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4. Litigation | 6 Months Ended
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Jun. 30, 2013
Warrants and options |
NOTE 4 - Litigation | In September of 2011, Maier & Company, Inc., filed a lawsuit in the Santa Barbara Superior Court against the Company and PSEI for alleged breach of a consulting agreement. In March 2013, the plaintiff obtained a judgment in the amount of $45,830. The parties entered into a settlement agreement allowing for a stipulation for entry of judgment. This judgment was paid by the Company in May 2013. In April 2012, Ned Sands filed a wrongful termination lawsuit in the Los Angeles Superior Court against the Company. In March 2013, the plaintiff sought and obtained entry of judgment in the amount of $22,500. The parties entered into a settlement agreement allowing for a stipulation for entry of judgment. This judgment has been satisfied and a notice of dismissal was filed with the Court in May 2013. In January 2013, the Company signed a term sheet (“Term Sheet”) with an outside financial firm (“Financial Firm”) to have that firm acquire certain portions of the Company’s liabilities to creditors, employees and former employees (“Creditors”) in exchange for common stock. The Financial Firm entered into agreements in July 2013 with such Creditors to acquire approximately $1.9 million of liabilities and filed a complaint on July 29, 2013 with the Second Judicial Circuit, Leon County, Florida seeking a judgment against the Company for this amount. Based on conditions agreed to in the Term Sheet, the Company will settle that judgment by issuing common stock to the Financial Firm. Upon award of the judgment, this common stock will be tradable without restrictions, will be issued in tranches such that the Financial Firm will not own more than 9.99% of outstanding shares at any time and will be priced at 80% of average closing bids during such period of time in which the dollar trading volume of the stock is three times the $1.9 million owed to the Creditors (“Settlement Period”). The Financial Firm will sell the shares to generate proceeds to pay the Creditors. At the current bid price of $0.15, the Financial Firm would receive approximately 15,600,000 shares of common stock for this settlement. If the bid price drops during the Settlement Period, the Company is obligated to issue additional shares to ensure the Financial Firm has sufficient stock to cover the $1.9 million owed to Creditors. For example, if the current bid price fell during the Settlement Period to $0.10, the Company would issue approximately 7,800,000 additional shares to the Financial Firm. The selling activities of the Financial Firm could put downward pressure on the stock price. This obligation to issue additional shares if the stock price drops may result in a derivative liability that would need to be valued at the outset using the Black Scholes model and be adjusted quarterly using the Black Scholes model. Such a derivative liability could create significant variability in the Company’s financial results. Please see footnote 12 for additional information on derivative liabilities. The Financial Firm holds a promissory note for $50,000 that is convertible into common stock at $0.06 and matures on December 31, 2014. If this note is converted into common stock, the Company would issue approximately 833,000 shares of common stock. In July 2013, the Company received notice that a complaint for property damage had been filed by the Truck Insurance Exchange against the Company for $393,592 related to water damage incurred by a printing company on the ground floor of the Company’s former office space in Los Angeles. This damage is alleged to have occurred in connection with a water leak in the Company’s former office in February 2013. The Company intends to file a response to this complaint by the end of August 2013 that will include, but not be limited to, the culpability of the building’s management in this leak. The Company has a dispute with its insurance carrier at that time regarding coverage for this incident and the Company intends to push this dispute to ensure that it had proper insurance coverage at that time. The $300,000 accrued for this issue as of December 31, 2012 was increased to $393,592 in the Company’s financial statements as of June 30, 2013.

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