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Note 6 - Loans Payable

9 Months Ended

Sep. 30, 2014

NOTE 6 – LOANS PAYABLE

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 future inventory and proceeds from the sale of that inventory as described in the deed of assignment. The loan was payable on June 23, 2013, six months from the date of the agreement. We recognized $81,900 and $54,114 of interest expense and $0 and $14,108 for loan cost amortization within interest expense for the six months ended September 30, 2014 and 2013, 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 Loans Payable are as follows as of September 30, 2014:

		September 30, 2014
2014		3,182,425
		$ 3,182,425

On May 9, 2014 we issued an unsecured Convertible Promissory Note for cash to an accredited investor in the amount of $132,876. The note bears interest at an annual rate of 7% per year, payable on the six month and one year anniversary of the note. The interest is payable at the option of the Company in either cash or shares of common stock at the market price on the interest payment dates as defined in the note. The note is convertible at any time at the option of the holder at a rate of $0.50 per share into 265,751 shares of our common stock. We evaluated the Note and determined it had a beneficial conversion feature due to the conversion price being lower than the market price of our common stock of $0.86 per share on the date of issuance. Accordingly, we recognized a discount related to the beneficial conversion feature associated with the Note in the amount of $95,671 for the nine months ended September 30, 2014.

On June 30, 2014 the holder of the note converted the principal amount by its terms into 265,751 shares of common stock. In addition, the Company issued 1,440 shares of common stock related to the accrued interest of $1,325 based on the market price on the date of conversion of $0.92 per share.

We recognized interest expense, comprised of $1,325 related to the stated interest rate of the note and $95,671 related to the beneficial conversion feature for the nine months ended September 30, 2014.

The proceeds from the Convertible Promissory Note discussed above were used to pay one of the judgments payable in full as discussed in Note 4.

- 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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