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5. Debt

15 Months Ended

Mar. 31, 2014

Note 5 Debt

(A) Summary of Debt Transactions

At December 31, 2013 and 2012, debt consists of the following:

	2013			2012
Notes payable	$	503,203		$	739,534
Notes payable - related party		26,108			133,000
Convertible notes		2,194,133			—
Convertible notes - related party		50,000			—
Less: debt discount		(1,925,191	)		—
Debt - net		848,253			872,534
Amortization of debt discount		92,304			—
Less: current portion - notes payable		(98,086	)		(236,325	)
Less: current portion - notes payable - related party		(26,108	)		(133,000	)
Long term debt - net	$	816,362		$	503,209

Notes Payable

	Third Party			Related Party			Totals
Balance December 31, 2011	$	849,640		$	6,000		$	855,640
Proceeds		120,000			127,000			247,000
Repayments		(230,106	)		—			(230,106	)
Balance December 31, 2012		739,534			133,000			872,534
Proceeds		160,000			61,655			221,655
Repayments		(116,331	)		(35,547	)		(151,878	)
Conversion of note payable to convertible debt		(180,000	)		(50,000	)		(230,000	)
Debt forgiveness		(100,000	)		(83,000	)		(183,000	)
Balance December 31, 2013	$	503,203		$	26,108		$	529,311

Convertible Debt - Net

The Company has recorded derivative liabilities associated with these convertible debt instruments, as more fully discussed at Notes 6 and 10 (C).

	Third Party			Related Party		Totals
Balance December 31, 2012	$	—		$	—	$	—
Proceeds		2,000,000			—		2,000,000
Repayments		—			—		—
Conversion of note payable to convertible debt		180,000			50,000		230,000
Conversion of accrued interest into convertible debt		14,133			—		14,133
Less: gross debt discount recorded		(1,925,191	)		—		(1,925,191	)
Add: amortization of debt discount		92,304			—		92,304
Balance December 31, 2013	$	361,245		$	50,000	$	411,245

In connection with the $2,000,000 convertible debt offering in November 2013, the Company issued 3,672,134 detachable warrants. The notes and warrants were treated as derivative liabilities, see Notes 6 and 10.

The Company was required to register the underlying convertible debt shares and warrants within 60 days (January 2014), and for the registration statement to become effective 90 days after this date (April 2014). As of the date of the accompanying report, the registration statement has not yet been filed, which upon filing, must be declared and remain effective. As a result of not filing the registration statement timely, the Company began accruing liquidated damages equal to 2% of the gross proceeds which is equivalent to $40,000 per month each for May and June 2014. The liquidated damages clause is capped at 15% of gross proceeds raised. If the Company fails to pay the liquidated damages, an interest rate of 18% will be applied to the outstanding debt instruments.

In the event any of these notes are prepaid prior to maturity, a penalty rate of 10% would apply for any payments occurring between months 12 – 18 and a 5% rate for any payments occurring between 19-24 months.

All convertible debt is secured by a 2^nd priority lien on all assets of the Company. The Company is subordinate only to a third party bank loan, which is currently included as a component of notes payable ($503,203).

(B) Terms of Debt

In 2012, all outstanding debt had the following terms:

• Unsecured

• Due on demand

• Interest ranging from 10% - 12%

In 2013, all outstanding debt had the following terms:

• Unsecured -$26,108

• Secured - $503,203

• Due:

• On demand ($26,108 – related party);

• Due August 29, 2018 ($503,203 – third party)

• Due November 26, 2015 ($2,244,133 – all convertible debt – gross – secured by all assets of the Company)

• Interest

• Non-interest bearing on notes issued prior to 2013 (see 2012 notes above); or

• Ranging from 12% - 15%

All convertible debt and related warrants issued with the convertible notes in 2013 were convertible at $0.25 and $0.375/share, respectively; however, given the existence of a ratchet feature, these debt and warrant instruments could potentially carry a lower conversion price in the future in the event any future offering offered a lower per share amount for a conversion.

(C) Future Commitments

At December 31, 2013, the Company has outstanding debt of $816,362 (See Note 5 (A)). Future minimum repayment obligations are as follows:

Year Ended December 31
2014	$	124,194
2015		2,649,250
Less: unamortized debt discount		(1,832,888	)
Less: current maturities		(124,194	)
Debt - long term	$	816,362

- 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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