On April 17, 2012,
the Company entered into a Bridge Loan Agreement (the Loan Agreement) with 1420524 Alberta Ltd. (the Creditor)
pursuant to which the Company borrowed $1,000,000 at an annual interest rate of 7% (the Loan), compounded quarterly;
following the occurrence of an event of default, as further specified in the Loan Agreement, the annual interest rate would increase
to 15%. The Loan was evidenced by a promissory note with a maturity date of the earlier of: (a) the closing of any equity financing
by us in excess of $1,000,000, or (b) April 16, 2013. As a condition to the Creditors entry into the Loan Agreement, we
issued the Creditor 625,000 Series G Stock Purchase Warrants (the Series G Warrants), which are exercisable through
April 17, 2016, with an initial exercise price of 84% of the average of the closing price for our common stock as reported on the
OTCQB for the five trading days immediately preceding the closing of the Loan, or $1.92 per share, subject to adjustment as provided
therein. Additionally, the Series G Warrants contain a cashless exercise provision and require us to file a registration statement
with the SEC for the shares issuable upon exercise of the Series G Warrants within 60 days receipt of a written request by the
Creditor. The Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of
the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at an initial fixed conversion price
equal to seventy (70%) percent of the average of the closing price for the Companys common stock as reported on the OTCQB
for the five trading days immediately preceding the closing of the Loan, or $1.60 per share subject to adjustment as provided therein.
The Company first
allocated between the Loan and the warrants based upon their relative fair values. The estimated fair value of the warrants issued
with the Loan of $1,207,750 was calculated using the Black-Scholes option pricing model and the following assumptions: market price
of common stock - $2.12 per share; estimated volatility - 167%; risk free interest rate - 0.88%; expected dividend rate - 0% and
expected life - 3.0 years. This resulted in allocating $547,050 to the warrants and $452,950 to the Loan.
Next, the intrinsic
value of the beneficial conversion feature was computed as the difference between the fair value of the common stock issuable upon
conversion of the Loan and the total price to convert based on the effective conversion price. The calculated intrinsic value was
$872,050. As this amount resulted in a total debt discount that exceeds the loan proceeds, the amount recorded for the beneficial
conversion feature was limited to $452,950. The resulting $1,000,000 discount to the Loan is being accreted over the one year term
of the Loan using the effective interest method.
During the year
ended August 31, 2012, the Company recognized $26,231 of interest expense related to this Note and $515 of accretion related to
the debt discount. The remaining debt discount of $999,485 will be amortized through April 16, 2013.