Related Party Notes Payable

6 Months Ended

Jun. 30, 2011

Related Party Notes Payable

(10) Related party transactions

The Company has an exclusive option to enter licensing/acquisition of rights agreements for individual characters, subject to existing third party rights, within the RIP Awesome Library of RIP Media, Inc., an entity in which Scott Rosenberg is the Manager. Scott Mitchell Rosenberg also provides production consulting services to the Company’s customers (production companies) through Scott Mitchell Rosenberg Productions (another related entity) wholly owned by Scott Mitchell Rosenberg. At the time the Company enters into a purchase agreement with a production company, a separate contract may be entered into between the related entity and the production company. In addition, consulting services regarding development of characters and storylines may also be provided to the Company by this related entity.  Revenue would be paid directly to the related entity by the production company.

As consideration for the Amendment of the assigned secured convertible notes payable to an entity managed by the CEO and one of the Company’s Directors, the Company must pay to such entity 25% of all gross revenues derived from Co-Owned intellectual property, including the merchandising revenue received from the film, “Cowboys and Aliens”. During the three and six months ended June 30, 2011, the Company incurred participation fees relating to this agreement of $9,375 and $13,125. As of June 30, 2011, the Company had unpaid fees relating to this agreement of $360,625.

In June 2010, the Company consummated a sale of its Drunkduck.com website to an affiliate of Brian Altounian, President and Chief Operating Officer of the Company. The sale includes all components of the website, all copyrights, trade secrets, trademarks, trade names and all material contracts related to the website’s operations with a cost basis of $40,000. The selling price totaled $1,000,000 which was comprised of $500,000 in cash to be paid in installments through October 28, 2010 and $500,000 in future royalties. For accounting purposes, the Company determined recognition of this sale on the installment method was appropriate since the collection of the purchase price could not be assured.  The Company has received $350,000, or 70% of the cash proceeds with the balance past due as of June 30, 2011.  The Company will also receive payments equal to 10% of Net Revenues generated from the website until the $500,000 in royalties is received. The Company retains partial ownership until the total selling price has been received.

As of June 30, 2011 and December 31, 2010, the Company had accrued payroll, included in Accrued expenses and other current liabilities, of $626,884 and $502,784, respectively, accrued interest, included in Accrued interest-related party notes payable, of $347,062 and $189,770, respectively, and accrued participation fees, included in Related party payable, of $360,625 and $347,500, respectively, due to Scott Rosenberg or entities in which he is a manager.  Related party payable as of June, 2011 also includes a short term loan of $257,000 from an entity which is managed by Scott Rosenberg.

Notes Payable

Related Party Notes Payable

(7) Related Party Notes Payable

Related party notes payable consist of the following as of:

	June 30, 2011 (Unaudited)		December 31, 2010
May 6, 2009 secured convertible notes payable	$	2,400,000	$	2,400,000
June 3, 2009 secured convertible notes payable		1,350,000		1,350,000
Related party notes payable		3,750,000		3,750,000
Less valuation discount		-		(2,470,982	)
Total short-term notes payable	$	3,750,000	$	1,279,018

On October 22, 2010, the Company entered into a series of agreements with its CEO, Chairman, and a major shareholder to extend the due date of certain existing loans made by the CEO. Pursuant to the terms of the agreements, the new due date for the secured convertible notes payable totaling $2,400,000 was extended to May 6, 2011 and the new due date for the secured convertible notes payable totaling $1,350,000 was extended to June 3, 2011. The interest rate under these loans was increased from 8% to 10%, effective upon the original due date of May 6, 2010 and June 3, 2010, respectively.

In exchange for these due date extensions, the Company granted to the CEO:

(1)   Two additional sets of warrants to purchase the Company’s common stock. The first set allowing for the exercise of up to 40,000,000 warrants to purchase shares of the Company’s common stock, at an exercise price of $0.11 per share, and the second set allowing for the acquisition of up to $3,750,000 in stock, also at an exercise price of $0.11 per share. Both sets (“New Warrants”) vested immediately and will expire on October 22, 2020; and

(2)   As more fully described in the Intellectual Property Rights Assignment Agreement between the Company and Scott Rosenberg (included as an exhibit to the Company’s 8K filing, as amended, on December 28, 2010), 25% of gross revenues from those certain co-ownership rights assigned to Scott Rosenberg.  A list of intellectual property that is excluded from this agreement is also in the exhibit to the 8K filing.

The notes are past due and the Company is currently negotiating with the note holder for an additional extension.

The notes, warrants and co-ownership rights were assigned to an entity that is managed by the CEO and a Director of the Company.

The warrants and convertible notes all contain adjustments to the exercise price for dilutive issuances.  If the Company sells or issues Additional Shares of Common Stock (defined as all shares of common stock issued other than stock issued to officers, directors or employees for work performed, shares issued upon the exercise of these warrants to purchases of common stock and shares issued in connection with the acquisition of the Company of voting control by another business entity) at a price less than the exercise or conversion price of the warrants or convertible note in excess of $200,000, then the exercise or conversion price is reduced to a price equal to the lowest price per share at which any Additional Shares of Common Stock were sold.

The dilutive issuances provisions of the warrants and convertible notes were triggered during the second quarter of 2011 due to issuances of common stock pursuant to the Dutchesss Opportunity Fund Agreement.  The revised pricing on the warrants and conversions is now set at $0.0121.

The Company considered authoritative guidance and determined that the debt modification represented a substantial debt modification. As such the proper accounting treatment for the conversion price was reevaluated. FASB guidance indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument (or embedded feature), regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock.  Accordingly, the embedded conversion feature of the notes and the conversion feature of the warrants resulted in a derivative liability being recorded by the Company when the Notes were modified and the New Warrants were granted (see Note  8).    The Company determined the fair value of the conversion feature of the Notes was $2,697,162 and the fair value of the New Warrants was $4,295,197 based on a binominal valuation model with the following assumptions: risk-free interest rate of 0.21% to 2.60%; dividend yield of 0%; volatility factor of 89.7%; and an expected life of 6 months to 10 years, resulting in total derivative at modification of $6,992,359.  For financial statement purposes, $3,750,000 of this amount was allocated to debt discount (i.e. up to face amount of the Notes) and is being amortized over the term of the Notes.   For the three and six months ended June 30, 2011, $1,644,452 and $2,470,982 of discount amortization is included in interest expense, respectively.  At June 30, 2011, the unamortized balance of the discount is $0.