NOTE 6 FINANCING AGREEMENT
1. On November 22,
2011, the Company entered into a financing agreement with one non-US investor pursuant to which, the investor will make available
of up to $1,000,000 by way of advances until November 22, 2012 (the Completion Date) in accordance with the terms
of the financing agreement. The Completion Date may be extended for an additional term of up to twelve months at the option of
the Company or the investor upon written notice on or before the Completion Date in accordance with the notice provisions of the
Financing Agreement. The Company will issue, within ten (10) Banking Days following the date of the receipt by the Company of any
advance under the Financing Agreement, common shares of the Company (each a Share) at the Share Price. Upon receipt
of an advance from the investor under the terms of the Financing Agreement, the Company will issue to the investor that number
of shares of the Company at a price equal 90% of the average of the closing price of the Companys common stock, for the
five (5) Banking Days immediately preceding the date of the advance. As of the twelve month period ended August 31, 2012, the Company
has drawn down a total of $200,000 and issued a total of 582,133 shares of common stock to the investor.
2. On March 28, 2012
we entered into an investment agreement (the Investment Agreement) with Fairhills Capital Offshore Ltd., a Cayman
Islands exempted company (Fairhills). Pursuant to the terms of the Investment Agreement, Fairhills has committed
to purchase up to Three Million Dollars ($3,000,000) of our common stock over a period of up to thirty-six (36) months.
On May 1, 2012, we entered into an amendment
to the Investment Agreement (the Amendment). Pursuant to the Amendment, the purchase price of the shares shall be
equal to a discount of Twenty-Five percent (25%) percent from the lowest volume weighted average price during the ten (10) trading
days immediately prior to receipt by Fairhills of a put notice (as defined in the Investment Agreement. In connection with the
Investment Agreement, we also entered into a registration rights agreement (the Registration Rights Agreement) with
Fairhills. Pursuant to the Registration Rights Agreement, we are obligated to file a registration statement with the Securities
and Exchange Commission (SEC) covering Eighteen Million (18,000,000) shares of the common stock underlying the Investment
Agreement within 21 days after the closing of the Investment Agreement. In addition, we are obligated to use all commercially reasonable
efforts to have the registration statement declared effective by the SEC within 120 days after the closing of the Investment Agreement
and maintain the effectiveness of such registration statement until termination in accordance with the Investment Agreement.
At an assumed purchase price under the
Investment Agreement of $0.04595 (equal to 75% of the closing price of our common stock of $0.0612on May 25, 2012), we will be
able to receive up to $436,525in gross proceeds, assuming the sale of the entire 9,500,000 Shares being registered hereunder pursuant
to the Investment Agreement. At an assumed purchase price of $0.04595 under the Investment Agreement, we would be required to register
55,788,357 additional shares to obtain the balance of $2,563,475 under the Investment Agreement. Fairhills has agreed
to refrain from holding an amount of shares which would result in Fairhills from owning more than 4.99% of the then-outstanding
shares of our common stock at any one time.
At the time the transaction was negotiated
between the parties. The price of the stock was substantially higher than the current trading price and based upon same we believed
that we would be able to receive the full amount of the financing. However since such time the market value of our common stock
has decreased and we do not believe that we will receive the full amount under the Investment Agreement unless there is an increase
in the price of our common stock.
On July 5, 2012, we entered into a second
amendment of the investment agreement with Fairhills Capital solely to change the wording of Section 7.7 of the Investment
Agreement: to read unless the SEC's concerns have been addressed and Investor is reasonably satisfied that the
SEC no longer is considering or intends to take such action.
On March 28, 2012, we entered into a
debt instrument (the Loan) with Fairhills whereby Fairhills Capital provided us with a $200,000 loan which is due
by September 28, 2012 and carries a 2% annual rate of interest. The note is not convertible into our common stock and we have agreed
that we will not use the funds raised in the Fairhills financing to repay this note. The note was secured by 3,333,333 shares of
our restricted common stock owned by our director and officer, Rick Walchuk. These shares shall be held in escrow by Fairhills
Capitals counsel and will be forfeited to Fairhills if we default on the note.
The Company paid $20,000 in financing
fees in respect to the funds advanced by Fairhills (see Note 4 - Commitment).