Note 6 – Convertible Notes

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Note 6 – Convertible Notes

NOTE 6 – CONVERTIBLE NOTES

On March 16, 2012, we entered into a Securities Purchase and Exchange Agreement (the “Securities Purchase and Exchange Agreement”) with W-Net and Europa, pursuant to which, we issued to the W-Net and Europa 6% Senior Secured Convertible Notes (the “Notes”) with an aggregate principal amount of $670,129 in exchange and the cancellation and exchange of (a) that certain Senior Secured Promissory Note, dated October 8, 2011 with balance of principal and interest due $205,293 at March 16, 2012 to Europa, and (b) that certain Senior Secured Promissory Note, dated October 12, 2011, with balance of principal and interest due $427,531 at March 16, 2012 to W-Net, and (iii) the revolving promissory note payable to W-Net with balance of principal and interest due $37,305 at March 16, 2012.

Pursuant to the Securities Purchase and Exchange Agreement, we may sell and issue up to an additional $1,329,871.23 in principal amount of the Notes in exchange for a cash purchase price and/or the cancellation and exchange of any promissory note issued by us, or evidencing debt assumed by us.

The Notes pay 6% interest per annum with a maturity date of April 15, 2015 and are secured by substantially all of our assets and three trademarks. No cash interest payments are required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. If there is an uncured event of default under the Notes, the holder of each Note may declare the entire principal and accrued interest amount immediately due and payable. Default interest will accrue after an event of default at an annual rate of 12%. The Notes may be prepaid by us at any time upon ten days’ prior written notice to the holders of the Notes, and the Notes may not be forced by us to be converted.

Each Note is convertible at any time into common stock at a specified conversion price, which will initially be $0.035 per share. The Note conversion price will be subject to specified adjustments for certain changes in the number of outstanding shares of our common stock, including conversions or exchanges of such. If additional shares of our capital stock are issued, except in specified exempt issuances, for consideration which is less than the then existing Note conversion price (a “Dilutive Issuance”), then such conversion price would be subject to a “full ratchet” adjustment that generally reduces the conversion price to equal the price in the Dilutive Issuance, regardless of the size of the Dilutive Issuance.

In accordance with current accounting guidelines, the Company determined that the full ratchet adjustment of the conversion feature created a derivative liability upon issuance. The fair value of the embedded beneficial conversion feature of the Notes was determined by management to be $331,463 using a weighted average Black-Scholes Merton option pricing model (See Note 7). This amount was recorded as a derivative liability and a valuation discount upon issuance. The valuation discount will be amortized as an expense over the 3 year life of the notes.

The Notes will greatly restrict the ability of our company or our subsidiaries to grant liens on our or their respective assets without the Note holders’ consent.

 Convertible notes consists of the following as of:

	March 31, 2012			December 31, 2011
6% Senior secured convertible notes and accrued interest	$	670,680		$	—
Debt Discount related to conversion feature		(326,984	)
Total	$	343,696		$	—