BIEBER BRANDS AND ASSOCIATES AGREEMENTS

12 Months Ended

Dec. 31, 2011

In May 2011, the Company entered into agreements with Justin Bieber Brands, LLC, and certain associates of Justin Bieber (collectively, the “Bieber Agreements”, and the “Bieber Group”, respectively) as well as a related agreement with a company formerly managed by the Company’s Chairman, Keith St. Clair. The Bieber Agreements provide that Justin Bieber shall act as a spokesman for PhoneGuard’s software and its potential to substantially reduce injuries and save lives from traffic accidents. Bieber has agreed to endorse PhoneGuard’s software in a number of ways, both online and in person over the term of the Bieber Agreement.

The Bieber Agreements are identical except with regard to the number of warrants and sales royalties we are obligated to issue and pay. Each agreement revolves around Justin Bieber’s endorsement of our PhoneGuard software. The key terms of the Bieber Agreements are:

·	Three year terms with Justin Bieber having the right to terminate after one year in which case the other two agreements terminate;
·	Sales royalties based upon a percent of revenues. The aggregate royalties percentage payable to Bieber Group is either: (i) 25% of annual sales of the product; or (ii) 40% on low margin sales (sales on a wholesale basis less than $10.66 per unit);
·	Pursuant to the agreements, the Company issued to the Bieber Group warrants to purchase an aggregate 121,160,749 shares of common stock at $0.01 per share or a total of 16.4% of the Company on a fully diluted basis. The warrants contain full anti-dilution protection rights on both the exercise price and quantity. Subsequent to December 31, 2011, as a result of provisions contained in the warrants protecting the holder against dilution, the exercise price of the warrants was reduced to $0.005 per share and the number shares of common stock for which the warrants could be exercised was increased to 242,321,498;
·	Pre-emptive rights for sales by the Company of equity and common stock equivalents above $0.01 per share so the Bieber Group can purchase such instruments at the same sale price to maintain their 16.4% ownership right;
·	The aggregate fair value of the warrants issued to the Bieber Group is $937,785 based on a Black-Scholes pricing model using a stock price of $0.0085 (based on the grant date quoted trading price of the Company's common stock), expected term of three years based on the contracted term, volatility of 200% (based on historical volatility), and a risk-free interest rate of 0.94%; and
·	The warrants have the right to receive any distributions, either in cash or in property, made by the Company on the pro rata ownership percentage as if the warrants had been exercised.

The Company’s Chairman, Mr. Keith St. Clair played a key role in negotiating the Bieber Agreements. As a result, effective May 2011, the Company also entered into an agreement with the Big Company (“TBC”), a company for which Mr. St. Clair was a manager of at that time. While Mr. St. Clair does not own any equity in TBC, Ervin Braun, a Board member owns a 2% equity interest in TBC. Mr. St. Clair stepped down from TBC shortly after joining the Board as the Company’s Chairman. The key terms of the TBC agreement are:

·	Term of one year to be extended as long as the Bieber Group agreements remain in effect;
·	Sales royalties based upon a percentage of the Company’s adjusted gross profit (“AGP”) after deducting activation and software costs and royalties payable to the Bieber Group. The royalties percentage payable to TBC is calculated based on one of the following scenarios: (i) 30% of AGP on direct annual sales; (ii) 15% of AGP on direct monthly sales where at least two payments have been made (otherwise no royalty shall be due); or (iii) 10% of AGP on wholesale sales;
·	TBC was granted the option to receive up to 50% of sales royalties due in shares of common stock valued at $0.01 per share with a maximum of 25,000,000 shares issuable.
·	The Company issued to TBC 18,000,000 shares of common stock, with a fair value of $153,000 based on the grant date market closing price of the stock which was $0.0085 per share;
·	The Company issued to TBC one year warrants to purchase an aggregate 37,000,000 shares of its common stock exercisable at $0.01 per share with a fair value of $215,710 based on a Black-Scholes pricing model using a stock price of $0.0085 (based on the grant date quoted trading price of the company's common stock), expected term of one year, volatility of 211% (based on historical volatility), and a risk-free interest rate of 0.19%. Subsequent to December 31, 2011, pursuant to provisions of the warrants providing anti-dilution protection to the holder, the exercise price of the warrants was reduced to $0.005 per share and the number of shares of shares of our common stock which may be purchased upon exercise of the warrants was increased to 74,000,000;
·	The Company issued to TBC one year warrants to purchase an aggregate 25,000,000 shares of its common stock exercisable at $0.02 per share; with a fair value of $122,000 based on a Black-Scholes pricing model using a stock price of $0.0085 (based on the grant date quoted trading price of the company's common stock), expected term of one year, volatility of 211% (based on historical volatility), and a risk-free interest rate of 0.19%. Subsequent to December 31, 2011, pursuant to provisions of the warrants providing anti-dilution protection to the holder, the exercise price of the warrants were reduced to $0.005 per share and the number of shares of shares of our common stock which may be purchased upon exercise of the warrants was increased to 100,000,000;
·	The Company granted to TBC similar pre-emptive rights as the Bieber Group, although not keyed to maintaining a specific percentage of the outstanding stock of the Company, and also granted TBC the same anti-dilution protection as in the warrants issued to the Bieber Group; and
·	The Company is obligated to pay TBC a consulting fee of $20,000 per month which accrues until we either raise $500,000 or enter into a factoring agreement, in which case we shall pay $10,000 per month with the balance accruing until we raise $5,000,000. The consulting fees shall reduce the amount of royalties payable to TBC on a dollar for dollar basis.

In May 2011, the Company valued a total of 183,160,749 warrants at $1,275,495 as discussed above and recorded a prepaid asset, allocated to current and non-current, and is being amortized over the 3 year term of the above mentioned agreements. As of December 31, 2011, the unamortized portion was $425,165 current and $577,516 non-current.

Due to the dilution protection provisions in the various warrant grants, the warrant values are treated as derivative liabilities in our consolidated financial statements. This results in the Company incurring non-cash gains or losses each quarter during the term of the warrants. If the price from the first to the last day of a quarter increases, then the Company will report a non-cash loss. Conversely, the Company will report a non-cash gain if the price decreases. (see Note 2).

Options Media Group Holdings, Inc. 10-K