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Note 6 - Convertible Bridge Loans

9 Months Ended

Sep. 30, 2012

NOTE 6 – CONVERTIBLE BRIDGE LOANS

In October and November 2011, we received $475,000 in gross proceeds from six existing stockholders in an interim convertible bridge loan financing involving the issuance of 12% convertible promissory notes and warrants to purchase common stock. Included in the proceeds was $50,000 received from Mark W. Weber, a member of our board of directors. Under the notes, the loans are due upon the earlier of (a) the closing of financing pursuant to which shares of common stock or other equity securities are issued by us for aggregate consideration of not less than $5,000,000, through the (i) conversion of the note, including accrued interest, or (ii) at the lender’s option, repayment of the note, or (b) in any event, two years after the issuance of the note. The number of shares of common stock issuable upon conversion of the note will be based on a conversion price equal to a 15% discount to the price obtained in any round of equity financing. In the event we fail to repay the promissory notes on or before November 30, 2011, the note’s interest rate will be increased to 15% per annum. We did not repay the promissory notes prior to that date, and the interest rate was increased to 15% per annum. Total interest expense related to the loans for the three and nine months ended September 30, 2012 and 2011 was $13,151, $0, $42,760 and $0, respectively.

In addition to interest on the promissory note, each note holder is entitled to receive a warrant to purchase the number of shares of common stock determined by dividing 115% of the principal amount of the note by the price at which our common stock is sold in any round of equity financing not less than $5,000,000, times 100%. The warrants will be exercisable at any time, commencing 90 days after the closing of the round of financing, and from time to time for a period of three years after the issuance date, at an exercise price of $11.00 per share (subject to appropriate adjustment in the event of any subsequent stock split or similar transaction).

During the nine months ended September 30, 2012, three of the convertible bridge loans totaling $193,431 (including accrued interest and loan fees of $18,431) were converted into 55,267 units in our private placement offering as discussed in Note 8. Accordingly, we issued 55,267 shares of our common stock, three year warrants to purchase 55,267 shares of our common stock at an exercise price of $3.75 per share and three year warrants to purchase 57,500 shares of our common stock at an exercise price of $11.00 per share. The fair value of the common stock was $230,540 based on the market prices of our common stock on the respective dates of conversion ranging from $2.11 to $5.75 per share. The fair value of the three year warrants to purchase 55,267 shares of our common stock at an exercise price of $3.75 per share was $171,023 and fair value of the three year warrants to purchase 57,500 shares of our common stock at an exercise price of $11.00 per share was $145,029. We recognized a loss on debt conversion for the nine months ended September 30, 2012 in the amount of $353,161. One of the convertible bridge loans converted was held by Mark Weber, a member of our board of directors, who converted a loan totaling $57,385 (including $7,385 of accrued interest and loan fees) into 16,396 shares of our common stock, three year warrants to purchase 16,396 shares of our common stock at an exercise price of $3.75 per share and three year warrants to purchase 16,429 shares of our common stock at an exercise price of $11.00 per share.

The fair value of the warrants issued upon the conversion was computed using the Black Scholes Option Pricing model using the following assumptions – expected life –3 years, risk free interest rate –0.31% to 0.82%, volatility –103.6% to 198.4%, and an expected dividend rate of 0%.

Total principal payments for future years for the Convertible Bridge Loans and the Convertible Debentures described in Note 5 are as follows as of September 30, 2012:

		September 30, 2012
2012		$ -
2013		4,426,750
		$ 4,426,750