LOANS FROM OFFICER

6 Months Ended

Mar. 31, 2012

Notes to Financial Statements

LOANS FROM OFFICER

E. LOANS FROM OFFICER

Between December 2008 and June 2009, Maximilian de Clara, the Company’s President and a director, loaned the Company $1,104,057.  The loan from Mr. de Clara bears interest at 15% per year and was secured by a lien on substantially all of the Company’s assets.  The Company does not have the right to prepay the loan without Mr. de Clara’s consent.  The loan was initially payable at the end of March 2009, but was extended to the end of June 2009.   At the time the loan was due, and in accordance with the loan agreement, the Company issued Mr. de Clara warrants which entitle Mr. de Clara to purchase 1,648,244 shares of the Company’s common stock at a price of $0.40 per share.  The warrants are exercisable at any time prior to December 24, 2014.  Pursuant to Codification section 470-50, the fair value of the warrants issuable under the first amendment was recorded as a discount on the note payable with a credit recorded to additional paid-in capital.  The discount was amortized from April 30, 2009, through June 27, 2009.  Although the loan was to be repaid from the proceeds of the Company’s June 2009 financing, the Company’s Directors deemed it beneficial not to repay the loan and negotiated a second extension of the loan with Mr. de Clara on terms similar to the June 2009 financing.  Pursuant to the terms of the second extension the note was due on July 6, 2014, but, at Mr. de Clara’s option, the loan can be converted into shares of the Company’s common stock.  The number of shares which will be issued upon any conversion will be determined by dividing the amount to be converted by $0.40.  As further consideration for the second extension, Mr. de Clara received warrants which allow Mr. de Clara to purchase 1,849,295 shares of the Company’s common stock at a price of $0.50 per share at any time prior to January 6, 2015.  On May 13, 2011, to recognize Mr. de Clara’s willingness to agree to subordinate his note to the convertible preferred shares and convertible debt as part of the settlement agreement, the Company extended the maturity date of the note to July 6, 2015.

In accordance with Codification 470-50, the second amendment to the loan was accounted for as an extinguishment of the first amendment debt.  The extinguishment of the loan required that the new loan be recorded at fair value and a gain or loss  was recognized, including the warrants issued in connection with the second amendment.  This resulted in a premium of $341,454, which was amortized over the period from July 6, 2009, the date of the second amendment, to October 1, 2009, the date at which the loan holder could have demanded payment of the loan.  During the six months ended March 31, 2012 and 2011, the Company paid $82,804 in interest expense to Mr. de Clara. During the three months ended March 31, 2012 and 2011, the Company paid $41,402 in interest expense to Mr. de Clara.