7% CONVERTIBLE NOTE	12 Months Ended
Dec. 31, 2013
Notes to Financial Statements
7% CONVERTIBLE NOTE	NOTE 19 – 7% CONVERTIBLE NOTE On August 29, 2013, the Company issued a 7% Convertible Note (the “7% Note”) to W-Net Fund I, L.P. (the “Holder”), a Delaware limited partnership, in exchange for the Revolving Promissory Note originally issued on June 7, 2013 by the Company to the Holder and amended on August 6, 2013 (the “Exchanged Note”). Per the terms of the 7% Note, the original principal balance is $750,000 and is not secured by any collateral or any assets pledged to the Holder. The maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, the Holder can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of this 7% Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average price occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert all or part of this 7% Note, subject to adjustment as provided in this 7% Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in this 7% Note. At any time after the 12-month period immediately following the date of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of this 7% Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion price as of the date of determination. Due to the “reset” clause in this 7% Note relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company, which is detailed in “NOTE 21 – DERIVATIVE LIABILITY”. On August 29, 2013, the date on which the Revolving Promissory Note was exchanged for the 7% Convertible Note, the Company recorded a $750,000 non-cash “loss on extinguishment of debt” while also recording a corresponding $640,074 “derivative liability” (see “NOTE 21 – DERIVATIVE LIABILITY”) and a $109,926 increase in “additional paid-in capital” as related to the beneficial conversion feature associated with this 7% Note. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 21.0%; (iii) risk free rate of 0.02%, (iv) expected term of 7 days ($550,000 was converted 7 days after issuance), (v) market value share price of $0.04, and (vi) per share conversion price of $0.02156. On September 5, 2013, the Holder converted $550,000 of principal into 25,510,204 shares of the Company’s common stock at a per share conversion price of $0.02156. On September 17, 2013, the Holder converted an additional $150,000 of principal into 6,757,328 shares of the Company’s common stock at a per share conversion price of $0.02156. On December 19, 2013, the Holder of this note converted the remaining principal of $50,000 and accrued and unpaid interest of $11,349, which totals $61,349, into 2,453,945 shares of the Company’s common stock at a per share conversion price of $0.025. As of December 31, 2013, the original $750,000 7% convertible note had been fully converted into shares of the Company’s common stock and was no longer on the Company’s balance sheet. On October 11, 2013, the Company issued an additional $850,000 of 7% convertible notes to four Holders. As previously stated, due to the “reset” clause in these 7% Notes relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 25.09%; (iii) risk free rate of 0.23%, (iv) expected term of 1 year, (v) market value share price of $0.063, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $1,292,000, which it recorded as a derivative liability as of the date of issuance while also recording a $442,000 non-cash interest expense and an $850,000 debt discount on its balance sheet in relation to the beneficial conversion feature (BCF) of these notes. On December 31, 2013, the Company revalued the derivative value of the $850,000 7% Notes using the weighted-average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. The Company determined the derivative value to be $4,284,000 as of December 31, 2013, which represents a change in the fair value of the derivative in the amount of $2,992,000 as compared to the derivative value on October 11, 2013. Accordingly, the Company recorded a non-cash change in fair value of derivative expense of $2,992,000 while also increasing the derivative liability from $1,292,000 to $4,284,000 as of December 31, 2013 (see “NOTE 21 – DERIVATIVE LIABILITY”). On December 20, 2013, the Company issued an additional $1,000,000 of 7% convertible notes to two Holders. As previously stated, due to the “reset” clause in these 7% Notes relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.02%, (iv) expected term of 1 year, (v) market value share price of $0.14, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $4,600,000, which it recorded as a derivative liability as of the date of issuance while also recording a $3,600,000 non-cash interest expense and an $1,000,000 debt discount on its balance sheet in relation to the beneficial conversion feature (BCF) of these notes. On December 31, 2013, the Company revalued the derivative value of the $1,000,000 7% Notes using the weighted-average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. The Company determined the derivative value to be $5,040,000 as of December 31, 2013, which represents a change in the fair value of the derivative in the amount of $440,000 as compared to the derivative value on December 20, 2013. Accordingly, the Company recorded a non-cash change in fair value of derivative expense of $440,000 while also increasing the derivative liability from $4,600,000 to $5,040,000 as of December 31, 2013 (see “NOTE 21 – DERIVATIVE LIABILITY”). As of December 31, 2013, the outstanding principal on the 7% Notes was $1,850,000 with accrued and unpaid interest in the amount of $15,668, for a total amount owed of $1,865,668. For the year ended December 31, 2013, the Company recorded $17,260 of interest expense related to these 7% Notes.

7% CONVERTIBLE NOTE

12 Months Ended

Dec. 31, 2013

NOTE 19 – 7% CONVERTIBLE NOTE

On August 29, 2013, the Company issued a 7% Convertible Note (the “7% Note”) to W-Net Fund I, L.P. (the “Holder”), a Delaware limited partnership, in exchange for the Revolving Promissory Note originally issued on June 7, 2013 by the Company to the Holder and amended on August 6, 2013 (the “Exchanged Note”). Per the terms of the 7% Note, the original principal balance is $750,000 and is not secured by any collateral or any assets pledged to the Holder. The maturity date is September 30, 2015, and the annual rate of interest is seven percent (7%), which increases to twenty-four percent (24%) per annum, or the maximum rate permitted under any applicable law, in the event of default. Subject to certain limitations, the Holder can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the period of time from the date of this 7% Note through and including September 30, 2014 is the lesser of (a) $0.025 per share and (b) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average price occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert all or part of this 7% Note, subject to adjustment as provided in this 7% Note. The conversion price is $0.025 per share for the period of October 1, 2014 through the maturity date of September 30, 2015, subject to adjustment as provided in this 7% Note. At any time after the 12-month period immediately following the date of this 7% Note, the Company has the option to pre-pay the entire outstanding principal amount of this 7% Note by paying to the Holder an amount equal to one hundred and fifty percent (150%) of the principal and interest then outstanding. The Company’s obligations under this 7% Note will accelerate upon a bankruptcy event with respect to the Company or any subsidiary, any default in the Company’s payment obligations under this 7% Note, the Company’s failure to issue shares of its common stock in connection with a conversion of this 7% Note, the Company’s or any subsidiary’s breach of any provision of any agreement providing for indebtedness of the Company or such subsidiary in an amount exceeding $100,000, the common stock of the Company being suspended or delisted from trading on the Over the Counter Bulletin Board (the “Primary Market”) market and the OTCQB, the Company losing its status as “DTC Eligible” or the Company becoming late or delinquent in its filing requirements with the Securities and Exchange Commission. Upon any such acceleration of this 7% Note, the Company shall be obligated to pay an amount equal to the greater of (i) one hundred and twenty percent (120%) of the outstanding principal of this 7% Note (plus all accrued but unpaid interest) and (ii) the product of (a) the highest closing price for the Company’s common stock for the five (5) days on which the Primary Market is open for business immediately preceding such acceleration and (b) a fraction, the numerator of which is the outstanding principal of this 7% Note, and the denominator of which is the applicable conversion price as of the date of determination.

Due to the “reset” clause in this 7% Note relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company, which is detailed in “NOTE 21 – DERIVATIVE LIABILITY”.

On August 29, 2013, the date on which the Revolving Promissory Note was exchanged for the 7% Convertible Note, the Company recorded a $750,000 non-cash “loss on extinguishment of debt” while also recording a corresponding $640,074 “derivative liability” (see “NOTE 21 – DERIVATIVE LIABILITY”) and a $109,926 increase in “additional paid-in capital” as related to the beneficial conversion feature associated with this 7% Note. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 21.0%; (iii) risk free rate of 0.02%, (iv) expected term of 7 days ($550,000 was converted 7 days after issuance), (v) market value share price of $0.04, and (vi) per share conversion price of $0.02156.

On September 5, 2013, the Holder converted $550,000 of principal into 25,510,204 shares of the Company’s common stock at a per share conversion price of $0.02156. On September 17, 2013, the Holder converted an additional $150,000 of principal into 6,757,328 shares of the Company’s common stock at a per share conversion price of $0.02156. On December 19, 2013, the Holder of this note converted the remaining principal of $50,000 and accrued and unpaid interest of $11,349, which totals $61,349, into 2,453,945 shares of the Company’s common stock at a per share conversion price of $0.025. As of December 31, 2013, the original $750,000 7% convertible note had been fully converted into shares of the Company’s common stock and was no longer on the Company’s balance sheet.

On October 11, 2013, the Company issued an additional $850,000 of 7% convertible notes to four Holders. As previously stated, due to the “reset” clause in these 7% Notes relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 25.09%; (iii) risk free rate of 0.23%, (iv) expected term of 1 year, (v) market value share price of $0.063, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $1,292,000, which it recorded as a derivative liability as of the date of issuance while also recording a $442,000 non-cash interest expense and an $850,000 debt discount on its balance sheet in relation to the beneficial conversion feature (BCF) of these notes.

On December 31, 2013, the Company revalued the derivative value of the $850,000 7% Notes using the weighted-average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. The Company determined the derivative value to be $4,284,000 as of December 31, 2013, which represents a change in the fair value of the derivative in the amount of $2,992,000 as compared to the derivative value on October 11, 2013. Accordingly, the Company recorded a non-cash change in fair value of derivative expense of $2,992,000 while also increasing the derivative liability from $1,292,000 to $4,284,000 as of December 31, 2013 (see “NOTE 21 – DERIVATIVE LIABILITY”).

On December 20, 2013, the Company issued an additional $1,000,000 of 7% convertible notes to two Holders. As previously stated, due to the “reset” clause in these 7% Notes relating to the conversion price, the Company has determined that the conversion feature is considered a beneficial conversion feature and thereby creates a derivative liability for the Company. On the date of issuance, the Company calculated the value of the derivative liability using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.02%, (iv) expected term of 1 year, (v) market value share price of $0.14, and (vi) per share conversion price of $0.025. Based upon this model, the Company determined an initial derivative liability value of $4,600,000, which it recorded as a derivative liability as of the date of issuance while also recording a $3,600,000 non-cash interest expense and an $1,000,000 debt discount on its balance sheet in relation to the beneficial conversion feature (BCF) of these notes.

On December 31, 2013, the Company revalued the derivative value of the $1,000,000 7% Notes using the weighted-average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 45.04%; (iii) risk free rate of 0.01%, (iv) expected term of 1 year, (v) market value share price of $0.151, and (vi) per share conversion price of $0.025. The Company determined the derivative value to be $5,040,000 as of December 31, 2013, which represents a change in the fair value of the derivative in the amount of $440,000 as compared to the derivative value on December 20, 2013. Accordingly, the Company recorded a non-cash change in fair value of derivative expense of $440,000 while also increasing the derivative liability from $4,600,000 to $5,040,000 as of December 31, 2013 (see “NOTE 21 – DERIVATIVE LIABILITY”).

As of December 31, 2013, the outstanding principal on the 7% Notes was $1,850,000 with accrued and unpaid interest in the amount of $15,668, for a total amount owed of $1,865,668. For the year ended December 31, 2013, the Company recorded $17,260 of interest expense related to these 7% Notes.