On December 21, 2012 the Company issued senior secured convertible notes (the “Convertible Notes”). The term of the Convertible Notes include an eight month maturity period and an annual interest rate of 12% which is accrued until payment or until the Convertible Notes are converted into equity. The Convertible Notes were issued at a price of $200,000 per unit, for total gross proceeds of $2,000,000 with an original issue discount of 0.2%. On March 28, 2013, the Company issued additional Convertible Notes for total gross proceeds of $1,130,000 with an original issue discount of 0.2%.

The Convertible Notes are convertible at a per share conversion price of $0.25, which is subject to a one-time reset right (“Conversion Price Reset”) as well as “weighted average” and other customary anti-dilution protections (“Debt Conversion Feature”). The Conversion Price Reset will be available on the earlier of (the “Reset Date”) (i) the date of maturity of the 12% Notes or (ii) the completion of a subsequent financing by the Company of at least $5,000,000, if the closing price of the Company’s stock is less than $0.30 on the Reset Date. For (i) the conversion price after the reset will be equal to 70% of the 5-day VWAP immediately preceding the Reset Date. For (ii) the Conversion Price after the reset will be equal to 70% of 5-day VWAP immediately after the Reset Date.

In connection with the issuance of Convertible Notes, 12,520,000 five-year cashless exercise warrants (“Convertible Note Warrants”) were issued with “weighted average” and other customary anti-dilution protections. 6,260,000 Convertible Note Warrants are exercisable at $0.50 and 6,260,000 Convertible Note Warrants are exercisable at $0.25 (see Note 6 for further detail).

The fair value of the Convertible Note Warrants and the Debt Conversion Feature, issued as of December 21, 2012, totaling $1,349,720 is recorded as a debt discount in the accompanying balance sheet and is amortized as interest expense in the accompanying statement of operations over the term of the Convertible Note using the effective interest method (see Note 6 for further detail).

The fair value of the Convertible Note Warrants and the Debt Conversion Feature, issued on March 28, 2013, totaling $272,697 is recorded as a debt discounts in the accompanying balance sheet and is amortized as interest expense in the accompanying statement of operations over the term of the Convertible Note using the effective interest method (see Note 6 for further detail).

For certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The Convertible Notes issued on December 21, 2012 and March 28, 2013 were issued with an original issue discount of 0.2%. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the term of the Convertible Note.

Convertible Note Face Value	$	3,130,000
Debt Discount
Convertible Note Warrant Derivative		908,649
Conversion Feature Derivative		713,768
Original Issue Discount		6,260
Total Debt Discount	$	1,628,677
Amortization of Debt Discount, as of March 31, 2013		(551,502	)
Debt Discount, Net	$	1,077,175

Convertible Note Carrying Value, at March 31, 2013	$	2,052,825

The Company paid Aegis Capital Corp. (“Aegis”) who acted as the sole placement agent for the first and second closings of the Convertible Notes Offering a commission of 10% of the funds raised in the Convertible Notes offering and a 3% non-accountable reimbursement of its expenses, for a total payment of $406,900, which is recorded as a deferred financing cost in the accompanying balance sheet.

The Company incurred additional fees of $96,556 for legal and escrow agent fees, which are recorded as a deferred financing cost in the accompanying balance sheet.

In addition, Aegis received five-year warrants (the “Convertible Note Broker Warrants”) to purchase 2,504,000 shares of the Company’s common stock. The Convertible Note Broker Warrants were issued with “weighted average” and other customary anti-dilution protections. The Convertible Note Broker Warrants are identical to the Convertible Note Warrants in all material respects, except that they are exercisable at $0.25. The fair value of the Convertible Note Broker Warrants of $194,381 is recorded under deferred financing costs in the accompanying balance sheet (see Note 6 for further detail).

The Convertible Note holders were sold 6,260,000 free trading shares by non-affiliated, third party shareholders of the Company at par value. Although the Company was not a party to the sale of these shares by third party shareholders, per FASB ASC Topic 718, the fair value of this non-affiliated third party transaction is recognized by the Company as a deferred financing cost of the Convertible Note transaction. Additionally, the Company will provide no reimbursement or compensation to the selling shareholders of the 6,260,000 free trading shares. As such, the Company does not anticipate recognizing any further expenses in relation to this third-party transaction. The fair value of this third party transaction of $1,537,940 is recorded under deferred financing costs in the accompanying balance sheet.

On March 29, 2013, the Company paid $15,000 for diligence fees for fees related to a potential future transaction, which is recorded as a deferred financing cost in the accompanying balance sheet.


Placement agent and other fees associated with Convertible Note offering	$	503,457
Convertible Note Broker Warrants		194,381
Third Party Share Grant		1,537,940
Total Deferred Financing Costs	$	2,235,777
Amortization of Deferred Financing Costs, as of March 31, 2013		656,623
Deferred Financing Costs, Net, as of March 31, 2013	$	1,579,154