438,243 Warrants to purchase the Company’s common stock, in addition to the 600,000 Warrants issued with the May Notes.  As of November 29, 2013, all Notes issued during the Offering were either paid in full as a result of the Note Repayment, or exchanged for shares of Series B Preferred and Warrants in connection with the Note Conversion.

Each Note accrued interest at a rate of 12% per annum, and was set to mature on November 29, 2013. Each Note was convertible, at the option of the holder thereof into that number of shares of the Company’s Common Stock, equal to the outstanding principal balance of the Note, plus accrued but unpaid interest, divided by $2.00.  The Notes contained "anti-dilution" protection, such that if the Company were to conduct a qualifying equity transaction, the conversion price of the Notes would be the lower of $2.00 or 90% of the price of the qualifying equity transaction.  Management determined that the embedded conversion feature was a derivative liability and recorded a debt discount of $324,603 based on the estimated fair value of the derivative liability. Such amount was determined by a third-party valuation firm using a Monte Carlo simulation and is being amortized into interest expense over the term of the note.  Each Note was also accompanied by Warrants to purchase a number of shares of the Company’s Common Stock equal to 75% of the aggregate principal amount of the Notes divided by the lower of $1.10 or the price of a qualifying equity transaction.  Under ASC 815, management determined that each Warrant’s price-protection feature is also a derivative liability and recorded a debt discount of $1,007,940 based on the estimated fair value of the derivative liability.  This amount is being amortized into interest expense over the term of the note.

In November 2013, each Note was either repaid or converted into the Company’s Series B Offering. A total of $2,508,716 was repaid in principal and accrued interest.  The remaining Notes totaling $739,706 was converted into Company’s Series B Offering.

Significant assumptions used in such valuations included:

Expected life	5 years
Estimated volatility	75.0%
Risk-free interest rate	0.07% - 0.10%
Expected dividends	None

A summary of convertible notes payable, net as of December 31, 2013, is as follows:

	Amount
Outstanding, December 31, 2012	$	772,000
Notes issued		4,549,000
Notes repaid		(2,950,700	)
Notes converted to Common Stock		(1,690,300	)
Debt discount recorded		(1,332,543	)
Debt discount amortized		1,332,543
Outstanding December 31, 2013	$	680,000

Bridge Financing

Between October and December 2012, the Company consummated the sale of senior secured convertible notes (“Bridge Notes”) to a limited number of accredited investors, resulting in net proceeds to the Company of $725,000.  As additional consideration for the purchase of the Bridge Notes, each investor received 5,000 shares of the Company’s Common Stock per $25,000 of principal amount purchased.  Each Bridge Note has a term of 120 days, and accrues interest at 9% per annum.  A fee of 10% was added to each Bridge Note, as a lender’s fee.  The principal, interest and lender’s fee are convertible, at the option of the holder, into shares of the Company’s Common Stock at a price of $1.00 per share.  The Company has repaid $125,000 in principal, $12,500 in fees, and $4,830 in interest to certain holders of the Bridge Notes.  In April and May 2013, Bridge Notes in the aggregate principal amount, plus accrued interest, of $376,222 were converted into 376,225 shares of the Company’s Common Stock.  The maturities on the outstanding Bridge Notes was extended through November 29, 2013.

In December 2012, the Company issued promissory notes to certain investors, resulting in net proceeds to the Company of $47,000. These promissory notes have a term of 30 days, and included a lender’s fee of 10%. These promissory notes were repaid in full in January 2013.

In January 2013, we completed a private placement, wherein we issued an aggregate principal amount of $660,000 in unsecured convertible promissory notes (the “January Notes”) to certain purchasers.  As additional consideration for the purchase of the January Notes, each purchaser received 5,000 post-split shares of the Company’s Common Stock per $25,000 of principal amount purchased.  The January Notes have a term of 120 days and accrue interest at a rate of 9% per annum.  At maturity, the holders of the January Notes have the right to convert all principal and accrued but unpaid interest into shares of Common Stock at a conversion price equal to $1.00 per share.  In May 2013, the maturity date of certain January Notes in the aggregate principal amount of $500,000 was extended to November 29, 2013, and the remaining balance of the January Notes, totaling $180,568 of principal and accrued interest, were converted into 180,568 shares of the Company’s Common Stock.

In February and March 2013, we completed a private placement, wherein we issued unsecured convertible promissory notes in the aggregate principal amount of $389,000 (the “March Notes”) to certain purchasers.  As additional consideration for the purchase of the March Notes, each purchaser received 5,000 shares of the Company’s Common Stock per $25,000 of principal amount purchased.  The March Notes mature on November 29, 2013 and accrue interest at a rate of 9% per annum.  Pursuant to the terms of the March Notes, each note is convertible into shares of the Company’s Common Stock at a conversion price equal to $1.00 per share.  In May 2013, March Notes in the aggregate principal amount, plus accrued interest, of $234,543 were converted into 234,543 shares of the Company’s Common Stock.

In April 2013, we completed a private placement, wherein we issued unsecured convertible promissory notes in the aggregate principal amount of $195,000 (the “April Notes”) to certain purchasers.  As additional consideration for the purchase of the April Notes, each purchaser received 5,000 shares of the Company’s Common Stock per $25,000 of principal amount purchased.  The April Notes mature on November 29, 2013 and accrue interest at a rate of 9% per annum.  Pursuant to the terms of the April Notes, the April Notes are convertible into shares of the Company’s Common Stock at a conversion price equal to $1.00 per share.  In May 2013, April Notes totaling $69,484 of principal and accrued interest were converted into 69,485 shares of the Company’s Common Stock.

In May 2013, we completed a private placement, wherein we issued unsecured promissory notes in the aggregate principal amount of $600,000 (the “May Notes”) and unsecured convertible promissory notes in the aggregate principal amount of $150,000 (the “Convertible May Notes”) to certain purchasers.  As additional consideration for the purchase of the Convertible May Notes, each purchaser received 5,000 shares of the Company’s Common Stock per $25,000 of principal amount purchased.

The May Notes matured on August 6, 2013 and accrued interest at a rate of 12% per annum.  In connection with, and as further consideration for the purchase of the May Notes, the Company issued a total of 600,000 5-year warrants to purchase shares of the Company’s Common Stock at a price of $1.10 per share to the purchasers.  The Convertible May Notes mature on November 29, 2013 and accrue interest at a rate of 9% per annum.  Each Convertible May Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $1.00 per share.  In June 2013, the May Notes were converted into the Notes from the Offering initiated in June, 2013.

In November 2013, the Company repaid $397,473 in outstanding principal, lender’s fees and interest on its outstanding convertible notes. In addition, $235,778 of outstanding principal, lender’s fees and interest on its outstanding convertible notes were converted into the Company’s Series B Offering.

Term Loan

In November 2013, the Company secured a commercial term loan in the amount of $2.0 million from Avid Bank.  The loan has a term of 2 years, accrues interest at 2.75% above prime, is secured against virtually all of the Company’s assets, and requires an Asset Coverage Ratio of assets to outstanding principal of 1.5.