NOTE 3 – NOTES PAYABLE

In April 2013, a 14%, $100,000 convertible note matured and was renewed on the same terms until July 31, 2013 at which time the note was again renewed. The new note utilizes the same terms as the previous note and has a maturity date of October 31, 2013.

In May 2013, a zero-coupon note in the amount of $230,000 matured and was replaced by a new note of similar terms with the same face value and a maturity date of August 31, 2013.

On March 15, 2013, we executed an agreement with a creditor to modify the terms of a previously matured but unpaid note for $1.4 million. Under such modified terms, the maturity date was extended to January 31, 2014 and the conversion price per common share was reduced to $0.125. In addition, the exercise price per common share of a warrant issued in conjunction with the note was reset to $0.22. We also assigned a customer receivable from our former Puerto Rico client and a potential arbitration recovery to the creditor as a source of future repayment of a second loan from the creditor of $625,000 and a $75,000 loan from an individual related to the creditor. The modification was accounted for as a troubled debt restructuring, but we recognized no gain because the effective interest rate of the modified promissory note was less than the effective interest rate of the original promissory note.

On May 8, 2013, by agreement with the creditor, the maturity date of the $625,000 loan was extended to July 15, 2013, the conversion price per common share was reduced to $0.125, and the exercise price per common share of a warrant issued in conjunction with the note was likewise decreased $0.22. However, the note was not repaid on its July 15, 2013 due date and is currently the subject of ongoing resolution negotiations. The $75,000 loan from the creditor-related individual was repaid on May 6, 2013.

In addition, we were unable to repay our 14% senior promissory notes of approximately $1.8 million on their maturity date of April 15, 2013. However, prior to June 30, 2013, we completed agreements to extend the maturity date to April 15, 2014, for approximately $1.7 million of the notes. We are currently in negotiations with the remaining holders.

On May 3, 2013, we entered into a Senior Secured Revolving Credit Facility Agreement that will allow us to borrow up to $5,000,000 to fund our general working capital needs. On the closing date, our current maximum allowable amount to borrow was $1,000,000. Increased borrowing amounts above the $1 million are subject to the sole and absolute discretion of the lender. Our initial draw on the credit facility occurred May 3, 2013 in the amount of approximately $884,000, which represents an initial draw of $1 million less transaction expenses. As of August 8, 2013, our current outstanding balance on the credit facility is approximately $800,000 and there is currently no availability to draw additional funds on the credit facility. The credit facility is guaranteed by the current and future assets of CompCare and its subsidiaries, with the exception of our Puerto Rico subsidiary. Borrowings under the credit facility will bear interest at an annual rate of 12%, payable weekly. The credit facility will mature on November 3, 2013. The Agreement contains financial covenants such as, but not limited to, minimum revenues, positive earnings before interest, tax, depreciation and amortization expenses, and loan-to-value ratio. The Agreement also specifies events of default and related remedies, including acceleration and increased interest rates following an event of default.

Loans under the credit facility will be evidenced by a Revolving Convertible Promissory Note. In the event of a default by the Company, the lender may convert all or any portion of the outstanding principal, accrued but unpaid interest and other sums payable under the Note into shares of our common stock at a price equal to (i) the amount to be converted, divided by (ii) 85% of the lowest daily volume weighted average price of our common stock during the five business days immediately prior to the conversion date. The Note or any portion thereof may also be converted in a likewise manner with the consent of the Company.

As consideration for investment banking and advisory services provided to us by the lender, we paid a fee to the lender in the form of 1,470,588 restricted shares of our common stock, which in accordance with the terms of the Agreement, was equivalent to $125,000. The Agreement specifies that if the lender has not realized $125,000 in cash proceeds from the sale of the shares within one year following the Agreement date, we will issue to the lender additional shares of our common stock such that upon lender’s sale of such additional shares, lender may realize $125,000 in cash proceeds. Alternatively, one year after the Agreement date, the lender may require us to redeem any shares that remain in its possession for cash equal to $125,000 less proceeds realized by the lender on previous sales of shares of our common stock. Should the lender realize $125,000 of proceeds without selling all shares, the remaining shares will be returned to us.

The ability of the lender, at its sole discretion, to redeem all or a portion of the shares constitutes a put option. Although the put option is not eligible for settlement until one year after the Agreement date, if it were settled as of June 30, 2013, it would require us to pay the lender $125,000. The following settlement amounts would result from $.01 changes in our stock price below and above the $0.085 per share price at which the initial quantity of shares were issue to the lender, assuming settlement after one year:


Stock price		Additional funds due lender		(Shares due borrower) Shares due lender
$	0.115		n/a		(383,635	)
$	0.105		n/a		(280,114	)
$	0.095		n/a		(154,800	)
$	0.085		n/a		n/a
$	0.075	$	14,706		196,080
$	0.065	$	29,412		452,492
$	0.055	$	44,118		802,145

In the foregoing table, at a stock price of $.075 and below, the lender would receive cash or additional shares of stock, but not both.

The maximum amount that we potentially would be required to pay to redeem the shares issued to the lender is $125,000.

We were also unable to repay a $1 million loan from a related party when due May 8, 2013.

In July 2013, a 10%, $50,000 promissory note that had matured May 31, 2013 was repaid.