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NOTES PAYABLE

3 Months Ended

Jun. 30, 2011

NOTE 5 – NOTES PAYABLE

Notes Payable – Related Parties

Funds are advanced to the Company from various related parties including Scott A. Haire, the Company's CEO, and entities controlled by him. Other shareholders may fund the Company as necessary to meet working capital requirements and expenses. The following is a summary of amounts due to related parties, including terms of the debt, and the interest accrued as of June 30, 2011:

Related party	Nature of relationship	Terms of the agreement	Principal amount

H.E.B., LLC, a Nevada limited liability company	Scott Haire is the managing member of H.E.B., LLC	Series of funds advanced under three separate, unsecured lines of credit totaling $1.3 million at 10% per annum; no maturity date; unused lines available at June 30, 2011 total $1,153,993. Accrued interest at June 30, 2011 is $38,455.	$	146,007

Commercial Holding AG, LLC	Commercial Holding AG, LLC has provided previous lines of credit to affiliates of VHGI	Unsecured notes with interest accrued at rates of 8% and 10% per annum until paid in full with no maturity date. Accrued interest at June 30, 2011 is $44,131.		200,643

TOTAL			$	346,650

As mentioned in Note 3 – “Significant Transactions,” the principal balance of $400,000 WMT Note due to VHGI for the purchase of assets in February 2010 was paid in full as of March 31, 2011. The accrued interest related to the WMT Note had a remaining balance of $31,036 due as of March 31, 2011 and this amount was paid in April 2011.

There is remaining accrued interest of $3,710 due to related parties as of June 30, 2011 for debt paid prior to the end of the quarter.

During the first quarter of 2011, the Company issued common stock in payment of a portion of the debt owed to H.E.B., LLC. During the second quarter of 2011, the Company issued common stock in payment of a portion of the debt owed to Commercial Holding AG, LLC. The number of shares issued for the debt and the related loss on conversion is summarized below:

Related party	Number of shares	Amount of debt	Loss on conversion

H.E.B., LLC	4,169,213	$778,108	$1,389,882

Commercial Holding AG, LLC	300,000	$186,000	$ 0

Notes Payable

In the first quarter of 2011, the Company issued debt in the amount of $1,660,000 to various unrelated parties. The terms of the debt are as follows: (i) interest accrues at 10% per annum; (ii) maturity date is six months from the date of issuance; and (iii) debt is secured by a first priority interest in the inventory of the Company and is senior to all other obligations of the Company. Additionally, the Company agreed to issue a total of 4,150,000 shares of common stock to the lenders at a price of $0.01 per share, the value of which reduced the balance of the notes payable. The Company issued 3,900,000 of the shares in the first quarter of 2011 and recorded the difference between the fair market value of the stock and the $39,000 reduction in notes payable as a loan origination fee in the amount of $2,276,250. The remaining 250,000 shares were issued in the second quarter of 2011 and a loan origination fee in the amount of $153,750 was recorded in addition to a $2,500 reduction to the notes payable. The total owed to these lenders as of June 30, 2011 is $1,305,168. As of the date of this filing $371,111 of this balance is in default. As of June 30, 2011 the accrued interest balance is $27,626.

On May 27, 2011 the Company executed a senior promissory note in the amount of $125,000 to an unrelated party. The principal and accrued interest, at 10% per annum, is due on August 27, 2011. As of June 30, 2011 the accrued interest balance is $2,089.

On June 17, 2011, the Company executed three senior promissory notes to unrelated parties in the total amount of $250,000. The terms of the debt are as follows: (i) interest accrues at 12% per annum; (ii) maturity date is three months a from the date of issuance; (iii) the Company will issue 475,000 shares of common stock; and (iv) the Company will issue to the Lenders five-year warrants to purchase 475,000 shares of common stock at a price of $0.60 per share. The fair market value of the 475,000 Common Shares to be issued has been recorded as a loan origination fee in the amount of $332,750. The stock will be issued in the third quarter of 2011. The Company measured the fair value of the warrants and recorded a 100% discount against the principal of the notes. The discount is being accreted to interest expense over the term of the notes using the effective interest method. The unamortized discount balance as of June 30, 2011 is 214,674. The accrued interest payable balance on the notes as of June 30, 2011 is $917.

Convertible Notes Payable

On October 28, 2010, the Company executed four convertible promissory notes to unrelated parties with a combined total face amount of $390,000 and a funded amount of $250,000. The maturity date for each of the notes was February 28, 2011 and there was no stated interest rate. In accordance with ASC Topic No. 470-20-25-4, the intrinsic value of the embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital. A discount in the amount of $202,800 was calculated as the total value of the beneficial conversion feature, which is being amortized over the term of the note. The remaining unamortized balance as of December 31, 2010 was $65,333 and this amount has been amortized and recorded as interest expense in the first quarter of 2011. In addition, the discount amount of $140,000 has also been amortized over the term of the loan. The unamortized balance as of December 31, 2010 was $94,640 and this amount has been fully amortized and recorded as interest expense in the first quarter 2011. Upon the February 28, 2011 maturity date, $275,000 of the balance owed was converted into 1,100,000 shares of common stock. An additional $20,000 of the balance owed was arranged to be converted into 80,000 shares of common stock which were issued in the second quarter of 2011. The remaining balance owed on the notes was paid in cash in March of 2011 and the balance owed as of June 30, 2011 is zero.

As consideration for making the above mentioned loans, a combined total of 800,000 warrants were issued to the lenders to purchase shares of the Company’s common stock. The warrants have an exercise price of $.25, $.50, $.75 and $1.00 in increments of 200,000, respectively. All the warrants expire 5 years from the date of issuance. The fair value of the warrants on the date of issuance was calculated using the Black-Scholes option pricing model at each of the above mentioned exercise prices with the following factors: (i) market price per share of the Company’s common stock on issuance date was $.38; and (ii) volatility of 296% was calculated using the Company’s closing stock prices since October 2008; and (iii) risk free rate of 2.15% based on the 1-year treasury rate. The $304,000 value of the warrants was recorded as a capital contribution and loan origination expense at the date of issuance.

On December 28, 2010, a convertible promissory note was executed in the amount of $50,000 to an unrelated party. Interest accrues on the note at 8% per annum and the maturity date of the note is September 30, 2011. The note is convertible into shares of the Company’s common stock at a 45% discount. The total discount amount related to the note is $3,000, which is being amortized over the nine-month term of the loan, and the unamortized discount balance at June 30, 2011 is $985. The total owed to this lender, net of discount, as of June 30, 2011 is $49,015. The accrued interest balance as of this same date is $2,056.

On April 4, 2011 and May 20, 2011, the Company executed convertible promissory notes with the same terms to the same unrelated party in the amounts of $50,000 and $30,000, respectively. The principal and accrued interest on each note, at 8% per annum, is due nine months from date of execution.

In accordance with ASC Topic No. 470-20-25-4, the intrinsic value of the embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital. A discount in the amount of $77,418 was calculated as the total value of the beneficial conversion feature. The discount is being accreted to interest expense over the term of the notes using the effective interest method. The remaining unamortized balance as of June 30, 2011 is $57,847. The accrued interest payable on the notes as of the same date is $1,078.

On January 10, 2011, the Company executed two promissory notes to two unrelated parties in the amount of $50,000 each. The notes and interest, accrued at 24% per annum, are due two months from the issuance date. An additional note payable in the amount of $100,000 with the same terms was issued to a third party on January 14, 2011. The Company issued a total of 400,000 shares of common stock in the first quarter for a total reduction to the notes payable in the amount of $8,000. The remaining note balances including $8,000 of accrued interest were paid in full as of March 31, 2011.

On June 9, 2011, the Company executed three convertible promissory notes to unrelated parties in the total amount of $300,000. The notes accrue interest at 10% and mature six months from the issue date. The notes are convertible into shares of the Company’s common stock at the lesser of $0.40 per share or 50% of the lowest bid price in the five days preceding the conversion date. In addition, the Company issued to such investors a total of 999,999 three-year detachable warrants to purchase shares of common stock at an exercise price of $0.40 per share.

The Company measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. The discount is being accreted to interest expense over the term of the notes using the effective interest method. The unamortized discount balance as of June 30, 2011 is $195,244. The accrued interest payable balance as of the same date is $1,808.

On June 21, 2011, the Company entered into a note and warrant purchase agreement whereby the Company issued and sold, and an unrelated party purchased: (i) a convertible promissory note of the Company in the principal amount of $560,000 bearing a 12% interest rate (ii) and two warrants, each giving the holders the right to purchase 250,000 shares of common stock. Additionally upon closing, the Company issued to the lender 100,000 shares of common stock of the Company valued at $60,000 as a loan origination fee. The maturity date of the company note is June 21, 2015. In consideration for the issuance and sale of the Company Note and warrants, the lender paid cash in the amount of $250,000 and issued five $50,000 5% secured notes, each with a maturity date 49 months from the initial funding date. The $60,000 variance between the face value of the note and the funds received represents a 9.1% original issue discount of $50,000 and a $10,000 payment obligation with respect to certain fees and expenses.

The company note is convertible into shares of the Company’s common stock, at the option of the lender, at a price per share equal to (a) the principal and interest to be converted divided by (b) 70% of the lowest trade price for the thirty (30) trading days immediately preceding conversion. The principal and interest subject o conversion under this Note shall be eligible for conversion in tranches (“Tranches”), as follows: (1) an initial Tranche in an amount equal to $310,000 and any interest or fees accrued thereon under the terms of the Company Note or the other Transaction Documents., and (5) additional subsequent Tranches each in an amount equal to $50,000 and any interest or fees accrued thereon. The first Tranche of $310,000, representing the amounts paid by the investor upon the closing of the transaction, may be converted at the lender’s option at any time. The lender’s right to convert any of the subsequent Tranches is conditioned upon the lender’s payment of the corresponding 5% secured note. Accordingly, principal and interest under the Company Note may only be converted by the lender in proportion to the amounts paid under each of the 5% secured notes.

Both warrants are exercisable for a period of five years from the initial funding date, and entitle the investor to purchase 250,000 shares of common stock. The first warrant is exercisable at $0.50 per share and the second at $1.00 per share.

The Company measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a discount against the principal of the note. The discount is being accreted to interest expense over the term of the notes using the effective interest method. The unamortized discount balance as of June 30, 2011 is $606,242. The accrued interest payable balance on the note as of the same date is $3,866.

Debentures

On March 30, 2010, the Company entered into a Securities Purchase Agreement and, pursuant to this agreement, a total of $1,000,000 in principal amount of convertible debentures (the “Debentures”), with a maturity date of March 2013, may be sold to investors. The Debentures may be converted into shares of the Company’s common stock at a conversion price equal to seventy percent (70%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the date of conversion; provided that no holder may convert Debentures into, nor shall the Company issue to such holder, shares of common stock to the extent that the conversion would result in a holder and its affiliates together beneficially owning more than 4.99% of the then issued and outstanding shares of the Company’s common stock. This ownership restriction may be waived, however, by a holder upon sixty-one (61) days prior written notice.

The Debentures may be redeemed by the Company at any time or from time to time at a price equal to (x) one hundred twenty percent (120%) of the principal amount of the Debenture if the Debenture is called for redemption prior to the expiration of six months from the issuance date, or one hundred thirty one percent (131%) if called for redemption thereafter, plus (y) interest accrued through the day immediately preceding the date of redemption.

During 2010, the Company issued Debentures in the aggregate principal amount of $695,000. In accordance with ASC Topic No. 470-20-25-4, the intrinsic value of the embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital. A discount in the amount of $297,857 was calculated as the total value of the beneficial conversion feature, which is being amortized over the term of the debt, and the unamortized balance at June 30, 2011 is $210,354. The debt balance net of the discount is $484,646. In addition, debt issuance costs of $102,850 have been deferred and are being amortized over the term of the debt. The unamortized balance of deferred loan costs at June 30, 2011 is $72,144. The debentures have a three (3) year life from the date of issuance. Interest expense on the debentures has been accrued at 6% per annum and the accrued interest recorded as of June 30, 2011 is $44,800