4.  Convertible Debentures

Convertible debentures consist of the following:

From December 13, 2010 through February 3, 2012, the Company conducted private offerings of up to $10,000,000 aggregate face amount of its convertible notes. A total of $7,722,783 aggregate face amount of the notes were sold for an aggregate purchase price of $7,020,711. Through December 31, 2011 $6,239,029 of these notes were sold, of which 4,518,425 were converted during 2011, leaving a balance of convertible notes outstanding of December 31 of $1,720,604. During 2012, the Company sold an additional $1,489,804 of these convertible notes, and an additional $2,425,711 of these notes were converted, leaving a balance of convertible notes outstanding of March 31, 2012 of $784,553. While the stated interest rate on the notes is 0%, the actual interest rate on the notes is 10% per annum. The notes mature on the first anniversary of their respective date of issuance. The notes are convertible, at the option of the note holder, into 36,850,348 shares of common stock of the Company (the “Conversion Shares”) at an initial conversion price of $0.25 per share (the “Conversion Price”).

Each of the investors in the offerings received, for no additional consideration, a warrant entitling the holder to purchase a number of shares of the Company’s common stock equal to 100% of the number of shares of common stock into which the notes are convertible (the “Warrant Shares”).  Each warrant is exercisable on a cash basis only at an initial price of $0.30 per share, and is exercisable immediately upon issuance and for a period of two (2) years from the date of issuance. Up to 36,850,348 Warrant Shares are initially issuable to date on exercise of the warrants of which 5,959,216 warrants were granted during the period.

During 2012, the Company sold $1,489,804 of  convertible notes for aggregate consideration of $1,354,980, resulting in a discount of $134,824. The aggregate relative value of the warrants issued in the 2012 offerings were valued at $593,208 using the Black-Scholes-Merton option valuation model with the following assumptions; risk-free interest rate of .27; dividend yield of 0%; volatility factors of the expected market price of common stock of 121%; and an expected life of two years (statutory term) and vest immediately upon issuance. The Company also determined that the notes contained a beneficial conversion feature of $761,772.  The aggregate value of the 2012 Offering Warrants, the beneficial conversion feature and the note discount are considered as debt discount and will be amortized over the life of the notes.  The value of this debt discount was added to the outstanding debt discount of $1,550,918 as of December 31, 2011.  During the period ended March 31, 2012, the Company amortized $2,462,666 of debt discount, resulting in an unamortized debt discount balance of 578,056 as of March 31, 2012.

As of March 31, 2012, the outstanding balance of the notes was $784,553.