5. Issuance of Debt

Convertible Secured Promissory Notes

On February 22, 2013 and December 28, 2012, the Co-Chairman of the Board of Directors loaned $600,000 and $500,000 to the Company in two convertible secured promissory notes (the “Convertible Notes”) maturing on August 22, 2013 and June 28, 2013, respectively, bearing interest rates at eight percent (8%) per annum payable at maturity. Each Convertible Note is secured pursuant to a certain Stock Pledge Agreement dated December 13, 2012 and includes a conversion feature which provides for the note to automatically convert into the Company’s common shares upon the consummation of a “Qualified Financing,” defined as an equity investment in one or a series of related transactions resulting in not less than $2,000,000, including the amount converted under the Convertible Notes. The number of common shares issued will be equal to the Convertible Notes’ principals divided by the price per share paid by the investors in the Qualified Financing. (See Notes 5.a below and Note 6)

Debt Conversion

Conversion of Convertible Secured Promissory Notes

The March 28, 2013 sale of common stock (see Note 6) was the impetus to the Qualified Financing, triggering an automatic conversion of the Convertible Notes into the Company’s common shares at $0.03 per share. For every two common shares purchased by means of surrender of the Convertible Notes, the holder received a warrant to purchase one share of common stock at $0.04 per share, for a term of five years. A total of 36,666,666 common shares and 18,333,333 warrants were issued.

The Company accounted for this transaction in accordance with ASC 470, Debt, as an extinguishment of debt, whereby a gain or loss was calculated as the difference between the reacquisition price and net carrying value of the debt. The reacquisition price was determined as the sum of the fair value of the common stock and new warrants. The warrants were valued using the Black-Scholes fair value model.

For the six months ended June 30, 2013, a loss of approximately $267,000 was recorded on the transaction based on a reacquisition price of approximately $1,367,000 and fair value of the debt exchanged of approximately $1,100,000.

Conversion of Subordinated Notes Payable

On March 28, 2013, certain subordinated notes payable holders, all of whom are directors and officers of the Company, agreed to convert $110,000 subordinated notes payable into the Company’s common shares at $0.03 per share. For every four common shares purchased by means of surrender of the subordinated notes payable, the holders received a warrant to purchase one share of common stock at $0.04 per share, for a term of five years. A total of 3,666,665 common shares and 916,665 warrants were issued.

For the six months ended June 30, 2013, a loss of approximately $26,000 was recorded on the transaction based on a reacquisition price of approximately $136,000 and fair value of the debt exchanged of approximately $106,000.

Secured Promissory Notes

On December 13, 2012, an unrelated party and the Co-Chairman of the Board of Directors loaned $300,000 and $200,000 to the Company in two secured promissory notes (the “Secured Notes”) maturing on June 13, 2013, respectively, bearing interest rates at eight percent (8%) per annum payable at maturity. On June 13, 2013, the Secured Notes were extended to July 8, 2013 at the same terms. On July 8, 2013, while interest rates remain un-changed, the Secured Notes’ maturity dates were extended as follows:

		Maturity Dates
Principal		31-Oct-13		31-Dec-13

$	300,000	$	100,000	$	200,000
$	200,000	$	66,667	$	133,333