9. Convertible Notes Payable

During January 2011, the Company entered into a series of Secured Loan Agreements with several individuals for the sale of secured convertible notes (the “Convertible Notes”) totaling $403,000. These are in addition to the $1,617,000 convertible notes issued during the year ending December

31, 2010. These individuals represent members of executive management, members of the board of directors, and significant shareholders. The Convertible Notes are for a term of two years, carry interest of 6% and are convertible into shares of common stock at the election of the holders of the Convertible Notes at $0.06 per share and, as long as the average share price of the Company’s common stock on the Over-the-Counter Bulletin Board remains above $0.06, at the election of the Company at $0.06 per share. The issuance of the Convertible Notes in the first quarter of 2011 does not represent a change of control as approximately 94% of the Convertible Notes were issued to shareholders of the Company that currently own approximately 34% of the Company’s outstanding share capital.

The Company recorded $67,167 in additional debt discount in 2011 related to the issuance of these convertible notes due to the beneficial conversion feature, which is shown as Additional Paid in Capital and reduction in the convertible notes payable. These discounts will be amortized over two years. The discount is based on the market value of the stock at the date of the note agreements which was $.07 per share.

In January 2011, the Company redeemed $20,000 of Convertible Notes.

The Convertible Notes may be converted into 33,333,334 shares of common stock, or approximately

279% of current outstanding shares of common stock.

The Company also entered into a Security Agreement to secure payment and performance of its obligations under the Convertible Notes pursuant to which it granted the holders of the Convertible Notes a security interest in all of its assets. The security granted will be subordinated to a security interest granted to the New Lender in connection with the loan commitment described in Note 8 (including any security interest that may be granted in connection with funds borrowed to pay amounts due under such loan) and any obligations to repay surety bonds issued in connection with services provided in the Company’s core business where the Company is the principal under the surety bond. The Company’s sole active subsidiary also guaranteed all amounts owed by the Company under the Convertible Notes.

The Company recorded $336,667 in debt discount related to the issuance of these convertible notes due to the beneficial conversion feature, which is shown as Additional Paid in Capital and reduction in the convertible notes payable. The discount is based on the market value of the stock at the date of the note agreements which was $.07 per share. Amortization expense related to these discounts was

$166,667 for the year ended December 31, 2011 and is included in interest expense. The remaining amortization period for the discount is 8 months for the first tranche of $1,332,000 and 12 months for

second tranche of $285,000. Interest expense recorded on these notes amounted to $120,000 and

$63,640 in 2011 and 2010 yielding an effective interest rate of 14.3%. The unamortized discount was

$129,667 and $232,500 at December 31, 2011 and 2010, respectively.

The Convertible Notes Agreements include certain default conditions including a provision of default if the Company is in default of any material contract to which the Company is a party or under any loan or other financing contract of agreement to which the Company is a party.

Scheduled principal repayments on the convertible notes payable are as follows at December 31,

2011:

The Company was not in compliance with the default conditions as of December 31, 2011. The annual interest rate is to increase to 20% for any period of default. As of December 31, 2011 the interest began to accrue at 20%. The redemption of shares is available to the lenders through the maturity dates set in the agreements.

As of April 22, 2013 the Convertible Notes were amended to provide the Lenders with the option to call a portion or all of the Principal Sum and/or Interest for payment at any time while the Convertible Notes remain outstanding. The maturity date has been extended to August 30, 2013. The annual interest will continue to accrue on each Note at the rate of 6% per annum through and including the applicable Original Designated Date, and at the rate of 20% per annum thereafter.

Due to the default on the Convertible Notes these are classified as current as of December 31, 2011.