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Note 7 - Loans Payable

9 Months Ended

Sep. 30, 2013

NOTE 7 – LOANS PAYABLE

On December 20, 2012, we received gross proceeds of $100,000 pursuant to the terms of a Loan Agreement dated December 20, 2012. The loan is secured by a Deed of Assignment for certain inventory and all proceeds from the sale of the inventory. The loan is payable on June 23, 2013, six months from the date of the agreement. We prepaid interest of $25,000 for the term of the loan and $15,000 for loan costs, which are being amortized over the life of the note. We recognized $27,600 and $0 of interest expense and $54,114 and $0 for the three and nine months ended September 30, 2013 and 2012, respectively. On June 23, 2013 we did not repay the loan and it is in default. As a result of the default, the interest rate on the loan is 109.5% per annum from the date of default.

Total principal payments for future years for the Convertible Debentures described in Note 5 and the Loan Payable are as follows as of September 30, 2013:

		September 30, 2013
2013		4,005,975
		$ 4,005,975

On May 16, 2013 we received gross proceeds of $100,000 pursuant to a Loan Agreement as of that date. The term of the loan was for 30 days. Total interest for the 30 day term was $10,000, which was recognized as interest expense for the nine months ended September 30, 2013. On June 18, 2013 the holder of the loan converted $110,000 of principal and interest in our unit private placement as further described in Note 8 at a conversion price of $1.50 per share into 73,333 shares of common stock and three-year warrants to purchase common stock at an exercise price of $2.00 per share. The fair value of the common stock was $95,333 based on the market prices of our common stock on the date of conversion of $1.30 per share. The fair value of the three year warrants to purchase 73,333 shares of our common stock at an exercise price of $2.00 per share was $43,687. We recognized a loss on debt conversion for the nine months ended September 30, 2013 in the amount of $29,020.

The fair value of the warrants issued upon the conversion was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.42%, volatility – 91.4%, and an expected dividend rate of 0%.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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