NOTE 10 – NOTES PAYABLE – SHAREHOLDERS

On January 11, 2012, a shareholder loaned the Company $35,000 at 3% interest per month for one year. On April 13 2012, the shareholder loaned principal to the Company in the aggregate amount $25,000. On June 28, 2012, the Company made a $10,000 principal payment on the note. At September 30, 2012, the principal balance on the note was $50,000 with prepaid interest of $450.

On July 15, the holder of one of the convertible notes in the amount of $137,500 exchanged this note for a new secured note in the amount of $165,000 for two years. The note contains an original issue discount of $27,500 which will be amortized on a quarterly basis of $3,438 per quarter. The note is secured by the Company’s intellectual property, notably the patent for OSPI. In exchange for the security the investor agreed to waive rights to conversion of the note into the Company’s stock and the existing warrants which have been cancelled.

At September 30, 2012 and December 31, 2011, the balance due on all notes payable to shareholders was $190,401 and $0, respectively.