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NOTES PAYABLE

6 Months Ended

Dec. 31, 2011

Convertible Notes Payable

In accounting for its convertible notes payable, proceeds from the sale of a convertible debt instrument with Common Stock purchase warrants are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portions of the proceeds allocated to the warrants are accounted for as paid-in capital. The remainder of the proceeds is allocated to the debt instrument portion of the transaction as prescribed by ASC 470-25-20. The Company then calculates the effective conversion price of the note based on the fair value allocated to the debt instrument to determine the fair value of any beneficial conversion feature (“BCF”) associated with the convertible note in accordance with ASC 470-20-30. The BCF is recorded to additional paid-in capital with an offset to debt discount. Both the debt discount related to the issuance of warrants and related to a BCF is amortized over the life of the note.

Convertible Notes Payable – Related Parties

Convertible notes payable due to related parties consisted of the following as of December 31, 2011 and June 30, 2011, respectively:

	December 31,		June 30,
	2011		2011
$250,000 face value, issued in February 2010, interest rate of 12%, matures in February 2013, net of unamortized discount of $95,804 and $137,774 at December 31, 2011 and June 30, 2011, respectively	$	154,196	$	112,226

$250,000 face value, issued in May 2010, interest rate of 12%, matures in May 2013, net of unamortized discount of $111,770 and $153,741 at December 31, 2011 and June 30, 2011, respectively		138,230		96,259

$250,000 face value, issued in August 2010, interest rate of 12%, matures in August 2013, net of unamortized discount of $171,844 and $222,848 at December 31, 2011 and June 30, 2011, respectively		78,156		27,152

$250,000 face value, issued in December 2010, interest rate of 12%, matures in December 2013, net of unamortized discount of $164,918 and $206,888 as of December 31, 2011 and June 30, 2011, respectively		85,082		43,112

$250,000 face value, issued in November 2011, interest rate of 15%, matures in November 2012, net of unamortized discount of $120,473 as of December 31, 2011		129,527		—

$250,000 face value, issued in December 2011, interest rate of 15%, matures in June 2013, net of unamortized discount of $98,493 as of December 31, 2011		151,508		—

$100,000 face value, issued in December 2011, interest rate of 15%, matures in June 2013, net of unamortized discount of $40,813 as of December 31, 2011		59,187		—

$300,000 face value, issued in December 2011, interest rate of 15%, matures in June 2013, net of unamortized discount of $78,011 as of December 31, 2011		221,989		—
Total convertible notes payable – related parties	$	1,017,875	$	278,749
Less current portion		129,527		—
Convertible notes payable – related parties, long-term	$	888,348	$	278,749

During fiscal year ended June 30, 2010, the Company entered into a financing agreement with a related party to fund up to $1,000,000 in four equal increment tranches. At each tranche, the Company would issue a 12% convertible note with a conversion price of $0.50 as well as warrants to purchase 50,000 shares of the Company’s Common Stock at $0.50 per share with a contractual life of 5 years. Each advance is due in 3 years from the advance dates. The proceeds of each advance by the lender to the Company are to be used to manufacture, ship, install and operate MyStudios, which serve as collateral for such advance.

The lender made each of the four advances in February, March, August and December of 2010 thus reaching the $1,000,000 limit under this financing agreement and the Company has granted all 200,000 warrants to the lender.

The value of the BCF recorded was $827,271 and the debt discount related to the attached warrants was $140,429, for a total debt discount of $967,700. The initial recorded BCF and debt discounts for the third of the four advances included in the above amounts were subsequently adjusted as described below to reflect the modification of the terms embedded in the host debt.

On August 2010, the Company issued a convertible note for $250,000 under the above $1,000,000 financing agreement (Tranche III). The note contained a conversion rate feature, and included a warrant to purchase 50,000 shares of the Company’s Common Stock at $0.50 per share, exercisable for 5 years. The Company recorded a BCF of $186,350 and a debt discount for $31,350, for a total discount of $217,700, relating to this financing transaction. Moreover, in connection with the Tranche III funding, the Company also issued to the lender an option, embedded in the convertible note and at the lender’s discretion, to put the converted Common Stock back to the Company at $0.60 per share. The embedded put option was evaluated and deemed to not meet the definition of a derivative and as such, was not bifurcated and accounted for as a derivative. Subsequent to the origination of the Tranche III, the Company then provided to the lender four separate amendments in which at each amendment, the maturity date of the put option was extended.

For Amendment 1, the Company extended the maturity date of the put option with no consideration given to the lender. For amendments two through four, the Company issued to the lender and its agent additional warrants to purchase Common Stock of the Company.

For Amendment 2 which occurred on November 15, 2010, the Company issued to the lender and its agent, warrants with contractual lives of 5 years to purchase 25,000 and 10,000 shares, respectively, of the Company’s Common Stock at $0.40 per share. The fair value of these warrants issued was $18,558 and $7,423, respectively, and was calculated using the Black-Scholes valuation model.

For Amendment 3 which occurred on November 22, 2010, the Company issued to the lender and its agent additional warrants with a contractual lives of 5 years to purchase 25,000 and 10,000 shares, respectively, of the Company’s Common Stock at $0.40 per share. The fair value of these warrants issued was $21,182 and $8,473, respectively, and was calculated using the Black-Scholes valuation model.

For Amendment 4 which occurred on December 7, 2010, the Company issued to the lender and its agent warrants with contractual lives of 5 year to purchase 50,000 and 25,000 shares, respectively, of the Company’s Common Stock at $0.40 per share. The fair value of these warrants issued was $43,843 and $21,922, respectively, and was calculated using the Black-Scholes valuation model.

The Company evaluated each of the aforementioned amendments under ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that while Amendments 1 and 2 were not deemed to be significant, Amendments 3 and 4 resulted in significant and consequential changes to the economic substance of the debt and thus resulted in extinguishment of the debt.

The extinguishment loss related to each of the amendments is summarized below:

First Amendment – October 29, 2010	$	0
Second Amendment – November 15, 2010	$	0
Third Amendment – November 22, 2010	$	234,802
Fourth Amendment – December 7, 2010	$	263,843
Total	$	498,645

The above extinguishment losses are recorded in other income and expense section of the statement of operations.

On November 3, 2011, the Company issued a convertible note to a related party for $250,000 that matures one year after issuance. The note bears an interest rate of 15% per annum and is convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.40 per share. This note includes the following priority repayment provisions: 1) the Company agrees to apply 50% of the first $600,000 of capital raised by the Company in the near term toward all outstanding notes the lender has outstanding with the Company; 2) the Company agrees to apply the first $825,000 of proceeds raised beyond the $600,000 to any outstanding notes the lender has outstanding with the Company; and 3) if the Company is unable to raise additional capital but a large marketing or sales agreement is entered into which provide for revenue in excess of $50,000, all funds received above $50,000 shall be applied to any notes the lender has outstanding with the Company at the time.

As additional compensation, the Company issued to the holder a warrant to purchase 60,000 shares of the Company’s Common Stock. The warrant has an exercise price of $0.40 per share and a contractual life of 5 years from the issuance date. The value of BCF recorded was $118,455 and the debt discount related to the attached warrants was $24,705, for a total debt discount of $143,160.

On December 2, 2011, the Company issued a convertible note to a related party for $250,000 that matures in June 2013. The note bears an interest rate of 15% per annum and is convertible, along with all accrued interest, after 180 days into shares of the Company’s Common Stock at $0.50 per share. In the event the Company enters into a revenue sharing agreement as specified in the note, the holder, at its option, may accelerate payment of the note up to 50% of the gross revenues received by the Company under the revenue sharing agreement.

As additional compensation, the Company issued to the holder a warrant to purchase 112,500 shares of the Company’s Common Stock. The warrant has an exercise price of $0.50 per share and a contractual life of 5 years from the issuance date. The value of the BCF recorded was $61,998 and the debt discount related to the attached warrants was $41,998, for a total debt discount of $103,996.

On December 15, 2011, the Company issued a convertible note to a related party for $100,000 that matures in June 2013. The note bears an interest rate of 15% per annum and is convertible, along with all accrued interest, after 180 days into shares of the Company’s Common Stock at $0.50 per share. In the event the Company enters into a revenue sharing agreement as specified in the note, the holder, at its option, may accelerate payment of the note up to 50% of the gross revenues received by the Company under the revenue sharing agreement.

As additional compensation, the Company issued to the holder a warrant to purchase 50,000 shares of the Company’s Common Stock. The warrant has an exercise price of $0.50 per share and a contractual life of 5 years from the issuance date. The value of the BCF recorded was $24,020 and the debt discount related to the attached warrants was $18,020, for a total debt discount of $40,040.

On December 30, 2011, the Company issued a convertible note to a related party for $300,000 that matures in June 2013. The note bears an interest rate of 15% per annum and is convertible, along with all accrued interest, after 180 days into shares of the Company’s Common Stock at $0.50 per share. In the event the Company enters into a revenue sharing agreement as specified in the note, the holder, at its option, may accelerate payment of the note up to 50% of the gross revenues received by the Company under the revenue sharing agreement.

As additional compensation, the Company issued to the holder a warrant to purchase 150,000 shares of the Company’s Common Stock. The warrant has an exercise price of $0.50 per share and a contractual life of 5 years from the issuance date. The value of the BCF recorded was $39,577 and the debt discount related to the attached warrants was $38,577, for a total debt discount of $78,154.

Convertible Notes Payable - Non-Related Parties

Convertible notes payable due to non-related parties consisted of the following as of December 31, 2011 and June 30, 2011, respectively:

	December 31,		June 30,
	2011		2011
$100,000 face value, issued in June 2011, interest rate of 8%, matures in December 2013, net of unamortized discount of $63,387 as of June 30, 2011	$	—	$	31,614

$100,000 face value, issued in September 2011, interest rate of 0%, originally matured in December 2011, extended to March 2012, net of unamortized discount of $-0- as of December 31, 2011		100,000		—

$100,000 face value, issued in October 2011, interest rate of 12%, matures in January 2012, $25,000 of principle repaid and net of unamortized discount of $87 as of December 31, 2011		74,913		—

$10,000 face value, issued in October 2011, interest rate of 10%, matures in January 2012, net of unamortized discount of $726 as of December 31, 2011		9,274		—

$15,000 face value, issued in October 2011, interest rate of 10%, matures in January 2012, net of unamortized discount of $1,089 as of December 31, 2011		13,911		—

$15,000 face value, issued in December 2011, interest rate of 12%, matures in March 2012, net of unamortized discount of $2,800 as of December 31, 2011		12,200		—

$10,000 face value, issued in December 2011, interest rate of 12%, matures in March 2012, net of unamortized discount of $1,901 as of December 31, 2011		8,099		—
Total convertible notes payable – non-related parties	$	218,397	$	31,614
Less current portion		218,397		31,614
Convertible notes payable – non-related parties, long-term	$	—	$	—

On June 3, 2011, the Company issued a convertible note for $100,000 that matured in December 2011. The note provided for an interest rate of 8% per annum and was convertible into shares of the Company’s Common Stock at $0.50 per share. The Company calculated the intrinsic BCF value of $80,000 which was recorded as a debt discount and was to be amortized over the life of the note. In July 2011, the principal amount and the accrued interest for the above note was converted into 201,622 shares of the Company’s Common Stock pursuant to the conversion rate provision in the agreement. Upon conversion, the remaining unamortized BCF amount of $62,796 was charged to interest expense and recorded in the other income (expense) section of statement of operations for the three and six months ended December 31, 2011.

On September 29, 2011, the Company issued a convertible note for $100,000 with an original maturity date 90 days after issuance. All or any amount of the principal amount of the note together with the accrued interest may be converted into shares of the Company’s Common Stock at a conversion price of $0.50 per share. In lieu of interest payments during the 90 day term, the Company issued to the holder a warrant to purchase 50,000 shares of the Company’s Common Stock. The warrant has an exercise price of $0.50 per share and a contractual life of 5 years from the issuance date. At the option of the Company, the due date of this note may be extended for three consecutive thirty-day periods. In lieu of interest during the extension periods, the Company will be required to grant the holder 16,667 five year warrants with a $0.50 exercise price. The value of the BCF recorded was $57,845 and the debt discount relate to the attached warrants was $21,844, for a total debt discount of $79,689.

Prior to December 29, 2011, the Company elected to extend the maturity date of the note in accordance with the extension provisions.

On October 5, 2011, the Company issued a convertible note for $100,000 that matures 90 days after issuance. The maturity date of the note can be extended, at the option of the holder, for a single 90 day period. The note bears an interest rate of 12% per annum and is convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.50 per share. The value of the BCF recorded was $2,600.

On October 13, 2011, the Company issued a convertible note for $10,000 that matures 90 days after issuance. The note bears an interest rate of 10% per annum and is convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.50 per share. The maturity date of the note can be extended, at the option of the holder, for two consecutive 30 day periods in exchange for a warrant equal to 20% of the initial amount of the note issued with a strike price of $0.50 per share for 5 years. As additional compensation, the Company issued to the holder a warrant to purchase 5,000 shares of the Company’s common stock. The warrant has an exercise price of $0.50 per share and a contractual life of 5 years from the issuance date. The value of the BCF recorded was $3,970 and the debt discount related to the attached warrants was $1,970, for a total debt discount of $5,940.

On October 13, 2011, the Company issued a convertible note for $15,000 that matures 90 days after issuance. The note bears an interest rate of 10% per annum and is convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.50 per share. The maturity date of the note can be extended, at the option of the holder, for two consecutive 30 day periods in exchange for a warrant equal to 20% of the initial amount of the note issued with a strike price of $0.50 per share for 5 years. As additional compensation, the Company issued to the holder a warrant to purchase 7,500 shares of the Company’s Common Stock. The warrant has an exercise price of $0.50 per share and a contractual life of 5 years from the issuance date. The value of the BCF recorded was $5,956 and the debt discount related to the attached warrants was $2,956, for a total debt discount of $8,912.

On December 9, 2011, the Company issued a convertible note to an unrelated individual for $15,000 that matures 90 days after issuance. The note bears an interest rate of 12% per annum and is convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.50 per share. The maturity date of the note can be extended, at the option of the holder, for a single 90 day period. As additional compensation, the Company issued to the holder a warrant to purchase 7,500 shares of the Company’s common stock. The warrant has an exercise price of $0.50 per share and a contractual life of five (5) years from the issuance date. The value of the beneficial conversion feature recorded was $2,003 and the debt discount relate to the attached warrants was $1,703, for a total debt discount of $3,706.

On December 14, 2011, the Company issued a convertible note for $10,000 that matures 90 days after issuance. The note bears an interest rate of 12% per annum and is convertible, along with all accrued interest, into shares of the Company’s Common Stock at $0.50 per share. The maturity date of the note can be extended, at the option of the holder, for a single 90 day period. As additional compensation, the Company issued to the holder a warrant to purchase 5,000 shares of the Company’s Common Stock. The warrant has an exercise price of $0.50 per share and a contractual life of 5 years from the issuance date. The value of the BCF recorded was $1,222 and the debt discount related to the attached warrants was $1,122, for a total debt discount of $2,344.

Non-Convertible Notes Payable – Related Parties

Non-convertible notes payable due to related parties consisted of the following as of December 31, 2011 and June 30, 2011:

	December 31,		June 30,
	2011		2011
Face value of $200,000, issued in April 2011, original maturity date of August 2011 extended to December 2011, 30,000 warrants per month were granted in lieu of interest through June 2011, warrants increased to 50,000 shares per month through August 2011, from September until maturity, the note bears interest at 12%		200,000		200,000

Face value of $250,000, issued in September 2011, matures in September 2012, 25,000 warrants per month issued for first 90 days, note bears interest at 15% from December 2011 through maturity		250,000		—

Face value of $125,000, issued in October 2011, matures in October 2012, 30,000 warrants issued in lieu of interest through December 2011, note bears interest at 15% from December 2011 through maturity		125,000		—
Total non-convertible notes payable – related parties	$	575,000	$	200,000
Less current portion		575,000		200,000
Non-convertible notes payable - related parties, long term	$	—	$	—

In April 2011, the Company executed a $200,000 note payable with a related party that matured 90 days following the date of the note. This note includes the following priority repayment provisions: 1) the Company agrees to apply 50% of the first $600,000 of capital raised by the Company in the near term toward all outstanding notes the lender has outstanding with the Company; 2) the Company agrees to apply the first $200,000 of proceeds raised beyond the $600,000 to any outstanding notes the lender has outstanding with the Company; and 3) if the Company is unable to raise additional capital but a large marketing or sales agreement is entered into which provide for revenue in excess of $50,000, all funds received above $50,000 shall be applied to any notes the lender has outstanding with the Company at the time.

The note provides for no interest but required the Company to issue to the lender, for each thirty day period of the original term, a warrant to purchase 30,000 shares of the Company’s common stock at a price of $0.60 per share over a contractual life of five years. The Company may also elect, at its option, to extend the maturity date for two 30-day periods upon notice of such election to the lender and the issuance of a warrant to purchase up to 50,000 shares of the Company’s Common Stock at a price of $0.60 per share with a contractual life of 5 years for each such extension. The note is not convertible and no warrant was issued in connection with the issuance of the note so there is no beneficial conversion feature value or debt discount applicable to the origination of the note.

On June 30, 2011 and July 30, 2011, the Company exercised its options on the above notes to extend the maturity dates, each time for 30 days, pursuant to the provision contained in the original financing agreement. Upon final maturity of the note payable at August 29, 2011, the Company and lender agreed to amend the original financing agreement in which the maturity date was extended to December 31, 2011 with an interest rate of 12% per annum. The lender could choose to have the accrued interest outstanding on the note be repaid in shares of the Company’s common stock in lieu of cash. For each instance where such election was made, the number of shares of the Company’s common stock to be issued was to be calculated at a discount based on seventy-five percent (75%) of the average of the closing prices of the Company’s common stock as reported by Bloomberg, L.P., or other independent reporting services acceptable to the lender and the Company for 10 trading days prior to the date such payment was due.

The Company evaluated the above amendment to extend the maturity date from August 29, 2011 to December 31, 2011 under the guidance of ASC 470-50, “Debt - Modification and Extinguishment”, and concluded that such extension of the maturity date of the note did not result in a 10% or more change in the present value of the cash flow, and thus did not result in an extinguishment of the note.

In September 2011, the Company entered into a one-year note payable for $250,000 with a related party. The note provided for 0% interest per annum for the first 90 days. In lieu of interest for the first 90 days, the Company granted the lender a warrant to purchase 25,000 shares of Company’s Common Stock at an exercise price of $0.40 for a contractual period of 5 years for each 30 days or portion thereof the note remains outstanding. If the note remains outstanding beyond the first 90 days, the note shall provide for an interest rate of 15% per annum. This note includes the following priority repayment provisions: 1) the Company agrees to apply 50% of the first $600,000 of capital raised by the Company in the near term toward all outstanding notes the lender has outstanding with the Company; 2) the Company agrees to apply the first $450,000 of proceeds raised beyond the $600,000 to any outstanding notes the lender has outstanding with the Company; and 3) if the Company is unable to raise additional capital but a large marketing or sales agreement is entered into which provide for revenue in excess of $50,000, all funds received above $50,000 shall be applied to any notes the lender has outstanding with the Company at the time.

The Company was also be required to provide to the lender or its representative online access, for viewing purposes only, to the accounting and financial data maintained by the Company. Online access shall be terminated once the loan and other funds advanced by the lender to the Company, including any accrued interest, have been fully paid. Failure to make online access available to the lender or its representative by September 30, 2011 shall cause the Company to issue to the lender a warrant to purchase 50,000 shares of the Company’s stock at an exercise price of $0.40 per share with a contractual life of 5 years. For each 30 day period thereafter that the lender or its representative has not been provided online access to Company’s accounting and financial data, the Company shall issue to the lender a warrant to purchase 50,000 shares of the Company’s Common Stock at an exercise price of $0.40 per share with a contractual life of 5 years. Online access was provided to the lender required within the specified date.

Further, per the terms of the agreement, if the note was not fully repaid by October 31, 2011, which was subsequently extended to November 15, 2011, and the Company has not deployed and made operational certain designated studios, the Company would be obligated to issue to the lender a warrant to purchase 25,000 shares of the Company’s common stock at an exercise price of $0.40 per share with a contractual life of 5 years.

In October 2011, the Company entered into a one-year note payable for $125,000 with a related party. The note provided for 0% interest per annum for the first 45 days. In lieu of interest for the first 45 days, the Company granted the lender a warrant to purchase 30,000 shares of Company’s Common Stock at an exercise price of $0.40 for a contractual period of 5. Effective December 1, 2011, the note bears interest of 15% per annum until paid.

This note includes the following priority repayment provisions: 1) the Company agrees to apply 50% of the first $600,000 of capital raised by the Company in the near term toward all outstanding notes the lender has outstanding with the Company; 2) the Company agrees to apply the first $575,000 of proceeds raised beyond the $600,000 to any outstanding notes the lender has outstanding with the Company; and 3) if the Company is unable to raise additional capital but a large marketing or sales agreement is entered into which provide for revenue in excess of $50,000, all funds received abouve $50,000 shall be applied to any notes the lender has outstanding with the Company at the time.

Non-Convertible Notes Payable – Non-Related Parties

Non-convertible notes payable due to non-related parties consisted of the following as of December 31, 2011 and June 30, 2011:

	December 31,		June 30,
	2011		2011
Various term notes with total face value of $65,398, due upon demand, interest rates range from 12% to 14%	$	40,488	$	40,398
Total non-convertible note payable – non-related parties		40,488		40,398
Less current portion		40,488		40,398
Non-convertible notes payable – non-related parties, long-term	$	—	$	—

- 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.

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