MMTC Micro Imaging Technology Inc (CE)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America applicable to a going concern which contemplated the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Since inception, the Company has incurred substantial losses and there is substantial doubt that the Company will generate sufficient revenues in the foreseeable future to meet its operating cash requirements. Accordingly, the Company’s ability to continue operations depends on its success in obtaining additional capital in an amount sufficient to meet its cash needs. This raises substantial doubt about its ability to continue as a going concern. These financial statements do not include any adjustments that might result from this uncertainty.

Our independent registered public accounting firm has included an explanatory paragraph in its report on the financial statements for the year ended October 31, 2012 which raises substantial doubt about our ability to continue as a going concern.

Micro Imaging Technology, Inc. (the “Company”), a California corporation, is a holding company whose operations are conducted through its Nevada subsidiary, Micro Imaging Technology (“MIT”). As of April 30, 2013, the Company owned eighty point seven percent (80.7%) of the issued and outstanding stock of MIT.

The losses incurred to date which are applicable to the minority stockholders of the Company’s consolidated subsidiary, MIT, exceed the value of the equity held by the minority stockholders. Such losses have been allocated to the Company as the majority stockholder and are included in the net loss and accumulated deficit in the condensed consolidated financial statements for the six months ended April 30, 2013. Any future profits reported by our subsidiary will be allocated to the Company until the minority’s share of losses previously absorbed by the Company have been recovered.

In 1997, the Company began marketing a small, point-of-use water treatment product aimed at the high purity segment of commercial and industrial water treatment markets. In February 2000, the Company formed Electropure EDI, Inc. (EDI), a wholly-owned Nevada subsidiary, through which all manufacturing and sales of its proprietary water treatment products were then conducted. In October 2005, the Company sold the assets of the EDI subsidiary and discontinued operations.

The Company acquired, in October 1997, an exclusive license to the patent and intellectual property rights involving laser light scattering techniques to be utilized in the detection and monitoring of toxicants in drinking water. In February 2000, the Company formed Micro Imaging Technology (MIT), a majority-owned Nevada subsidiary, to conduct research and development based upon advancements developed and patented from the licensed technology. The technology being developed is a non-biologically based system utilizing both proprietary hardware and software to rapidly (near real time) determine the specific specie of an unknown microbe present in a fluid with a high degree of statistical probability (“MIT system”). It will analyze a sample presented to it and compare its characteristics to a library of known microbe characteristics on file. At present, it is the Company’s only operation.

Effective with the sale of its EDI operation in October 2005, the Company’s planned principal operation, the further development and marketing of its remaining technology, has not produced any significant revenue and, as such, the Company, beginning with the fiscal year starting November 1, 2005, is considered a development stage enterprise.

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments which management believes are necessary for a fair presentation of the Company’s financial position at April 30, 2013 and results of operations for the periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with our audited financial statements and footnotes as of and for the year ended October 31, 2012, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 29, 2013.

Changes in Capitalization and Reverse Stock Split

On February 8, 2013, the Company effectively amended its Articles of Incorporation and decreased the authorized number of shares of Common Stock from 2.5 billion to 25 million shares. At the same time, the Company underwent a five hundred-for-one (500:1) reverse stock split of its Common Stock and Redeemable Convertible Preferred Stock. For purposes of this Quarterly Report, all issuances of common stock and options or warrants to purchase common stock, if any, are reflected retroactively in post-reverse split amounts. As of April 30, 2013, the reverse split effected by the Company resulted in a reduction in capital stock and an increase in additional paid-in capital in the amount of $24,677,786.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.   This change in classification does not materially affect previously reported cash flows in the Consolidated Statement of Cash Flows, and had no effect on the previously reported Consolidated Statement of Operations for any period.

Going Concern

The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company has not generated revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. The Company has obtained funds from several shareholders and believes this funding will continue. Management believes the existing shareholders will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business.

Accounts Payable – Trade

As of April 30, 2013, the amount due to a former consultant to the Company, $112,000, represented 52% of the total amount due for accounts payable to non-affiliates.

Litigation and Claims

On May 16, 2012, Alpine MIT Partners, LLC (Plaintiffs) filed a civil action against the Company and its Chairman and Chief Executive Officer, Jeffrey G. Nunez, (collectively, the Company), in the Texas District Court, Travis County. Plaintiffs alleged breach of contract and civil conspiracy, as well as tortious interference with contractual relations and prospective business relations. The lawsuit alleges that the Company breached certain provisions of a March 7, 2012 Securities Purchase Agreement the Company executed with the Plaintiff to sell up to $2.0 million of 7% Senior Secured five-year Convertible Debentures convertible into shares of common stock at a conversion rate of $.003 per share. The purchase and sale of the first $1.0 million Debenture was scheduled to close on or before April 6, 2012 and was subject to, among other things, Alpine closing the necessary equity funding to consummate the transactions. No money was ever received by the Company from Alpine.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The lawsuit also suggests that the Company’s Chairman and Chief Executive Officer, Jeffrey G. Nunez, has a history of regulatory and securities law violations. The Company’s Board of Directors has researched the matter and understands that in January 2004, Mr. Nunez was requested by the NASD to appear and provide testimony pursuant to NASD Rule 8210. Mr. Nunez did not appear, but agreed not to associate in any capacity, in the future, with NASD member firms. The Company’s Board of Directors believes this to be of no consequence with respect to Mr. Nunez’ qualifications to serve as a board member and chief executive officer of the Company.

The Company argued that the lawsuit was improperly filed in Texas and that the Texas court had no jurisdiction over the Company in this matter. At a hearing on March 7, 2013, the court upheld the Company’s position and dismissed the case against the Company.

On January 10, 2013, the Company learned that Plaintiffs had filed a lien against the Company’s patents on May 8, 2012 with the California Secretary of State under the Uniform Commercial Code. On or about January 29, 2013, the Company filed suit against Alpine MIT Partners, LLC in the Orange County, California Superior Court alleging, among other claims, that the UCC filing is unauthorized. The lawsuit also names the managing director and managing member of Alpine as Defendants and alleges that they made false promises, intentional misrepresentations and breached the contract which is the subject of the Texas suit. The Company is seeking damages of $1.6 million.

In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.

Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of its financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. Since the lawsuit filed against the Company in Texas has been dismissed, no loss contingency has been accrued.

Antidilution Liability

The Company has recorded a $65,401 liability to allow for the possible dilutive impact of equity issuances that alter or effect conversion or exchange rates existing on the various dates of conversion or exercise of securities having adjustable conversion rates.

Accrued Payroll, Payroll Taxes and Benefits

From April 2010 through March 2012, payments made to two employees were recorded as reductions in accrued and unpaid payroll. In April 2012, the Company reclassified such payments as net payroll payments; calculated and recorded the employer and employee taxes that should have been withheld on such payment. Federal and state payroll tax returns have been filed for the last three quarters of 2010, all of 2011 and the first quarter of 2012. Estimated penalties and interest on the late filings and payments, in the sum of $27,029, have been accrued as of April 30, 2013. On September 20, 2012, the Internal Revenue Service filed a Notice of Federal Tax Lien against the Company assessing $58,858 for unpaid taxes, penalties and interest. A Notice of Tax Lien was also filed by the State of California on November 9, 2012 in the amount of $8,206, including penalty and interest, The Company has been in contact with the respective tax authorities in an effort to negotiate a payment arrangement for the taxes due.

Accrued Payroll and Benefits consist of the above payroll taxes and salaries, wages, and vacation benefits earned by employees, but not disbursed as of April 30, 2013. Accrued Payroll also includes the above estimated penalties and interest due on such unpaid payroll taxes. Liability for vacation benefits is accrued when earned monthly and reduced when taken. At the end of each fiscal period, the balance in the accrued vacation benefits liability account is adjusted to reflect current pay rates. Annual leave earned but not taken is considered an unfunded liability since this leave will be funded from future appropriations when it is actually taken by employees.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Receivables from related parties are non-interest bearing, uncollateralized obligations and consist of a $2,000 advance to one recently hired employee in October 2012 to assist with moving expenses. The preparation of financial statements requires our management to make estimates and assumptions relating to the collectivity of our accounts receivable. Management believes that the referenced receivables are collectible and as of October 31, 2012 and April 30, 2013, the Company has determined that no Allowance for Doubtful Accounts was required.

Inventory is stated at the lower of cost or market and comprised entirely of finished goods. Cost is determined on a first-in, first-out (FIFO) basis. The Company’s management monitors inventory for excess and obsolete items and makes necessary valuation corrections when such adjustments are required.

Property and equipment are recorded at cost and are depreciated using the straight-line method over an expected useful life of 3 or 5 years. Effective October 31, 2011, the Company reclassified and capitalized as machinery and equipment eight of its MIT 1000 Systems that it had carried as finished goods valued at $75,788. A revised model of the systems has been designed and the Company will utilize these eight first generation models as laboratory testing equipment. Commencing November 1, 2011, these systems are being depreciated over an expected useful life of 3 years.

The production tooling for the Company’s revised MIT 1000 has been capitalized and the $14,000 cost is being amortized over an estimated useful life of 3 years.

Expenditures for normal maintenance and repairs are charged to operations. The cost and related accumulated depreciation of assets are removed from the accounts upon retirement or other disposition, and the resulting profit or loss is reflected in the Statement of Operations. Renewals and betterments that materially extend the life of the assets are capitalized.

The accounting policies followed are as set forth in Note 1 of the Notes to Financial Statements in the Company’s 2011 Annual Report on Form 10-K. The Company has not experienced any material change in its critical accounting policies since November 1, 2011. The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates, which are based upon historical experience and on other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company considers the following accounting policies to be most critical in their potential effect on its financial position or results of operations.

New Accounting Pronouncements

The following accounting standards updates were recently issued and have not yet been adopted by us.  These standards are currently under review to determine their impact on our consolidated financial position, results of operations, or cash flows. There were various other updates recently issued which represented technical corrections to the accounting literature or application to specific industries.  None of the other updates are expected to a have a material impact on our consolidated financial position, results of operations or cash flows.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On January 31, 2013, the FASB issued Accounting Standards Update [ASU] 2013-01, entitled Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.  The guidance in ASU 2013-01 amends the requirements in the FASB Accounting Standards Codification [FASB ASC] Topic 210, entitled Balance Sheet.  The ASU 2013-01 amendments to FASB ASC 210 clarify that ordinary trade receivables and receivables in general are not within the scope of ASU 2011-11, entitled Disclosure about Offsetting Assets and Liabilities, where that ASU amended the guidance in FASB ASC 210.  As those disclosures now are modified with the ASU 2013-01 amendments, the FASB ASC 210 balance sheet offsetting disclosures now clearly are applicable only where reporting entities are involved with bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, and securities borrowing and lending transactions that either are offset using the FASB ASC 210 or 815 requirements, or that are subject to enforceable master netting arrangements or similar agreements.  A SU 2013-01 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU is not expected to have a material impact on our financial statements.

On February 7, 2013, the FASB issued Accounting Standards Update [ASU] 2013-03, entitled Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities. The guidance in ASU 2013-03 amends the requirements in the FASB Accounting Standards Codification [FASB ASC] Topic 825, entitled Financial Instruments.  The objective associated with issuing this amended guidance is to clarify the scope and applicability of a particular disclosure for nonpublic entities [nonissuers] that resulted from the issuance of ASU 2011-04, entitled Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, where that amended guidance essentially served to rewrite the guidance in FASB ASC 820, entitled Fair Value Measurement. The ASU 2013-03 amendments to FASB ASC 825 became effective upon issuance of the guidance.  Since the amendments were issued on February 7, 2013, that date serves as the effective date of the amended guidance. The adoption of ASU 2013-03 is not expected to have a material effect on the Company’s operating results or financial position.

On February 28, 2013, the FASB issued Accounting Standards Update [ASU] 2013-04, entitled Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.  The ASU 2013-04 amendments add to the guidance in FASB Accounting Standards Codification [FASB ASC] Topic 405, entitled Liabilities and require reporting entities to measure obligations resulting from certain joint and several liability arrangements where the total amount of the obligation is fixed as of the reporting date, as the sum of the following:

●          The amount the reporting entity agreed to pay on the basis of its arrangement among co-obligors.

●          Any additional amounts the reporting entity expects to pay on behalf of its co-obligors.

While early adoption of the amended guidance is permitted, for public companies, the guidance is required to be implemented in fiscal years, and interim periods within those years, beginning after December 15, 2013.  The amendments need to be implemented retrospectively to all prior periods presented for obligations resulting from joint and several liability arrangements that exist at the beginning of the year of adoption.  The adoption of ASU 2013-04 is not expected to have a material effect on the Company’s operating results or financial position.

On April 22, 2013, the FASB issued Accounting Standards Update [ASU] 2013-07, entitled Liquidation Basis of Accounting.  With ASU 2013-07, the FASB amends the guidance in the FASB Accounting Standards Codification [FASB ASC] Topic 205, entitled Presentation of Financial Statements.  The amendments serve to clarify when and how reporting entities should apply the liquidation basis of accounting.  The guidance is applicable to all reporting entities, whether they are public or private companies or not-for-profit entities.  The guidance also provides principles for the recognition of assets and liabilities and disclosures, as well as related financial statement presentation requirements. The requirements in ASU 2013-07 are effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods within those annual periods.  Reporting entities are required to apply the requirements in ASU 2013-07 prospectively from the day that liquidation becomes imminent.  Early adoption is permitted. The adoption of ASU 2013-07 is not expected to have a material effect on the Company’s operating results or financial position.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Earnings Per Share

Basic earnings per share are based on the weighted average number of shares outstanding for a period.  Diluted earnings per share are based upon the weighted average number of shares and potentially dilutive common shares outstanding.  Potential common shares outstanding principally include convertible notes payable and stock options under our stock plan.  Since the Company has incurred losses, the effect of any common stock equivalent would be anti-dilutive.

Stock Based Compensation

Stock-based compensation costs for stock options issued to employees is measured at the grant date, based on the fair value of the award using the Black Scholes Option Pricing Model, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

No stock-based compensation was recognized during the six months ended April 30, 2013.

On February 14, 2012, the Board of Directors adopted the 2012 Employee Benefit Plan which is authorized to grant up to 120,000 shares of common stock or options to purchase common stock to eligible employees, directors, officers, consultants or advisors. Eligibility and vesting, in the case of options, is determined by the Board of Directors. Between January 16, 2013 and February 22, 2013, the Company issued 16,000 shares of common stock which vested immediately under the Plan to legal counsel for services rendered and the fair market value of $1.05 and $1.50 per share. The aggregate value of the shares was $20,400.

The following table summarizes information about options granted under the Company’s equity compensation plans through April 30, 2013 and otherwise to employees, directors and consultants of the Company. Generally, options vest on an annual pro rata basis over various periods of time and are exercisable, upon proper notice, in whole or in part at any time upon vesting. Typically, in the case of an employee, vested options terminate when an employee leaves the Company. The options granted have contractual lives ranging from two to ten years.

Summary information about the Company’s options outstanding at April 30, 2013 is set forth in the table below. Options outstanding at April 30, 2013 expire between August 2013 and January 2016.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of April 30, 2013, all outstanding options had fully vested and there was no estimated unrecognized compensation from unvested stock options.

The following table summarizes the information relating to warrants granted to non-employees as of October 31, 2012 and changes during the six months ended April 30, 2013:

Summary information about the Company’s warrants outstanding at April 30, 2013 is set forth in the table below. Warrants outstanding at April 30, 2013 expire in and April 2015.

On November 10, 2010, the Company entered into a convertible note for $64,868 with a stockholder. The Note matured on May 31, 2012 and bears interest at the rate of ten percent (10%) per annum. The Note is convertible into shares of common stock at a forty two percent (42%) discount to the average of the lowest three (3) closing bid prices of the common stock during the ten (10) trading days prior to the conversion date. The note holder may convert any or all of the unpaid principal note prior to the maturity date. The Company calculated the intrinsic value of the conversion feature to be $46,973 as of the date of issuance of the debentures using the same criteria as noted above, which amount has been fully amortized as of April 30, 2013. The Company has expensed $16,030 in accrued interest on the note as of April 30, 2013. If the note had been converted as of April 30, 2013, the Company would have issued a total of 203,348 shares of common stock the value of which would exceed, by $46,973 the principal balance due on the note. The Company is currently negotiating with the lender to settle or renegotiate the Note.

On November 27, 2009, the Company borrowed $25,000 from an unaffiliated lender. In September 2011, the lender converted $12,500 of the principal and $2,876 in accrued interest into 17,084 shares of common stock. The Company issued an Amended and Restated Convertible Note for the $12,500 principal balance of the loan. The amended note matured on December 31, 2012 and bears interest at 6% and is convertible into common shares at a 55% discount to the average of the lowest three (3) closing bid prices of the common stock during the ten (10) trading days prior to the conversion date. The Company calculated the intrinsic value of the conversion feature on the remaining balance to be $10,507 as of the date of issuance of the amended note which has been fully amortized as of April 30, 2013. As of April 30, 2013, the Company had expensed a total of $1,204 in accrued interest on the remaining principal balance of $12,500. If the $12,500 balance of the note had been converted as of April 30, 2013, the Company would have issued a total of 50,505 shares of common stock valued at $15,278 more than the principal balance due on the note.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

At April 30, 2013 and October 31, 2012, without taking into effect any unamortized discounts, convertible debentures consisted of the following:

At April 30, 2013 and October 31, 2012, without taking into effect any unamortized discounts, notes payable to an officer and to stockholders consisted of the following:

Concurrent with his April 13, 2012 resignation as Chairman of the Board of Directors and Chief Executive Officer, the Company agreed to repay a total of $160,000 in principal loans, $24,339 in accrued interest and $13,120 in unpaid fees and expenses due Michael Brennan over a 25-month payment schedule commencing May 1, 2012. Payments due Mr. Brennan for February, March and April 2013, each in the amount of $7,500, have not been made per the payment schedule. As of April 30, 2013, payments have been made to Mr. Brennan to reduce the principal balance to $114,450.

With the exception of the above $114,450 in notes payable to a former officer and director, and the overdue payments due to Mr. Brennan, all of the above notes payable were past due as of April 30, 2013. The Company is currently negotiating with holders of the remaining $52,000 in principal notes to either extend the maturity date or convert the notes into shares of common stock.

Commencing on January 1, 2005, the Company sponsored a Simple IRA retirement plan which covers substantially all qualified full-time employees. Participation in the plan is voluntary and employer contributions are determined on an annual basis. Employer contributions would be made at the rate of three percent (3%) of the employees’ base annual wages. However, the Company made no contributions to the IRA plan during the six months ended April 30, 2013 and 2012.

MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Common Stock Issued in Private Placement Transactions

On May 8, 2012, Board member, Gregg J. Newhuis, entered into a Subscription Agreement, as amended on October 31, 2012, to purchase a total of 1,800,000 shares of the Company’s common stock at $0.50 per share over a six-month period. Mr. Newhuis also received a one-year option to purchase up to an additional 266,667 shares of common stock at $1.50 per share in September 2012. This option was cancelled in October 2012. The Company received the final $100,000 from Mr. Newhuis on November 29, 2012 pursuant to his May 2012 subscription arrangement. Giving effect to the February 8, 2013 reverse stock split, the Company issued a total of 200,000 shares of common stock at $0.50 per share for the November 29, 2012 purchase.

On April 20, 2012, the Company granted three-year warrants to purchase 80,000 shares of common stock to a major shareholder as part of a Subscription Agreement for the purchase of 80,000 shares of common stock at $0.75 per share. The warrants are exercisable at $1.00 per share within one year of the subscription; $2.50 per share within two years; and at $5.00 per share during the third year of the warrant. On January 11, 2013, the warrant holder exercised his right to purchase one half of the warrants granted and paid $40,000. Giving effect to the February 8, 2013 reverse stock split, the Company issued 40,000 shares of common stock at $1.00 per share on this transaction.

On January 11, 2013, Victor Hollander, a Director and the Company’s Chief Financial Officer, purchased 3,333 shares of common stock for proceeds of $5,000, at the fair market value of $1.50 per share.

On May 21, 2012, the Company entered into a Subscription Agreement with a major stockholder to purchase a total of 400,000 shares of the Company’s common stock at $0.50 per share, for a total of $200,000 which the Company received during fiscal 2012. As additional consideration, the purchaser was granted a one-year option to purchase up to an additional 66,667 shares of common stock at $1.50 per share commencing on the date the final dollars are invested. On February 6, 2013, this stockholder surrendered his rights to the referenced warrants in full.

On February 6, 2013, the Company entered into a Subscription Agreement with a major stockholder to purchase up to $180,000 in shares of common stock at a purchase price of $0.85 per share over a three month period. Between February 6, 2013 and April 3, 2013, the shareholder purchased a total of 211,764 shares of common stock and paid $180,000.

Pursuant to an April 1, 2012 consulting arrangement, the Company agreed to pay Jeffrey Nunez a five percent (5%) transaction fee on all proceeds received by the Company during the one year term of such agreement. The fee is payable in shares of the Company’s common stock which are to be valued as the average closing price of the common stock for the five (5) trading days prior to the transaction which triggers the fee. Between April 20 and October 31, 2012, the Company issued Mr. Nunez a total of 35,512 shares of common stock valued at $53,000 pursuant to the transaction fee arrangement. As of January 31, 2013, an additional $7,000 was due Mr. Nunez under this arrangement at which time the transaction fee arrangement was terminated by mutual agreement. On April 26, 2013, $6,007 of the transaction fee due him was credited against a receivable that Mr. Nunez owed the Company and the remaining $993 balance was paid in the form of 435 and 196 shares of common stock at $1.63 and $1.45 per share, respectively.

Common Stock Issued in Cancellation of Debt

On January 16, 2013, the Company issued its legal counsel a total of 8,000 shares of common stock in payment for $12,000 in legal services rendered for $1.50 per share.

On February 22, 2013, the Company issued an additional 8,000 shares of common stock to legal counsel in payment of $8,400 in legal services rendered for $1.05 per share.

On May 20, 2013, a Director made a short term loan to the Company in the sum of $7,000 which is payable on demand.