NOTE 12 – CONVERTIBLE NOTE PAYABLE

Our convertible note payable consists of the following:


	September 30, 2014			December 31, 2013
Convertible note payable-Typenex	$	1,657,500		$	—
Less – current portion		(282,500	)		—
Convertible note payable-noncurrent		1,375,000			—
Less – unamortized discount		(659,082	)		—
Convertible note payable-noncurrent, net	$	715,918		$	—

Convertible note payable-current portion	$	282,500		$	—
Less – unamortized discount		(235,417	)		—
Convertible notes payable-current portion, net	$	47,083		$	—

On August 13, 2014, we entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of a 10% convertible promissory note (the “Note”) in the principal amount of $1,657,500 (the “Closing Amount”) convertible into shares of our common stock. The Note has an original issue discount (“OID”) of $150,000. Typenex retained $7,500 of the Closing Amount for due diligence and legal bills related to the transaction and paid $25,000 on our behalf to a third party for brokerage fees (together, the “Fees”). The financing closed on August 13, 2014 (the “Closing Date”).

In addition, we issued to Typenex warrants (the “Warrants”) to purchase 997,692 shares of our common stock, subject to adjustment in the event of a cashless exercise, as defined in the Warrant. Warrants for 170,044 shares were immediately exercisable with the remainder only becoming exercisable, in five tranches, if and when the Investor Notes (see Note 8 above) are paid. The Warrants are exercisable at $3.00 per share (the “Exercise Price”) for a period of three years on a cash or cashless basis. If we, at any time while the Warrants are outstanding, sell or issue our common stock or securities convertible into or exercisable for shares of our common stock, including common stock issued under the Note, at an effective price per share less than the Exercise Price, then, subject to a few exceptions set forth in the Warrant, the Exercise Price will be reduced to such lower price provided that the number of shares of common stock issuable under the Warrant may not exceed a number of shares equal to three times the number of shares of common stock issuable under the Warrants as of the Closing Date.

The Note bears interest at the rate of 10% per annum. All interest and principal must be paid twenty-five months after the date of the first borrowing under the Note (the “Maturity Date”). The outstanding balance on the Note is convertible into common stock, at Typenex's option, at $3.00 per share (the “Optional Conversion”).

Beginning on the date that is six months after the date of the first borrowing and on the same day of each month thereafter until the Maturity Date, we must pay to Typenex the lesser of (i) $82,875, plus the sum of any accrued and unpaid interest, or (ii) the then outstanding balance under the Note. Payments of each installment amount may be made in cash or, as long as we are in compliance with certain terms and conditions set forth in the Note, by converting such installment amount into our common stock. The conversion price for each installment conversion will be the lesser of (i) the $3.00, and (ii) 70% (the “Conversion Factor”) of the average of the three lowest closing bid prices in the 20 trading days immediately preceding the applicable conversion (the “Market Price”), provided that if at any time the average of the three lowest closing bid prices in the 20 trading days immediately preceding any date of measurement is below $1.00, then in such event the then-current Conversion Factor shall be reduced to 65% for all future Conversions, subject to other reductions set forth in the Note. In the event we elect to prepay all or any portion of the Note, we are required to pay to Typenex an amount in cash equal to 125% multiplied by the sum of all principal, interest and any other amounts owing. The Note is secured by all of our assets.

On a date that is 20 trading days from each date that we deliver conversion shares to Typenex, there is a true-up date in which we will deliver additional shares if the installment conversion price on that date is less than the installment conversion price used in the applicable installment notice. These additional shares will be equal to the difference between the number of shares that would be delivered to Typenex at the time of the true-up date and the amount originally delivered.

On August 15, 2014, we received net cash proceeds from our initial borrowing under the Note of $225,000 as follows: total initial borrowing of $282,500 less the $32,500 of Fees and OID applicable to the initial borrowing of $25,000. We expensed the Fees immediately as interest expense as the initial borrowing and all subsequent tranches were immediately convertible into our common stock by the lender.

In addition, Typenex has the option to convert all or any part of the outstanding balance of principal, interest, OID and other fees (the “Conversion Feature”) in six tranches; an initial tranche of $282,500 plus interest and other fees owed and five subsequent tranches of $275,000 plus interest and other fees owed for an aggregate total of $1,657,500 plus interest and other fees owed at a conversion price of $3.00 per share. Currently, only the $282,500 initial tranche is conversion eligible. The five subsequent $275,000 tranches become conversion eligible if and when Typenex repays to us the corresponding $250,000 Investor Note(s).

With regards to our $282,500 initial borrowing, on August 15, 2014, we recorded the $25,000 of OID plus the $118,373 fair value of the first Warrant issued, plus $139,127 of the $151,937 fair value of the initial borrowing conversion feature, or, in total, $282,500, as debt discount and recorded the excess, $12,810, as loss on origination of derivative liability in our condensed statements of operations. We are amortizing the $282,500 debt discount associated with the initial borrowing on a straight line basis, which approximates the effective interest method, over the nine month repayment term of the initial borrowing.


	Nine Months Ended September 30, 2014
Debt discount - OID	$	25,000
Debt discount – Warrant #1		118,373
Debt discount – conversion feature		151,937
Less: loss on origination of derivative		(12,810	)
Debt discount – beginning balance		282,500
Less: amortization of debt discount		(47,083	)
Unamortized debt discount – end of period	$	235,417

With regards to the remaining $1,375,000 owed under the Note, we recorded the remaining $125,000 of OID plus the $576,151 fair value of the remaining Warrants issued, or, in total, $701,151, as debt discount. We are amortizing the $701,151 debt discount on a straight line basis, which approximates the effective interest method, over the twenty-five month term of the Note.

Our unamortized debt discount applicable to the noncurrent portion of the Note consists of:


	Nine Months Ended September 30, 2014
Debt discount - OID	$	125,000
Debt discount – Warrants #2 - #6		576,151
Debt discount – beginning balance		701,151
Less: amortization of debt discount		(42,069	)
Unamortized debt discount – end of period	$	659,082

Our convertible note, net consists of:


	Nine Months Ended September 30, 2014
Note	$	1,657,500
Debt discount – OID		(150,000	)
Debt discount – Warrants		(694,524	)
Debt discount – conversion feature		(151,937	)
Debt discount – conversion feature expensed as loss on origination of derivative		12,810
Convertible note, net – beginning of period		673,849
Amortization of debt discount		89,152
Convertible note, net – end of period	$	763,001

During the three and nine months ended September 30, 2014, we recorded debt discount amortization and interest expense of $89,152 and $21,312, respectively, applicable to this Note.

The fair value of the conversion feature applicable to the $21,312 of accrued interest was $11,609 and this amount was recorded as interest expense and an increase to our derivative liability in our condensed financial statements.