Note 5 – Securities Option Agreement, Secured Convertible Debentures, Senior Debentures and Demand Notes

Mortgage promissory note:

On November 29, 2012, we borrowed $1,000,000 froma lender and in exchange, the Company issued a 12% promissory note and a mortgage and security agreement. The 12% promissory note, among other matters, accrues interest at 12% per annum, is payable in full on November 29, 2014, and is secured by our corporate office building, located at 1080 NW 163^rd Drive, Miami Gardens, FL 33169.

On January 11, 2013, we received an additional advance of $400,000 pursuant to its existing lending facility with 1080 NW 163rd Drive, LLC. The additional advance of $400,000 was endorsed by a promissory note, which was consolidated with the initial advance of $1,000,000 from the mortgage on 1080 NW 163rd Drive, LLC. The consolidated promissory mortgage note has an aggregate principal balance of $1,400,000, accrues interest at 12% per annum, is payable in full on November 29, 2014, and is secured by our corporate office building, located at 1080 NW 163rd Drive, Miami Gardens, FL 33169.

Securities Option Agreement:

On June 30, 2012, we executed a Securities Option Agreement with Vicis Capital Master Fund (“Vicis”) whereby Vicis grants us an option to purchase and redeem all securities and debentures held by Vicis. The option becomes exercisable on the date that all principal and accrued interest on all debentures has been paid in full, and may be exercised at any time after initial exercise date through and including December 31, 2013 (expiration date). Upon exercise of the “option” the redemption price for the securities shall be an amount equal to $16,000,000 minus the sum of principal and accrued interest paid on all debentures held by Vicis. Upon exercise of the option, any and all unpaid dividends on the securities shall be surrendered and cancelled without payment of additional consideration.

Extension of Maturity Dates of Outstanding Non-Convertible Debentures:

On June 30, 2012, we entered into an agreement to modify our outstanding debentures solely to extend their maturity dates that originally ranged from June 30, 2012 to July 1, 2013 to December 31, 2013. There were no other material modifications to the debentures and the holders received no additional consideration to effect the modification. As a result of these modifications, we evaluated each debenture to determine whether the maturity extension constituted a substantial modification. Under current accounting standards, from a debtor’s perspective, a modification of a debt instrument is deemed equivalent to the exchange of debt instruments if the present value of the cash flows under the terms of the modified arrangement are at least 10 percent different from the present value of the remaining cash flows under the terms of the original debt instrument. In cases where the difference in cash flows exceeds this level, extinguishments accounting is prescribed. As a result of our calculations, we concluded that the present values, using the effective interest rates on the issuance dates, of our face value $5,266,130, $2,000,000, and $3,500,000 debentures exceeded the substantive threshold. Accordingly, the debentures were adjusted to their respective fair values of $6,150,160, $2,313,888, and $3,852,748 and a corresponding charge to income in the amount of $3,135,235 representing the extinguishment loss.

The fair values of the debentures were determined based upon their future cash flows, discounted at a credit-risk adjusted market interest rate of 7.4%.

2012 Issuance of Non-Convertible Debentures and Demand Notes

On March 29, 2012, we issued a face value $500,000, 10% senior secured debenture, due June 30, 2012, extended to December 31, 2013

On April 30, 2012, we issued a face value $500,000, 10% senior secured debenture, due June 30, 2012, extended to December 31, 2013.

On June 26, 2012, we issued a face value $450,000, 10% senior secured debenture, due June 30, 2012, extended to December 31, 2013.

During the year ended December 31, 2012, we received advances in the total amount of $1,150,000, as part of a series of 10% senior secured debentures, due December 31, 2013, issued to our largest investor.

During the year ended December 31, 2012, we received advances in the total amount of $275,000, represented by Demand Notes, issued to our largest investor.

The carrying values our senior debentures and demand notes consisted of the following as of June 30, 2013 and December 31, 2012:

	June 30,		December 31,
	2013		2012

2,000,000 face value 12% debenture, due December 31, 2013	$	2,485,486	$	2,398,153
$3,500,000 face value 12% debenture, due December 31, 2013		4,138,468		3,993,053
$5,266,130 face value 12% debenture, due December 31, 2013		6,606,256		6,374,130
$ 500,000 face value 10% debenture, due December 31, 2013		500,000		500,000
$ 500,000 face value 10% debenture, due December 31, 2013		500,000		500,000
$ 450,000 face value 10% debenture, due December 31, 2013		450,000		450,000
$1,150,000 advances on 10% debenture, due December 31, 2013		1,150,000		1,150,000
	$	15,830,210	$	15,365,336

Demand notes	$	524,087	$	275,000
5% Convertible Notes		300,000		-
Demand and 5% Convertible Notes	$	824,087	$	275,000

2011 Issuance of Non-Convertible Debentures

On August 8, 2011 and September 30, 2011, we issued face value $2,000,00012% debentures, due July 1, 2013, and face value $3,500,00010% debentures, due June 30, 2012, respectively, for aggregate cash of $5,500,000. Concurrent with these financing transactions we also issued the investor warrants to purchase an aggregate of 18,000,000 shares of our common stock for $0.50 for over a five year period.

We allocated the gross proceeds from the financing transactions to the debentures and the warrants based upon their relative fair values, as reflected in the following table:

September 30, 2011 Financing Arrangement	Fair Values		Relative Fair Values
$3,500,000 face value of debentures	$	3,560,675	$	1,695,404
Warrants to purchase 10,000,000 shares of common stock		3,790,000		1,804,596
	$	7,350,675	$	3,500,000

August 8, 2011 Financing Arrangement	Fair Values		Relative Fair Values
$2,000,000 face value of debentures	$	2,127,063	$	721,642
Warrants to purchase 8,000,000 shares of common stock		3,768,000		1,278,358
	$	5,895,063	$	2,000,000

The fair value of the debentures was computed based upon the present value of all future cash flows, using credit risk adjusted discount rates ranging from 7.63% to 7.86%. The discount rate was developed based upon bond curves of companies with similar high risk credit ratings plus a range of 0.25% to 0.36% risk free rate based upon yields for zero coupon government securities with maturities consistent with those of the debentures. The fair value of the warrants was determined using the Binomial Lattice technique. The effective volatility and risk free rates resulting from the calculations were 55.15% — 129.86% and 0.07% — 1.11%, respectively.

June 30, 2011 Financing, Debt Settlement, and Accrued Interest Settlement

On June 30, 2011, we issued face value $5,266,130, 12% debentures, due July 1, 2013 and warrants to purchase 21,064,520 shares of our common stock for $0.50 per share, which expire five years from the issuance date; for $2,500,000 cash, settlement of $2,500,000 in bridge financing and settlement of $266,130 in accrued interest on the former convertible debentures. See discussion on the conversion of the convertible debentures, below. The cash and advance settlement were accounted for as financing transactions. The settlement of the accrued interest was accounted for as an extinguishment of debt.

The debentures were allocated $5,000,000 face value and $266,130 to the financing and extinguishment, respectively. Applying that same relationship, we allocated 20,000,000 and 1,064,520 warrants to the financing and extinguishment, respectively.

We allocated the gross proceeds from the financing transaction to the debentures and the warrants based upon their relative fair values, as reflected in the following table:

	Fair Values		Relative Fair Values
$5,000,000 face value of debentures	$	5,340,195	$	2,029,536
Warrants to purchase 20,000,000 shares of common stock		7,816,000		2,970,464
	$	13,156,195	$	5,000,000

The fair value of the debentures was computed based upon the present value of all future cash flows, using a credit risk adjusted discount rate of $7.75%. This discount rate was developed based upon bond curves of companies with similar high risk credit ratings plus a 0.50% risk free rate based upon yields for zero coupon government securities with maturities consistent with those of the debentures. The fair value of the warrants was determined using the Binomial Lattice valuation technique. The effective volatility and risk free rate used in the calculation were 113.8% and 1.70%, respectively.

For purposes of the extinguished instrument, we recorded the allocated face value of the debentures and the allocated number of warrants at their fair values. The difference between these amounts and the carrying value of the settled obligation was recorded as an extinguishment loss in our income, as follows:

	Extinguishment Calculation
$266,130 face value of debentures	$	284,238
Warrants to purchase 1,064,520 shares of common stock		416,014
		700,252
Carrying value of settled obligation		266,130
Extinguishment loss	$	434,122

The fair value of the debentures and the warrants were determined in the same manner as those allocated to the financing and as described above.

The total carrying value of the debentures arising from the financing and the extinguishment transactions amounted to $2,313,774. This discounted balance is subject to amortization through charges to interest expense over the term to maturity using the effective interest method. Amortization commenced on July 1, 2011.

2013 Demand Notes and Convertible Debt

On February 15, 2013 we received an additional advance of $100,000 from 1080 NW 163rd Drive, LLC. This advance is not evidenced by a formal promissory note. This additional advance accrues interest at 8% per year, and was payable in full on June 9, 2013. This note is now in default.

On February 19, 2013, the Company’s CEO advanced the Company $25,000. This advance is not evidenced by a formal promissory note. The advance was for working capital, is non-interest bearing and is due on demand. Interest will be imputed on these notes at current market rates.

On April 22, 2013 and May 3, 2013 the Company received advances from Vicis in the amount of $50,000 and $25,000, respectively, both due on demand. These advances are not evidenced by a formal promissory note.

On May 31, 2013, the Company issued to Samer Bishay a $300,000 face value, 5% Secured Convertible Promissory Note, due December 1, 2013. This note is convertible into shares of the Company’s common stock at a rate of $0.08 per share, for a total of 3,750,000 common shares. This note has a second priority security interest, junior in priority only to the holder of the first priority interest, to all real property of the Company and any and all cash proceeds and/or non-cash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefore or for any right to payment.

Subsequent to June 30, 2013, the Company issued convertible debt securities and entered into additional demand note agreements.

On July 7, 2013, August 9, 2013, August 15, 2013, August 22, 2013, September 9, 2013 and September 30, 2013, the Company received $111,000, $55,000, $75,000 and $125,000, $100,000 and $55,000, respectively, for working capital from an outside party. These notes are due on demand and are non-interest bearing. Interest will be imputed on these notes at current market rates.

On July 15, 2013, the Company issued to Samer Bishay a $200,000 face value, 5% Secured Convertible Promissory Note, due January 15, 2014. This note is convertible into shares of the Company’s common stock at a rate of $0.08 per share, for a total of 2,500,000 common shares. This note has a second priority security interest, junior in priority only to the holder of the first priority interest, to all real property of the Company and any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment.

On August 9, 2013, August 14, 2013 and September 3, 2013, the Company’s CEO advanced the Company $5,000, $20,000 and $25,000 respectively. These advances are not evidenced by a formal promissory note. These advances were for working capital, are non-interest bearing and are due on demand. Interest will be imputed on these notes at current market rates.