NOTE 5 - STOCKHOLDER NOTES PAYABLE

(a) Loans Converted into Common Stock

Prior to conversion in December 2011, the Company had $200,000 outstanding on a $400,000 (Inventory Funding Loan) revolving note payable with a stockholder.  The note had a stated interest rate of 8% per annum and was for inventory purchases.  Interest accrued daily and was payable upon maturity or conversion as amended.  Advances on the note were collateralized by substantially all assets of the Company. 

The Company had another revolving note payable (Operating Capital Loan) in the amount of $1,000,000, due to the same stockholder.  Prior to conversion in December 2011, the Company had $830,000 outstanding on this note. The note bore interest at 8% per annum and a maturity date of May 2012.  The purpose of this note was to provide bridge capital for financing.  Advances on the note are collateralized by substantially all of the assets of the Company. 

In August 2011, the Company amended the terms of both the Inventory Funding Loan and Operating Capital Loan to provide for conversion feature of the notes payable into shares of the Company’s common stock at $1 per share. 

In September 2011, the Company entered into an additional note payable (Short-Term Loan) agreement with the same stockholder for $150,000.  The note matured in May 2012 and bore interest at 8% per annum as amended, and is convertible into the Company’s equity securities in the same terms as the above Loans.

In December 2011, the combined full outstanding principal balance of $1,180,000 on the Inventory Funding Loan, Operating Capital Loan and Short-Term notes payable together with $84,228 of accrued interest on these notes were converted into 3,735,419 (1,264,228 shares pre-reverse Acquisition) shares of common stock at a conversion price of $.34 ($1.00 per share pre-reverse Acquisition).

(b) Revolving Loans

In October 2011, we entered into a new revolving promissory note agreement (Secondary Operating Capital) with a stockholder for $1,000,000. The revolving promissory note bears interest at 8%, is due on September 30, 2013, as amended, and is secured by substantially all of the assets of the Company. As of June 30, 2012 the balance outstanding payable on the note was $600,000.

On March 7, 2012, we entered into an additional note payable agreement with the same stockholder for $250,000. The note is due on on March 7, 2014 and bears interest at 8% per annum. As of June 30, 2012 the balance outstanding payable on the note was $250,000.

On September 24, 2012, the Company entered into a new revolving promissory note agreement (Unrestricted Line of Credit) with a stockholder for $1,500,000. The revolving promissory note bears interest at 8% per annum, all principal and accrued interest are due and payable on September 24, 2014. See Note 12.