NOTES PAYABLE

3 Months Ended

Mar. 31, 2012

5. NOTES PAYABLE

A summary of notes as of March 31, 2012 and December 31, 2011 is as follows:

	March 31, 2012			December 31, 2011
Convertible notes payable, gross	$	765,000		$	240,000
Note payable to CSI		362,500			362,500
Bridge notes payable, gross		211,500			—
Total notes payable, gross		1,339,000			602,500
Less amount classified as current		(1,131,794	)		(465,000	)
Less discount		(119,706	)		—
Long-term notes payable , net of current portion	$	87,500		$	137,500

The following is a roll-forward of notes payable from December 31, 2011 through March 31, 2012:

Balance as of December 31, 2011	$	602,500
Increase in face value of note payable		375,000
Notes payable financing		361,500
Debt discount – Convertible Note Payable, gross		(119,104	)
Debt discount – Convertible Promissory Note		(82,247	)
Amortization of debt discounts		81,645
Balance as of March 31, 2012	$	1,219,294

Convertible Promissory Notes

RVH, Inc.:

In February 2011, the Company issued a $150,000, 6 month 12% promissory note due in August 2011. The note is secured with a priority lien on all the Company’s rights, titles, and interest in its assets, together with the proceeds thereof. The Company incurred $4,500 of an original issue discount which was deducted from the loan proceeds and was recorded as a debt discount and was being amortized over the loan term. In addition, the Company paid the lender $10,000 of legal fees which was recorded as a debt discount and was being amortized over the loan term and issued 6,000,000 warrants (with a cashless exercise provision) exercisable at $0.01 per share for a term of 2.5 years. The fair value of the warrants was $55,800, calculated using the Black-Scholes option pricing model with the following assumptions: stock price of $0.01 (based on the grant date quoted trading price of the Company's common stock), expected term of two and one-half years, volatility of 230% (based on historical volatility), and a risk-free interest rate of 1%. The relative fair market value of the warrants was $40,671 which was recorded as debt discount and was being amortized over the term of the note. The Company recorded the aggregate debt discounts of $55,171 for this note (which consisted of the loan fee, legal fees and warrant discount) and amortized $39,054 to interest expense through June 2011.

In July 2011, the Company amended this note to add a conversion feature making the note convertible at $0.01 per share. All other terms remained the same. The debt modification was treated as a debt extinguishment under ASC 470-50. Accordingly, the remaining unamortized discount at the time of modification of $16,117 was written-off to loss on extinguishment of debt. There was no beneficial conversion value of the new note as the conversion price was deemed to be equal to the fair value of the common stock. In December 2011, the amount of common stock on an as converted basis exceeded our authorized share amount which resulted in the Company treating the convertible note embedded conversion feature as a derivative liability in the consolidated financial statements; see Note 2 “Fair Value of Financial Instruments and Fair Value Measurements”.

In September 2011, as a result of the above mentioned note modification, the note holder converted $50,000 of the promissory note’s principal along with $10,675 of accrued interest into 6,067,561 shares of common stock, see Note 6.

As of December 31, 2011, $100,000 of principal remained outstanding and there was approximately $8,600 of accrued interest. While the note matured in August 2011, the note holder has neither converted the note into common stock nor notified the Company that it was in default. A provision in the note allows the note holder to convert the note into common stock at $0.001 per share upon a default.

In March 2012, the Company increased the amount of the convertible promissory note outstanding principal balance from $100,000 to $475,000, extended the maturity date from August 2011 to May 21, 2012 and the conversion price was set at $0.005 per share (with full anti-dilution provisions). This modification qualified as a debt extinguishment for accounting purposes under ASC 470-50-40-10. There was no intrinsic value of the repurchased beneficial conversion feature as the note’s conversion price exceeded the market price of the common stock on the modification date. The Company recorded a loss on the extinguishment of debt of $360,386 in the first quarter of 2012. In a separate transaction arranged by the Company, the note holder intended to assign the note to another party and the assigned note was to have its maturity date extended to March 30, 2013. As discussed further in Note 13, on May 16, 2012, the existing note holder, who had fulfilled all of their obligations under the assignment agreement, officially notified the Company, that as a result of the assigning party not fulfilling all of its requirements (including payment) under the assignment agreement, that the assignment agreement had been officially withdrawn. The parties have agreed to a 10 day extension from the May 21, 2012 maturity date, in order to negotiate the terms of the note. The note holder has not waived any other defaults that may have occurred under the note and they have not waived any of their rights or remedies available to them under the note, including the reimbursement of legal fees incurred by the note holder. The Company can give no assurances as to the resolution of the note.

Cape One Financial:

In March 2012, the Company entered into a $150,000, three- month 10% convertible secured note that is payable July 2, 2012 and is convertible into common stock at $0.005 per share. Due to the authorized share shortage, the embedded conversion option is accounted for as a bifurcated derivative. The Company paid loan fees of $15,000, a structuring fee of $15,000 and loan origination fees of $5,250. The Company also issued five-year warrants to purchase an aggregate 90,000,000 shares of common stock at $0.005 per share, valued at its relative fair value of $14,613 and issued the lender 53,575,715 shares of common stock (as part of a voluntary reduction in the conversion price of previously converted securities into common stock) valued at its relative fair value of $69,241. Total discounts to be amortized over the three-month debt term are $119,104, with a balance of $117,837 remaining at March 31, 2012. The Company received the net proceeds of $114,750 in April 2012; as such, the amount is included in the line item “Other current assets” on the Company’s consolidated balance sheet as of March 31, 2012.

Law firm:

In May 2011, the Company issued to a law firm a $210,000 convertible note which is payable on demand of which $43,687 was repaid and $26,313 was converted into 2,392,044 shares of common stock, leaving a balance of $140,000 as of December 31, 2011. The principal and interest on this note is convertible into common stock at $0.011 per share. Additionally, the Company issued the law firm 3,000,000, three-year warrants exercisable at $0.011. The note and warrants were issued in satisfaction of accounts payable due to the law firm. The warrants were valued using the Black-Scholes option pricing model with the following assumptions, stock price of $0.0085 (based on the grant date quoted trading price of the Company's common stock), expected terms of three years, volatility of 159% (based on historical volatility), and a risk-free interest rate of 1.84%. The relative fair value of these warrants, approximately $19,000, was fully expensed due to the note being payable on demand. There was no intrinsic value for the embedded conversion feature because the conversion rate of the note equaled the trading price of the Company’s common stock. In December 2011, the amount of common stock on an as converted basis exceeded our authorized share amount which resulted in the Company treating the convertible note embedded conversion feature as a derivative liability in the consolidated financial statements; see Note 2 “Fair Value of Financial Instruments and Fair Value Measurements”.

Note Payable to CSI

In July 2011, the Company issued a $450,000 note in connection with the CSI Agreement and it stipulated 18 equal monthly installments of $25,000 beginning in August 2011; see Note 4 for additional information. During 2011, the Company repaid $87,500, leaving $362,500 outstanding as of December 31, 2011. The Company made a partial payment of the November 2011 payment and did not make its December 2011 payment. In February 2012, the Company amended the terms of this note payable such that equal monthly payments in the amount of $25,000 will commence in April 2012 and continue through June 2013. As such, the Company is presenting the payments that are scheduled to occur within the next twelve months, or $275,000, as current, with the remaining $87,500 classified as long-term. The Company did not make its April 2012 payment of $25,000. To date, the note holder has not notified the Company in writing that it is in default.

Bridge Notes Payable

In January 2012, the Company issued two $105,750, 3 month 15% secured promissory notes due in April 2012. The notes each include principal of $100,000, loan origination fees of $4,000, and documentation preparation fees of $1,750. The Company also issued five-year warrants to purchase an aggregate 20,000,000 shares of common stock at $0.01 per share, valued at $70,747. Total discounts to be amortized over the three-month debt term are $82,247, with a balance of $1,869 remaining at March 31, 2012. In April 2012, the Company repaid $200,000 of the notes.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details

Options Media Group Holdings, Inc. 10-Q