Settlement of Liabilities with Ironridge

3 Months Ended

Apr. 30, 2013

Settlement Of Liabilities With Ironridge

Settlement of Liabilities with Ironridge

Note 8 – Settlement of Liabilities with Ironridge

Ironridge Transaction

On March 6, 2013, pursuant to an order setting forth a stipulated settlement (the “Order” and the “Stipulation”) issued by the Superior Court of the State of California for the County of Los Angeles – Central District (the “Court”), Ironridge Global IV, Ltd. (“Ironridge”), who had previously purchased a total of $1,017,744 in accounts payable and accrued expenses (the “Claim”) owed by us to various parties, was issued 7,000,000 shares of our common stock (the “Initial Issuance”) in satisfaction of such accounts payable and accrued expenses, which amount will come off our balance sheet and have been legally released. The accounts payable and accrued expenses represented amounts originally owed by us to various creditors in connection with trade payables, the purchase of property and equipment, prior credit agreements, and attorneys’ fees.

The shares issued in the Initial Issuance are subject to adjustment as provided below:

— From the date of the Stipulation until that number of consecutive trading days following the Issuance Date required for the aggregate trading volume of the Common Stock to exceed $10,000,000 (the “Calculation Period”), Ironridge will retain that number of shares of Common Stock of the Initial Issuance (the “Final Amount”) with an aggregate value equal to (a) $1,068,631 (105% of the Claim Amount), plus reasonable attorney’s fees and expenses, divided by (b) 80% of the following: the closing price of the Common Stock on the trading day immediately preceding the date of entry of the Order (which closing price was $0.35 per share), not to exceed the arithmetic average of the individual volume weighted average prices of any five trading days during the Calculation Period, less $0.01 per share (the “Share Price”).

— If at any time during the Calculation Period the Initial Issuance is less than any reasonable possible Final Amount or a daily volume weighted average price is below 80% of the closing price on the day before the Issuance Date, Ironridge may request that the Company reserve and issue additional shares of Common Stock (the “True-Up Shares”) as soon as possible, and in any event, within one trading day. For each day after Ironridge requests issuance that shares are not, for any reason, received into Ironridge’s account in electronic form and fully cleared for trading, the Calculation Period shall be extended by one trading day.

— At the end of the Calculation Period, if the sum of the Initial Issuance and any True-Up Shares does not equal the Final Amount, adjustments shall be made to the shares of Common Stock issued pursuant to the Stipulation and either additional shares shall be issued to Ironridge or Ironridge shall return shares to the Company for cancellation.

The Stipulation provides that at no time shall shares of Common Stock be issued to Ironridge and its affiliates which would result in them owning or controlling more than 9.99% of the Company’s outstanding Common Stock. The Company also agreed pursuant to the Stipulation that (a) until at least one half of the total trading volume for the Calculation Period has traded, the Company would not, directly or indirectly, enter into or effect any split or reverse split of Common Stock; (b) until at least thirty days from the date the Order is approved, the Company would not, directly or indirectly, issue any securities pursuant to a Form S-8 registration statement; and (c) until at least six months from the date the Order is approved, the Company would not, directly or indirectly, issue or sell any free trading securities for financing purposes (except for shares issuable to TCA Global Credit Master Fund, LP).

At April 30, 2013, pursuant to the adjustment of common shares contemplated by the Order, the Company estimates the ultimate settlement with Ironridge will take less common shares and has re-evaluated the number of common shares to settle at April 30, 2013 to be 4,294,524. Accordingly, the loss on extinguishment of the liabilities under the Ironridge transaction is reflected in the accompanying financial statements based management’s estimates as follows: 

Fair Value of Shares to settle (4,294,524)	$	1,202,467
Carrying amount of liabilities released		(1,073,631	)
Estimated Loss on extinguishment	$	128,836

Additionally, at April 30, 2013, management presently estimates Ironridge will need to return 2,705,476 shares of common stock. It is noted that the loss reflected above may vary from current estimates once the actual settlement with Ironridge occurs and such settlement is expected to occur when the Company meets all conditions stated in the Order.