NOTE 10 - STOCKHOLDERS’ DEFICIENCY

During the quarter ended March 31, 2011, the Company issued 1,866,667 shares of common stock and received proceeds of $180,000 for the exercise of warrants.  In addition, the Company issued 400,000 shares of common stock and received proceeds of $50,000 from investors.  Pursuant to a private placement, convertible debentures were issued during the quarter ended March 31, 2011, for which a discount of $62,500 was recorded, and warrants to purchase 1,240,000 shares of common stock were repriced, resulting in deferred finance costs of $57,706.   Finally, the Company issued 100,000 shares of common stock for services, valued at $25,000.

During the quarter ended June 30, 2011, the Company issued 740,000 shares of common stock and received $92,500 in proceeds from investors.  The Company issued 500,000 shares of common stock and received $50,000 in proceeds upon the exercise of warrants. Pursuant to a private placement, convertible debentures were issued during the quarter ended June 30, 2011, for which a discount of $52,000 was recorded. The Company issued warrants to purchase 75,000 shares of common stock valued at $8,584 for services, and issued 333,334 shares of common stock in satisfaction of an obligation to issue common stock valued at $50,000.

During the quarter ended September 30, 2011, the Company issued 1,100,000 shares of common stock and received $130,000 in proceeds from investors.  The Company issued 16,000 shares of common stock upon the cashless exercise of 24,000 common stock warrants.  Pursuant to a private placement, convertible debentures were issued during the quarter ended September 30, 2011, for which a discount of $15,921 was recorded. In addition, in July, 2011, the Company issued a significant shareholder, Christopher Maggiore, warrants to purchase 3,000,000 shares at an exercise price of $.25 per share for a term of three years.  These warrants were issued to Mr. Maggiore in consideration Mr. Maggiore providing financing to the Company which prevented him from being able to avail himself of a company offer to certain warrant holders to exercise their warrants on a reduced exercise price basis. The Company recognized finance costs of $203,069 in connection with the grant.

During the quarter ended December 31, 2011, the Company issued 37,594 shares of common stock, valued at $10,000, to a consultant.  The Company issued 920,000 shares of common stock and warrants to purchase 180,000 shares of common stock and received $115,000 in proceeds from investors.  The Company issued 1,317,398 shares of common stock, and warrants to purchase 1,976,097 shares of common stock in repayment of loans from a significant shareholder totaling $164,675, and recognized finance costs of $178,538 from this transaction.

On December 2, 2011, the Company and HEP Investments, LLC, a Michigan limited liability company (“Lender”), entered into the following documents, effective as of December 1, 2011: (i) a Loan Agreement under which the Lender has agreed to advance up to $2,000,000 to the Company, subject to certain conditions, (ii) a Convertible Secured Promissory Note in the initial principal amount of $600,000 (“Note”) and (iii) (a) a Security Agreement, under which the Company granted the Lender a security interest in all of its assets and (b) an IP security agreement under which the Company and its subsidiaries granted the Lender a security interest in all their respective intellectual properties, including patents, in each case order to secure their respective obligations to the Lender under the Note and related documents.  In addition, the Company’s subsidiaries have guaranteed the Company’s obligations under the Note.

As of December 5, 2011, the Lender has advanced the Company $600,000, consisting of $500,000 in cash and $100,000 previously advanced by the Lender in connection with a transaction previously disclosed in a Current Report on Form 8-K dated September 12, 2011.   The Lender has agreed to advance the remaining $1,400,000 in $250,000 increments (final increment of $150,000) upon request of the Company’s CEO, subject to satisfaction of certain conditions.  In addition, the Company has agreed to (i) issue the Lender warrants to purchase 1,666,667 shares of common stock at an exercise price of $.12 per share (including a cashless exercise provision), expiring 09/30/2016 and (ii) enter into a Registration Rights Agreement with respect to all the shares of common stock issuable to the Lender in connection with the Loan transaction, in each case subject to completion of funding of the full $2,000,000 called for by the Loan Agreement.

Amounts advanced under the Note are (i) secured by all the Company’s assets, (ii) convertible into the Company’s restricted common stock at the lesser of $.12 per share or a 25% discount off of the ten day trailing quoted price of the common stock in the over the counter (OTC) market, (iii) bear interest at the rate of 11% per annum and (iv) must be repaid as follows:  accrued interest must be paid on the first and second anniversary of the Note and unpaid principal not previously converted into common stock must be repaid on the second anniversary of the Note (December 31, 2013). The Company has also agreed to a specified use of proceeds.  The Note may be prepaid upon sixty days written notice, provided that the Company shall be required to pay a prepayment premium equal to 5% of the amount repaid.

The Company has made certain agreements with the Lender which shall remain in effect as long as any amount is outstanding under the Loan.  These agreements include an agreement not to make any change in the Company’s senior management, without the prior written consent of the Lender. Two representatives of the Lender will have the right to attend Board of Director meetings as non-voting observers.

During the quarter ended March 31, 2012, as compensation for serving as a member of the board of directors, the Company granted warrants to purchase 200,000 shares of common stock to Philip M. Rice (CFO and a Director) in January, 2012, at an exercise price of $.12 per share.  The warrants have a term of three years and vest as follows: 50,000 were vested on the grant date with the remainder vesting throughout 2012 on a quarterly basis. The warrants vested during the quarter ended March 31, 2012, and each subsequent quarter, were valued at $10,721 using the Black Scholes pricing model with the following assumptions: closing stock price of $.24, an expected volatility of 125.11%; annual rate of dividends 0%;  and a risk free  rate of 0.33%. In addition, as part of a convertible debt agreement entered into with Venture Group (see Note 7 – Convertible Debt), the Company recorded a debt discount of $332,000 and finance costs of $293,282.

During the quarter ended June 30, 2012, the Company sold 400,000 shares of its common stock and 40,000 common stock warrants to a related party for proceeds of $50,000 as part a subscription agreement to issue 2,400,000 common shares and 240,000 warrants at $.125 per unit (See Note 9 – Related Party Transactions – Stock Subscription Agreements).

During the quarter ended September 30, 2012, the Company sold 874,467 shares of its common stock and 87,447 common stock warrants to a related party for proceeds of $109,308 as part a subscription agreement to issue 2,400,000 common shares and 240,000 warrants at $.125 per unit (See Note 9 – Related Party Transactions – Subscription Agreements).  In addition the Company issued 120,000 shares of its common stock and 12,000 common stock warrants to another related party at a unit price of $.125 for total proceeds of $15,000. Also, during the quarter, the Company issued 1,720,000 shares of common stock and 172,000 common stock warrants to investors at a unit price of $.125 for total proceeds of $215,000. Finally, as compensation for serving as a member of the board of directors, the Company granted warrants to purchase 50,000 shares of common stock to Brian Young (a Director) in July, 2012, at an exercise price of $.12 per share.  The warrants have a term of three years and vest as follows: 12,500 were vested on the grant date with the remainder vesting on a quarterly basis. The warrants vested during the quarter ended September 30, 2012, and each subsequent quarter, were valued at $2,773 using the Black Scholes pricing model with the following assumptions: closing stock price $.23, an expected volatility of 114.66%; an annual rate of dividends 0%; a risk free rate of 0.25%.

During the quarter ended December 31, 2012, the Company sold 1,125,533 shares of its common stock and 112,553 common stock warrants to a related party for proceeds of $140,692 in completion of a subscription agreement to issue 2,400,000 common shares and 240,000 warrants at $.125 per unit (See Note 9 – Related Party Transactions – Stock Subscription Agreements).  In addition, the Company issued 80,000 shares of its common stock and 8,000 common stock warrants to another related party at a unit price of $.125 for total proceeds of $10,000. Also, during the quarter, the Company issued 600,000 shares of common stock and 60,000 common stock warrants to investors at a unit price of $.125 for total proceeds of $75,000. Also, during the quarter, the Company received $35,000 from an investor for 350,000 common stock warrants that were exercisable at $.10 per share. Finally, an investor received 11,797 shares as part of a cashless exercise of 233,333 common stock warrants that had an exercise price of $.15.

A summary of the status of the Company’s warrants is presented below.

Warrants outstanding and exercisable by price range as of December 31, 2012 were as follows: