Note 8 - Equity Financing and the Debt Restructuring

2012 Equity Financing and the Debt Restructuring

On March 26, 2012, we closed on an equity financing (the "2012 Equity Financing") as well as a restructuring of our outstanding senior convertible indebtedness (the "2012 Debt Restructuring") resulting in complete satisfaction of our senior indebtedness.

We entered into an Engagement Agreement, dated October 28, 2011, with MDB Capital Group, LLC ("MDB"), pursuant to which MDB agreed to act as the exclusive agent of the Company on a "best efforts" basis with respect to the sale of the Company's securities.

Pursuant to the Engagement Agreement, we entered into a Securities Purchase Agreement ("SPA") dated March 23, 2012 with select institutional and other accredited investors for the private placement of 27,800,000 units of our securities. The SPA included a purchase price of $0.25 per unit, with each unit consisting of one share of common stock and two forms of Warrant: (1) The "A" Warrant grants the investors the right to purchase an additional share of common stock for each two shares of common stock purchased, for a term of six years and at an exercise price of $0.35 per share; and (2) The "B" Warrant will not be exercisable unless and until the occurrence of a future issuance of stock at less than $0.25 per share., The holders of the B Warrants agreed in December 2013 to amend the terms of the B Warrant to reduce the amount of subsequent financing required to extinguish the B Warrants with the result that the B Warrants have now been extinguished.

Net proceeds from the 2012 Equity Financing, after deducting the commissions and the estimated legal, printing and other costs and expenses related to the financing, were approximately $6.1 million. Coincident to the closing of the 2012 Equity Financing, we also closed on the 2012 Debt Restructuring. In connection therewith, the Company paid $2,750,000 to Castlerigg Master Investment Ltd. ("Castlerigg"), and issued to Castlerigg 2,000,000 shares of common stock in full and complete satisfaction of the senior convertible note and all accrued interest

In December 2011, we entered into a loan with 7 accredited individuals and entities under the terms of which we borrowed $1,300,000 to be used as working capital ("Bridge Loan"). . In consideration of the Bridge Loan we granted to the holders of the Bridge Loan warrants with a five year term to purchase 357,500 shares of our common stock at an original exercise price of $0.65 per share. In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an original exercise price of $0.35 per share.

In connection with the 2012 Equity Financing and under the terms of the SPA, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. In addition, one other entity converted the amount owed by us for equipment purchases in the amount of $500,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. The proceeds from these conversions were treated as funds raised with respect to the financing.

On April 5, 2012 we secured an additional $154,000 from 1 company and 4 individuals (three of which are members of our Board of Directors) on the same terms and conditions as the investors of the 2012 Equity Financing. As a result of this funding we issued 616,000 shares of our common stock and A warrants totaling 400,400 of which 308,000 were issued to investors and 92,400 were issued to our investment banker.

All warrants listed below were issued with price protection provisions and were accounted for as derivative liabilities. The Warrants have an exercise price of $0.25 per share and were valued using the Black Scholes pricing model.

	Common Shares Issued		Number of Warrants		Value of Warrants
Investors		24,816,000		12,408,000	$	67,767
Bridge Loan Conversion		1,600,000		800,000		4,369
Equipment Finance Conversion		2,000,000		1,000,000		5,462
Agency		--		4,262,400		23,280
Total		28,416,000		18,470,400	$	100,878

We recorded an aggregate derivative liability of $100,878 and $1,090,884 as of March 31, 2014 and 2013, respectively related to the reset feature of the warrants mentioned above. A derivative valuation loss of $92,246 and $333,415 was recorded to reflect the change in value of the aggregate derivative liability from December 31, 2013 and 2012, respectively. The aggregate derivative liability of $100,878 was calculated using a Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 1.34%, (ii) expected life (in years) of 4.0; (iii) expected volatility of 119.06%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.015.

2010 Equity Financing and the Debt Restructuring

On December 24, 2010, we closed on an equity financing (the "Equity Financing") as well as a restructuring of our then outstanding convertible indebtedness (the "Debt Restructuring"). The Equity Financing and the Debt Restructuring are described as follows.

In December 2010 we entered into a Placement Agency Agreement, with Philadelphia Brokerage Corporation ("PBC"), pursuant to which PBC agreed to act as the exclusive agent of the Company to sale units of the Company's securities. The units consisted of two shares of our common stock and one warrant to purchase a share of our common stock.

Pursuant to the Placement Agency Agreement, we entered into Subscription Agreements with select institutional and other accredited investors for the private placement of approximately 12,500,000 units of our securities. The Subscription Agreements included a purchase price of $1.20 per unit, with each unit consisting of two shares of common stock and one warrant to purchase an additional share of common stock. The warrants have a term of five years and had an original exercise price of $1.00 per share which has been reset to $0.725 per share pursuant anti-dilution price protection provisions.

On November 29, 2010, we entered into a bridge loan transaction with three accredited investors pursuant to which we issued unsecured notes in the aggregate principal amount of $1.0 million. Upon the closing of the Equity Financing, the lenders converted the entire principal amount plus accrued interest into the same units offered in the Equity Financing and the proceeds from the bridge loan transaction were treated as funds raised with respect to the financing.

On December 24, 2010, we also closed on the Debt Restructuring. In connection therewith, we (i) issued an Amended and Restated Senior Convertible Note in the principal amount of $5.5 million (the "Amended and Restated Note") to Castlerigg Master Investment Ltd. ("Castlerigg"), (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg , (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants , and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010. As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest.

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013. We also issued 150,000 shares and 75,000 warrants to acquire our common stock at $.90 per share to the holder of this note as consideration to extend the term of the note.

A portion of the net proceeds from the 2012 Equity Financing was used to close on the 2012 Debt Restructuring therewith. The Company paid $2,750,000 and issued 2,000,000 shares of common stock valued at $760,000 to Castlerigg in satisfaction of the $5,500,000 senior convertible note and accrued interest.

Investor warrants totaling 12,499,980 issued under the Subscription Agreements contain price protection adjustments in the event we issue new common stock or common stock equivalents in certain transactions at a price less than $1.00 per share and were accounted for as embedded derivatives and valued on the transaction date using a Black Scholes pricing model. The exercise price has been reset to $0.7250 per share due to subsequent financings.

We recorded an aggregate derivative liability of $21,506 and $231,800 as of March 31, 2014 and 2013 respectively, related to the reset feature of the warrants issued under the Placement agency Agreement. A derivative valuation loss of $21,007 and $122,400, respectively, were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2013 and 2012, respectively. The aggregate derivative liability of $21,506 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.45%, (ii) expected life (in years) of 1.7; (iii) expected volatility of 159.01%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.015.