NOTE 3

CONVERTIBLE DEBENTURES

From December 12, 2013 through March 31, 2014, the Company sold $2,024,500 in principal amount of three year debentures, convertible at any time into Company common stock at $1.50 per share. The debentures bear interest at a rate of 9.5% per annum accruing monthly with the first interest payment after six months and then monthly. Purchasers of the convertible debentures also received warrants to purchase an aggregate of 184,045 shares of Company common stock exercisable for five years at an exercise price of $1.65. The Company incurred financing costs in connection with the issuance of the convertible debentures of $175,635 paid, or to be paid, in cash and will issue warrants to purchase 192,424 shares of common stock; these deferred costs have been capitalized in the accompanying balance sheets, and are being amortized to interest expense using the effective interest method over the 3 year life of the debt. The fair value of the conversion option and warrants on the date issued to the debenture holders totaled $79,111, is discounted from the carrying value of the debenture and amortized into interest expense over the 3 year life of the debt using the effective interest method. At March 31, 2014, the carrying value of the convertible debentures totaled $1,949,855, net of the $74,645 debt discount. Accrued interest related to the convertible debentures totaled $27,913. The Company expects to amortize approximately $43,000 into interest expense in each of the next 3 years reducing the related deferred costs and debt discount. Principal and all accrued interest is due at maturity, but can be repaid at any time with no penalty.

The fair value of the conversion option and warrants is carried on the face of the accompanying Balance Sheet as derivative liability and totaled $83,876 at March 31, 2014. Any change in fair value of the derivative liability is reported as a gain or loss on derivative liability in the accompanying statement of operations. The Company recognized a gain on the derivative of $11,600 during the three months ended March 31. 2014.