Note 5 - Notes Payable

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 5 - Notes Payable

NOTE 5 – NOTES PAYABLE

Notes payable consists of the following as of:

	December 31, 2011		December 31, 2010
Note payable to W-Net Fund L.L.P, a related party, secured by substantially all of our assets and three trademarks. The note, including interest at the per annum rate of 12%, is due on August 12, 2012. As additional consideration for the note, W-Net Fund received a warrant to acquire 1,748,953 shares of common stock. The warrants are exercisable for 5 years at an exercise price of $0.10 per share (See Note 9). .	$	359,402	$	-
Revolving Promissory Note payable to W-Net Fund I, L.P. (“W-Net”), a related party. Under the terms of the Revolving Note, W-Net agreed to advance to us, from time to time and at W-Net’s discretion, amounts up to an aggregate of $150,000 pursuant to requests made us until December 31, 2012. All advances shall be paid on or before December 31, 2012 and interest shall accrue from the date of any advance on any principal amount withdrawn, and on accrued and unpaid interest thereon, at the rate of twelve percent (12%) per annum, compounded annually. The Company’s obligations under the Revolving Note will accelerate, upon written notice from W-Net, upon a bankruptcy event with respect to the Company, any default in the Company’s payment obligations or the Company’s breach of any provision of any material agreement between the Company and W-Net. Upon an event of default, the Revolving Note will bear interest at the rate of 15% per annum, compounded annually (See Note 9).		75,000		-
Note payable to Europa Inc, a related party, secured by substantially all of our assets and three trademarks. The note, including interest at the per annum rate of 12%, is due on August 12, 2012. As additional consideration for the note, Europa received a warrant to acquire 500,000 shares of common stock. The warrants are exercisable for 5 years at an exercise price of $0.10 per share (See Note 9).		102,663		-
Notes payable to a bank, secured by our personal property, due in monthly principal and interest payments of $2,913 through August 2011, including interest at a per annum rate of 7.5%. The notes were paid in full during the year ended December 31, 2011.		-		22,716
Notes payable to a stockholder, unsecured, bearing interest at 8% per annum and due on demand. The notes were paid in full during the year ended December 31, 2011.		-		20,000
Note payable to our former Chief Financial Officer. As of December 31, 2010, this note was unsecured, non-interest bearing and due on demand. On August 23, 2011, the note was modified to provide interest at the per annum rate of 12% and payments of principal and interest in the amount of $4,000 per month. All unpaid amounts are due on August 22, 2012. The note is secured by three trademarks and substantially all of our assets.		37,694		44,000
Notes Payable`		574,759		86,716
Debt Discount (1)		(98,579)			-
Total	$	476,180	$	86,716

(1)The aggregate fair value of the warrants issued to W-Net Fund and Europa discussed above was determined to be $132,791. The fair value was determined using the black scholes option pricing model using the following assumptions: Risk-free interest rate - 1.00%; Expected dividend yield - None; Expected life - 5 years, and; Expected volatility - 77%. The Company recorded the fair value of the warrants as debt discount upon issuance, and is amortizing the cost over the life of the notes. During the year ended December 31, 2011, the Company recorded amortization of $34,213 related to the amortization of the discount, and the unamortized discount at December 31, 2011 was $98,579.

For the purposes of balance sheet presentation notes payable have been grouped as follows:

	December 31, 2011		December 31, 2010
Notes payable	$	—	$	22,716
Notes payable, related party - current		37,694		64,000
Notes payable, related party – long term		438,486		—
	$	476,180	$	86,716