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EX-10.3 - AGREEMENT - Options Media Group Holdings, Inc.opmg_ex103.htm
EX-10.4 - AGREEMENT - Options Media Group Holdings, Inc.opmg_ex104.htm
EX-32.1 - CERTIFICATION - Options Media Group Holdings, Inc.opmg_ex321.htm
EX-31.1 - CERTIFICATION - Options Media Group Holdings, Inc.opmg_ex311.htm
EX-10.2 - PROMISSORY NOTE - Options Media Group Holdings, Inc.opmg_ex102.htm
EX-31.2 - CERTIFICATION - Options Media Group Holdings, Inc.opmg_ex312.htm
EXCEL - IDEA: XBRL DOCUMENT - Options Media Group Holdings, Inc.Financial_Report.xls
EX-10.1 - ASSET PURCHASE AGREEMENT - Options Media Group Holdings, Inc.ompg_ex101.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
 
Commission file number: 333-147245
 
OPTIONS MEDIA GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
26-0444290
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
123 NW 13th Street, Ste. 300
Boca, Raton, FL
 
33432
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  (561) 368-5067

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(Do not check if a smaller reporting company)
     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

Class
 
Outstanding at November14, 2011
Common Stock, $0.001 par value per share
 
967,967,465 shares
 


 
 

 
 
OPTIONS MEDIA GROUP HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

    PAGE  
PART I. FINANCIAL INFORMATION
       
ITEM 1.
FINANCIAL STATEMENTS
  3  
 
Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010
    3  
 
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010
    4  
 
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010
    5  
 
Notes to Consolidated Financial Statements (Unaudited)
    7  
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    27  
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    39  
ITEM 4.
CONTROLS AND PROCEDURES
    39  
           
PART II. OTHER INFORMATION
           
ITEM 1.
LEGAL PROCEEDINGS
    40  
ITEM 1A.
RISK FACTORS
    40  
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    40  
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
    40  
ITEM 4.
(REMOVED AND RESERVED)
    40  
ITEM 5.
OTHER INFORMATION
    40  
ITEM 6.
EXHIBITS
    40  
SIGNATURES     41  
EXHIBIT INDEX     42  
 
 
2

 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1.   FINANCIAL STATEMENTS
 
OPTIONS MEDIA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
 
 
(unaudited)
       
ASSETS
Current assets:
           
Cash
  $ 831,716     $ 35,756  
Accounts receivable, net of allowance for doubtful accounts of $200,311 and $212,583 at September 30, 2011 and December 31, 2010, respectively
          392,025  
Prepaid expenses
    262,450       204,045  
Prepaid marketing expense
    429,214        
Other current assets
    17,408       9,632  
Total current assets
    1,540,788       641,458  
Property and equipment, net of accumulated depreciation of $78,995 and $47,566 at September 30, 2011 and December 31, 2010, respectively
    62,908       79,351  
Prepaid marketing expense, net of current portion
    683,807        
Intangible assets, net of accumulated amortization of $93,750 and $367,361 at September 30, 2011 and December 31, 2010, respectively
    1,051,250       2,291,065  
Other non-current assets
    38,217       36,422  
Assets of discontinued operations held for sale
          80,893  
Total assets
  $ 3,376,970     $ 3,129,189  
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
               
Accounts payable
  $ 510,164     $ 629,123  
Accrued expenses
    278,582       396,468  
Customer deposits
    241,973        
Deferred revenue
    4,958       15,073  
Warrant liability
    3,945,689        
Note payable
    300,000        
Convertible notes payable
    266,313        
Due to related parties
    70,000       30,498  
Other current liabilities
    50,358       94,453  
Total current liabilities
    5,668,037       1,165,615  
Notes payable, net of current portion
    100,000        
Total liabilities
    5,768,037       1,165,615  
Commitments and contingencies (Note 12)
               
Options Media Group Holdings, Inc. (OPMG) stockholders’ (deficit) equity:
               
Preferred stock; $0.001 par value, 10,000,000 shares authorized
               
Preferred stock; $0.001 par value Series A, 18,600 and none issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    19        
Preferred stock; $0.001 par value Series B, C, E, F, G none issued and outstanding at both September 30, 2011 and December 31, 2010
           
Preferred stock; $0.001 par value Series D, 483,633 and 1,856,797 issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    484       1,857  
Common stock; $0.001 par value, 1,500,000,000 shares authorized, 962,498,742 and 414,388,121 issued and outstanding at September 30, 2011 and December 31, 2011, respectively
    962,501       414,389  
Additional paid-in capital
    31,362,259       24,291,660  
Accumulated deficit
    (34,716,330 )     (22,744,332 )
Total stockholders’ (deficit) equity
    (2,391,067 )     1,963,574  
Total liabilities and stockholders’ (deficit) equity
  $ 3,376,970     $ 3,129,189  
 
The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
 
 
3

 
 
OPTIONS MEDIA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
Three Months Ended
   
Nine Months Ended
 
   
Sept. 30, 2011
   
Sept. 30, 2010
   
Sept. 30, 2011
   
Sept. 30, 2010
 
Net revenues
  $ 4,052     $ 294,098     $ 525,103     $ 633,208  
Cost of revenues
          144,524       324,046       379,808  
Gross profit
    4,052       149,574       201,057       253,400  
Operating expenses:
                               
Compensation and related costs
    1,632,643       492,396       4,343,443       1,424,854  
Commissions
          29,763       41,084       85,153  
Advertising
    319,614       90,801       655,294       136,102  
Rent
    49,290       50,094       149,842       159,948  
General and administrative
    625,693       611,285       2,069,140       1,388,655  
Impairment of software licenses
    82,500             2,135,697        
Server hosting and technology
services
                      5,500  
Total operating expenses
    2,709,740       1,274,339       9,394,500       3,200,212  
Income (loss) from continuing operations
    (2,705,688 )     (1,124,765 )     (9,193,443 )     (2,946,812 )
Other income (expense):
                               
Change in fair market value of warrant liability
    3,442,611             (2,670,194 )      
Other income
    12,500             28,234        
Interest expense
    (7,939 )     (70 )     (73,889 )     (1,986 )
Settlement gain (loss)
    (18,795 )           (18,795 )     103,582  
Loss on extinguishment of debt
    (16,117 )           (16,117 )      
Total other income (expense)
    3,412,260       (70 )     (2,750,761 )     101,596  
Income (loss) from continuing operations
    706,572       (1,124,835 )     (11,944,204 )     (2,845,216 )
Discontinued operations:
                               
Income (loss) from discontinued
operations
    3,597       (1,350,599 )     (102,277 )     (2,949,249 )
Gain from sale of discontinued
operations
                116,218        
Income (loss) from discontinued operations, net
    3,597       (1,350,599 )     13,941       (2,949,249 )
Net income (loss)
  $ 710,169     $ (2,475,434 )   $ (11,930,263 )   $ (5,794,465 )
Preferred stock dividends
    (32,817 )           (41,735 )      
Net income (loss) available to common stockholders
  $ 677,352     $ (2,475,434 )   $ (11,971,998 )   $ (5,794,465 )
Earnings (loss) per share, basic and diluted – continuing operations
  $ 0.00     $ (0.00 )   $ (0.02 )   $ (0.01 )
Earnings (loss) per share, basic and diluted – discontinued operations, net
  $ 0.00     $ (0.00 )   $ 0.00     $ (0.01 )
Earnings (loss) per share, basic and diluted
  $ 0.00     $ (0.01 )   $ (0.02 )   $ (0.02 )
Weighted average number of common shares outstanding:
                               
Basic
    902,477,411       288,905,606       618,328,474       239,369,311  
Diluted
    1,163,884,351       288,905,606       717,975,394       239,369,311  

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
 
 
4

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
Operating activities
           
Net loss
  $ (11,930,263 )   $ (5,794,465 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Stock granted to non-employees for services
    40,000       42,000  
Stock granted to employees
    40,074       34,675  
Stock granted for settlement
    18,795       268,608  
Stock options granted to employees
    1,508,257       352,290  
Stock options granted for settlement
          29,200  
Vesting of preferred stock Series C and E
    1,188,096        
Warrants price adjustment
    200,423        
Write-off of prepaid royalties
    135,808        
Change in fair market value of warrant liability
    2,670,194        
Impairment of intangible assets
    1,999,889        
Impairment of goodwill
          3,096,815  
Amortization of prepaid equity instruments
    221,353        
Amortization of prepaid expenses
          192,368  
Amortization of intangibles
    364,926       21,693  
Amortization of debt discount
    58,055        
Depreciation
    31,430       366,781  
Bad debt
    61,266       149,980  
Extinguishment of debt
    16,117        
Changes in operating assets and liabilities:
               
Accounts receivable
    330,759       (180,070 )
Prepaid expenses
    (61,092 )     (6,564 )
Other current assets
    (7,776 )     7,129  
Other non-current assets
    (1,795 )      
Accounts payable
    105,041       (305,502 )
Accrued expenses
    (107,211 )     (186,736 )
Customer deposits
    241,973        
Deferred revenues
    (10,115 )     39,577  
Due to related parties
    39,502       (32,104 )
Other current liabilities
    (29,095 )     (13,580 )
Cash used in continuing operating activities
    (2,875,389 )     (1,917,905 )
Cash provided by (used in) discontinued operating activities
    (108,107 )     183,269  
Investing activities
               
Purchases of property and equipment, net
    (14,987 )      
Purchase of intangible asset
          (20,000 )
Purchase of software
          (163,425 )
Proceeds from sale of intangible asset
    175,000        
Purchase of anti-texting software
    (300,000 )      
Cash used in continuing investing activities
    (139,987 )     (183,425 )
Cash used in discontinued investing activities
          (5,000 )
Financing activities
               
Bank overdraft
          (27,721 )
Proceeds from sales of preferred stock Series A
    1,860,000        
Proceeds from sales of preferred stock Series G
    2,074,966        
Proceeds from sales of common stock
    234,200       1,238,780  
Proceeds from warrants exercises
          12,465  
Proceeds from loans
    145,500        
Financing costs
    (259,800 )     (225,282 )
 
 
5

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – continued
(UNAUDITED)
 
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
Dividends paid
    (41,735 )      
Repayments of loans
    (93,688 )     (237,100 )
Principal payments on capital lease obligations
          (976 )
Cash provided by financing activities
    3,919,443       760,166  
Net increase (decrease) in cash and cash equivalents
    795,960       (1,162,895 )
Cash at beginning of period
    35,756       1,316,067  
Cash at end of period
  $ 831,716     $ 153,172  
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 3,326     $ 2,379  
Cash paid for taxes
  $     $  
Supplemental disclosure of non-cash investing and financing activities:
               
Embedded conversion option liability
  $ 59,671     $  
Settlement of accounts payable in exchange for intangible asset
  $ 14,000     $  
Settlement of accounts payable in exchange for note payable
  $ 210,000     $  
Converted preferred stock Series D to common stock
  $ 30,936     $  
Converted preferred stock Series G to common stock
  $ 207,479     $  
Converted debt to common stock
  $ 50,000     $ 109,900  
Converted accrued interest to common stock
  $ 10,675     $  
Issued note payable for asset acquisition
  $ 450,000     $  
Issued common stock for asset acquisition
  $ 375,000     $ 2,635,500  
Issued prepaid common stock for services to be rendered
  $ 153,000     $ 255,484  
Issued common stock in exchange for current liability
  $ 15,000     $  
Issued common stock for warrants exercised
  $ 10,748     $  
Issued ratchet shares of common stock
  $ 77,394     $  
Issued warrants with derivative characteristics
  $ 1,275,495     $  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
6

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
Description of Business
 
Options Media Group Holdings, Inc. or the “Company”, “we”, “us", or “our” was incorporated in the state of Nevada and is the holding company for its operating subsidiaries.
 
In April 2010, through our wholly-owned subsidiary PhoneGuard, Inc., the Company entered into an asset purchase agreement and sublicense agreement with Cellular Spyware, Inc. (“CSI”). The asset acquisition gave the company rights to the name PhoneGuard whereby the Company then entered the mobile and smart phone application market. PhoneGuard acquired certain assets of CSI for an anti-virus and anti-malware software product and became the exclusive marketer within the United States and Canada.During August 2010 (in addition to anti-virus and anti-malware software), the Company also acquired an exclusive license for CSI's rights to a state-of-the-art anti-texting product in North, Central, and South Americas (see below).  The Company did not commercialize the anti-virus product.
 
In May 2011, the Company entered into an agreement with Bieber Brands to promote the sale of the PhoneGuard product, see Note 9.  In June 2011, the Company changed its focus from the sale of its anti-virus software to the sale of anti-texting software.In July 2011, the Company entered into an Asset Purchase Agreement (the “Agreement”) with CSI. In connection with the Agreement, the Company purchased all of the intellectual property to the anti-texting software owned by CSI (the “Software”). The Company had previously licensed the Software and had all rights to North, Central, and South Americas. As a result of the Agreement, the Company now owns all worldwide rights to the Software; see Note 4 for additional information.  Around this time, the Company offered a free “lite” version of the Software to consumers via a soft launch.
 
The Company intends to sell its anti-texting Software in the fourth quarter of 2011, via the following offerings:
 
·  
PhoneGuard: this option is targeted towards teens and is offered to the user via a one-time download cost and provides standard product offerings.  It is an advertising supported model.
 
·  
PhoneGuard Family:this option is targeted towards parents and is offered to the user via a one-time download cost.  It is a step up from the PhoneGuard model as it provides additional functionality not included within the PhoneGuard model.  It is not an advertising supported model.
 
·  
PhoneGuard Family Pro:this option is targeted towards parents and is offered to the user via an annual subscription cost.  It is a step up from the PhoneGuard Family model as it provides additional functionality via a web portal that is not included within the PhoneGuard Family model.  It is not an advertising supported model.
 
·  
PhoneGuard Enterprise:this option is targeted towards businesses and is offered via an annual subscription cost.  It is a model that has access to the all of the product’s available offerings and is customizable to meet the specific needs of each of our client’s business.  It is not an advertising supported model.
 
In February 2011, the Company discontinued its e-mail business (see Note 3). Continuing operations consist of the PhoneGuard business and lead-generation business.
 
Basis of Presentation
 
The unaudited interim condensed and consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and certain non-recurring adjustments and reclassifications) have been made that were deemed necessary to present fairly the results of operations, for the three months and nine months ended September 30, 2011, the cash flows for the nine months ended September 30, 2011, and the financial position as of September 30, 2011. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.
 
 
7

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these unaudited interim financial statements.
 
Going Concern
 
As reflected in the accompanying unaudited consolidated financial statements for the nine months ended September 30, 2011, the Company had a net loss of $11,930,263 and $2,875,389 of net cash used in continuing operations. At September 30, 2011, the Company had a working capital deficit of $4,127,249.The working capital deficit includes a warrant liability of $3,945,689 (see Note 2). Without derivative accounting treatment, our working capital deficit would have been $181,560.
 
Additionally, at September 30, 2011, the Company had stockholders’ deficit and an accumulated deficit of $2,391,067 and $34,716,330, respectively. These matters and the Company’s expected needs for capital investments and working capital required to support operational growth raise substantial doubt about its ability to continue as a going concern. The Company’s unaudited consolidated financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from its inability to continue as a going concern.
 
The Company has financed its working capital and capital expenditure requirements primarily from the sales of common stock; preferred stock; issuances of short-term and long-term debt securities; and sales of advertising, data services, and mobile software. In July 2011, the Company raised $500,000 from private placements of preferred and common stock. The Company continues to aggressively manage its operating expenses.The Company’s growth strategy is focused towards PhoneGuard’s anti-texting Software which is anticipated to generate positive cash flows.
 
As of September 30, 2011, management believes that the Company will meet its expected needs required to continue as a going concern through September 30, 2012, either through cash generated from operations, cash provided by equity, cash provided by debt, or a combination of each.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, PhoneGuard, Inc., Options Acquisition Sub, Inc., 1 Touch Marketing, LLC, The LeadLink, Inc., Mobile Connections, Inc. (“MCI”) and Mobile Innovations, Inc. (“MII”). MCI and MII were incorporated in July 2011 for the purposes of researching and developing the Company’s mobile billing model for the PhoneGuard software. All material inter-company balances and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments, and assumptions (upon which the Company relies) are reasonable based upon information available at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of our unaudited consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our unaudited consolidated financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.
 
 
8

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
The most significant estimates include the valuation of accounts receivable, estimates of depreciable lives, valuation of property and equipment, valuation of discounts on debt, valuation of beneficial conversion features in convertible debt, valuation of derivative liabilities, valuation and amortization periods of intangible assets and software, valuation of goodwill, valuation of stock-based compensation, and the deferred tax valuation allowance.
 
Accounting for Derivatives
 
The Company evaluates its convertible instruments, options, warrants, or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging. Under the provisions of ASC 815-40, convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (“reset provisions”), are also required to be accounted for in accordance with derivative accounting treatment under ASC 815-10. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense).  Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to a liability at the fair value of the instrument on the reclassification date.
 
Fair Value of Financial Instruments and Fair Value Measurements
 
We measure our financial assets and liabilities in accordance with GAAP. For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.
 
We adopted accounting guidance (ASC 820), Fair Value Measurements and Disclosures, for financial and non-financial assets and liabilities not recognized or disclosed at fair value in the consolidated financial statements on a recurring basis.  These guidelines define fair value, provide guidance for measuring fair value, and require certain disclosures.This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
 
The following is a brief description of those three levels:
 
Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
Level 2:
Inputs other than quoted prices that is observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 
Level 3:
Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
 
The Company has significant nonfinancial assets and liabilities for the nine months ended September 30, 2011 that require recognition and disclosure at fair value.
 
 
9

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
We measure and report fair values of our intangible assets and derivative instruments. The fair value of intangible assets has been determined using the present value of estimated future cash flows method. The following table summarizes our non-financial assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2011:
 
   
Fair Value Measurements at September 30, 2011 Using:
       
   
Quoted Prices inActive Markets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
   
Total Carrying Value at
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Sept. 30, 2011
 
Assets:
                       
Intangible assets – trademark and software                                          
  $     $     $ 1,051,250     $ 1,051,250  
Liability:
                               
Derivative warrant liability
  $     $     $ 3,945,689     $ 3,945,689  
 
The following is a roll-forward through September 30, 2011 of the fair value liability of level 3 warrant derivative instruments:
 
Balance at January 1, 2011:
     
Derivative warrant liability fair value                                                                                                                
  $ 1,275,495  
Change in fair value                                                                                                                 
    2,670,194  
Balance at September 30, 2011                                                                                                                 
  $ 3,945,689  
 
Changes in fair value of the embedded conversion option liability are included in other income (expense) in the accompanying unaudited consolidated statements of operations.
 
The Company estimates the fair value of the warrant derivative liability utilizing the Black-Scholes pricing model, which is dependent upon several variables such as the expected term (based on contractual term), expected volatility of our stock price over the expected term (based on historical volatility), expected risk-free interest rate over the expected term, and the expected dividend yield rate over the expected term.  The Company believes this valuation methodology is appropriate for estimating the fair value of the derivative liability. 
 
The following table summarizes the assumptions the Company utilized to estimate the fair value of the embedded conversion option at September 30, 2011:
 
      121,160,749       37,000,000       25,000,000  
Assumed Variables:
 
Warrants
   
Warrants
   
Warrants
 
Expected term 
    2.61       0.61       0.61  
Expected volatility 
    206 %     247 %     247 %
Risk-free interest rate 
    0.42 %     0.13 %     0.13 %
Dividend yield 
    0.00 %     0.00 %     0.00 %
 
There were no changes in the valuation techniques during the three months ended September 30, 2011.
 
 
10

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
Revenue Recognition
 
The Company will recognize revenue when: (i) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (ii) delivery has occurred or services have been provided; (iii) the fee is fixed or determinable; and (iv) collection is reasonably assured.
 
In accordance with ASC 605-45-05 Reporting Revenue Gross as a Principal vs. Net as an Agent, wereport revenues for transactions in which we are the primary obligor on a gross basis and revenues in which we act as an agent on and earn a fixed percentage of the sale on a net basis, net of related costs.Credits or refunds are recognized when they are determinable and estimable.
 
The Company’s revenue from its PhoneGuard Software will principally be derived from advertising services and subscription fees.
 
Advertising Revenue. The Company expects to generate advertising revenue primarily from display, audio and video advertising. The Company will generate its advertising revenue through the delivery of advertising impressions sold on a cost per thousand, or CPM, basis. In determining whether an arrangement exists, the Company ensures that a binding arrangement, such as an insertion order or a fully executed customer-specific agreement, is in place. The Company generally recognizes revenue based on delivery information from its campaign trafficking systems. In addition, the Company will also generate referral revenue from performance-based arrangements, which may include a user or recipient of an “auto reply” performing some action such as clicking on an advertisement and signing up for a membership with that advertiser. The Company records revenue from these performance-based actions when it receives third-party verification reports supporting the number of actions performed in the period. The Company generally has audit rights to the underlying data summarized in these reports.
 
Subscription and Other Revenue. The Company will generate subscription services revenue through the sale of its PhoneGuard’s anti-texting software. For one-time download fees, revenue will be recognized at the time of payment.  For annual subscription fees, subscription revenue will be recognized on a straight-line basis over the subscription period.
 
The Company offers lead generation programs to assist a variety of businesses with customer acquisition for the products and services they are selling. The Company pre-screens the leads to meet its clients' exact criteria. Revenue from generating and selling leads to customers is recognized at the time of delivery and acceptance by the customer.
 
PhoneGuard previously sold an older version of anti-texting mobile software under a licensing agreement. Sales to distributors and retailers were recognized at the time of shipment as the software licenses has an indefinite term except if the sale is under a consignment arrangement in which case, we recognize the sale only upon the distributor reselling the software. Sales to consumers over the Internet are recognized on a pro rata basis over the term of the subscription period.
 
The Company sold its e-mail business in February 2011 and receives commission from the purchaser on sales made to the Company’s previous customers. Revenue is recorded when commission is received as there is not enough collection history to record accruals with true-ups to actual. These commissions are reported in discontinued operations.  During the three months ended September 30, 2011, the Company has not received any commissions from the purchaser.
 
Segments
 
The Company follows ASC 280-10 for,Disclosures about Segments of an Enterprise and Related Information.  Segment information is provided in Note 11, however the Company will reassess its segment disclosure at year-end as the Company’s on-going future operations will be primarily, if not solely, from its PhoneGuard Software.
 
 
11

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
 
Net Earnings (Loss) Per Share

   
3 months ended
   
9 months ended
 
   
Sept. 30, 2011
   
Sept. 30, 2010
   
Sept. 30, 2011
   
Sept. 30, 2010
 
Basic numerator:
                       
Income (loss) from continuing operations
  $ 706,572     $ (1,124,835 )   $ (11,944,204 )   $ (2,845,216 )
Less: preferred stock dividends
    (32,817 )           (41,735 )      
Numerator for basic earnings (loss) per share – continuing operations
    673,755       (1,124,835 )     (11,985,939 )     (2,845,216 )
Numerator for basic earnings (loss) per share – discontinued operations, net
    3,597       (1,350,599 )     13,941       (2,949,249 )
Numerator for basic earnings (loss) per share – available to common shareholders
  $ 677,352     $ (2,475,434 )   $ (11,971,998 )   $ (5,794,465 )
Diluted numerator:
                               
Numerator for basic earnings (loss) per share – continuing operations
  $ 673,755     $ (1,124,835 )   $ (11,985,939 )   $ (2,845,216 )
Add: preferred stock dividends
    32,817             41,735        
Numerator for diluted earnings (loss) per share – continuing operations
    706,572       (1,124,835 )     (11,944,204 )     (2,845,216 )
Numerator for diluted earnings (loss) per share – discontinued operations, net
    3,597       (1,350,599 )     13,941       (2,949,249 )
Numerator for diluted earnings (loss) per share – available to common shareholders
  $ 710,169     $ (2,475,434 )   $ (11,930,263 )   $ (5,794,465 )
Basic weighted average common shares
    902,477,411       288,905,606       618,328,474       239,369,311  
Dilutive instruments
                               
Options
    42,136,344             18,490,063        
Warrants
    146,526,237             56,798,618        
Preferred stock
    53,437,578             13,797,525        
Convertible debt
    19,306,781             10,560,714        
Total dilutive common shares
    261,406,940             99,646,920        
Diluted weighted average common shares
    1,163,884,351       288,905,606       717,975,394       239,369,311  
Basic EPS:
                               
Basic earnings (loss) per share – continuing operations
  $ 0.00     $ (0.00 )   $ (0.02 )   $ (0.01 )
Basic earnings (loss) per share – discontinued operations, net
    0.00       (0.00 )     0.00       (0.01 )
Basic earnings (loss) per share
  $ 0.00     $ (0.01 )   $ (0.02 )   $ (0.02 )
Diluted EPS:
                               
Diluted earnings (loss) per share – continuing operations
  $ 0.00     $ (0.00 )   $ (0.02 )   $ (0.01 )
Diluted earnings (loss) per share – discontinued operations, net
    0.00       (0.00 )     0.00       (0.01 )
Diluted earnings (loss) per share
  $ 0.00     $ (0.01 )   $ (0.02 )   $ (0.02 )
 
Basic earnings (loss) per common share is based on the weighted-average number of all common shares outstanding. The computation of diluted earnings (loss) per share does not assume the conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings (loss) per share. 
 
 
12

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
For the three and nine months ended September 30, 2011, (i) 14,850,000 and 72,510,000 incremental options, respectively; (ii) 1,883,333 and 63,883,331 incremental warrants, respectively; (iii) zero and 73,802,846 incremental preferred stock, respectively; and (iv) no incremental convertible debt for either period; for an aggregate incremental total of 16,733,333 and 210,196,177 respectively; were excluded from the denominator for diluted income per share as the impact of their conversion was anti-dilutive.  At September 30, 2011, there would be an aggregate 510,617,348 additional shares of common stock if all of the following items converted to their common stock equivalents: (i) 123,793,333 options outstanding that would be convertible into 123,793,333 shares of common stock; (ii) 250,044,078 warrants outstanding that would be convertible into 250,044,078 shares of common stock; (iii) 502,525 shares of preferred stock that would be convertible into 111,660,665 shares of common stock; and (iv) two convertible notes payable that would be convertible into 25,119,272 shares of common stock.  For both the three and nine months ended September 30, 2010, there were 29,345,217 incremental options excluded from the calculation of diluted shares as the impact of their conversion was anti-dilutive due to the net loss.
 
Comprehensive Income (Loss)
 
ASC Topic 220, Comprehensive Income, requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The items of other comprehensive income (loss) that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, unrealized gains and losses on certain investments in debt and equity securities and the effective portion of certain derivative instruments. There are no components of comprehensive income (loss) other than the Company’s net income (loss) for each of the three and nine months ended September 30, 2011 and 2010.
 
Software Costs
 
The anti-texting software acquired from CSI is not considered to be internally developed software as the anti-texting software did not meet the provisions of ASC Topic 350, Intangibles – Goodwill and Other, since the Company purchased such software with the intent to market it to the public.  As such, the Company notes that treatment of the cost of the software and future product enhancements are governed by the provisions of ASC 985, Software.At the time the software purchase was finalized, the Company had a free version of the software released in the app markets for Android and Blackberry.  Thus, the Company determined that it had met the provisions of ASC 985, as (i) it deemed the software to be technologically feasible; and (ii) there were no on-going research and development (“R&D”).  Accordingly the Company recorded the cost of the software in the line item “Intangible assets, net”.
 
Pursuant to the provisions of ASC 985, the Company will amortize the capitalized cost utilizing the straight-line method over the three-year estimated useful life of the software.Amortization commenced at the acquisition date, as a free “lite” version of the product was available to customers.  Future product maintenance and customer support, for the software, will be expensed as incurred.  Should the Company begin to enter a product enhancement phase, it will determine at that time if post-R&D phase costs should be capitalized.
 
Recently Issued Accounting Standards
 
In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04 regarding ASC Topic 820, Fair Value Measurement.  This ASU updates accounting guidance to clarify how to measure fair value to align the guidance surrounding Fair Value Measurement within Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). In addition, the ASU updates certain requirements for measuring fair value and for disclosure around fair value measurement. It does not require additional fair value measurements and the ASU was not intended to establish valuation standards or affect valuation practices outside of financial reporting. This ASU will be effective for the Company’s fiscal year beginning January 1, 2012. Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
 
 
 
13

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income(Topic 220): Presentation of Comprehensive Income. This ASU amends the ASC to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the ASC in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
 
3. DISCONTINUED OPERATIONS
 
In February 2011, the Company sold its e-mail business, databases, and its 1 Touch Marketing business for $175,000 in cash and settlement of $14,000 of accounts payable plus a percentage of all revenue generated over a 24 month period from our sales force, most of whom were hired by the purchaser and from customers on a customer list. The maximum additional payment of sales royalties is capped at $1.5 million in the first year and $1.5 million in the second year. The operating amounts associated with these product lines are reported as discontinued operations in the accompanying consolidated financial statements. The Company recorded a net gain on the asset sale of $116,218 which is presented in discontinued operations for the nine months ended September 30, 2011. Our continuing operations are from our PhoneGuard subsidiary and lead generation business.
 
Revenues and pretax income (loss) from discontinued operations for the three and nine months ended September 30, 2011 and 2010, respectively, were as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue 
  $ (6,584 )   $ 806,533     $ 163,775     $ 2,823,290  
Net income (loss) before income taxes
  $ 3,597     $ (1,350,599 )   $ 13,941     $ (2,949,249 )
 
4. ASSET ACQUISITION OF CSI SOFTWARE
 
On July 15, 2011, the Companyentered into an Agreementwith CSI and Anthony Sasso (“Sasso”). In connection with the Agreement, the Company purchased all of the intellectual property to the anti-texting Software owned by CSI for an aggregate amount of $1,125,000. The Company had previously licensed the Software and had all rights to North, Central, andSouth Americas. As a result of the Agreement, the Company now owns all worldwide rights to the Assets. As consideration for the Assets, the Company paid CSI $300,000 in cash, a $450,000 promissory note, and 25,000,000 shares of the Company’s common stock (subject to a Lock-Up/Leak-Out Agreement as described below) (the “Consideration Shares”), valued at $375,000based on a blended, pro rata, price per share of two recent private placements. The note payable stipulated 18equal monthly installments of $25,000 beginning in August 2011.  The $1,125,000 acquisition of the Software was treated as an asset purchase and the consideration was recorded in the line item “Intangible Assets, net” on the Company’s unaudited consolidated balance sheet as of September 30, 2011.
 
 
 
14

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
On July 15, 2011, the Company entered into a Settlement and Release Agreement with Sasso (the “Release Agreement”) whereby Sasso released the Company from any claims arising from his employment, including any potential severance. In consideration for entering into the Release Agreement, the Company immediately vested Sasso’s outstanding Series C preferred stock (which was convertible into 42,749,787 shares of common stock). Sasso agreed to a Lock-Up/Leak-Out Agreement (the “Lock-Up”) which limits the sales of Sasso’s shares to: (i) 10,000,000 shares during the first month after entering into the Lock-Up and (ii) beginning August 1, 2011 (and in every calendar month thereafter), 10% of the total trading volume of the Company’s common stock for the prior calendar month. In connection with the Release Agreement and Lock-Up, the Company filed a registration statement on Form S-8 registering 20,000,000 of Mr. Sasso’s shares. Additionally, CSI and Sasso agreed to a Lock-Up/Leak-Out Agreement which limits the sales of the Consideration Shares to 10% of the average trading volume for the Company’s common stock for the prior 30 day period beginning on August 15, 2011, and every 30 day period thereafter.
 
5. INTANGIBLE ASSETS, NET
 
As of September 30, 2011 and December 31, 2010, intangible assets, net, were comprised of the following:
 
   
September 30,
2011
   
December 31,
2010
 
Intangible assets subject to amortization:
           
Software (3 years)                                                                           
  $ 1,125,000     $  
Software license (3 years)                                                                           
          2,638,426  
Total intangible assets subject to amortization                                                                           
    1,125,000       2,638,426  
Intangible assets not subject to amortization:
               
Trademark                                                                           
    20,000       20,000  
Total intangible assets, gross carrying amount                                                                           
  $ 1,145,000     $ 2,658,426  
Less accumulated amortization                                                                           
    (93,750 )     (367,361 )
Total intangible assets, net                                                                           
  $ 1,051,250     $ 2,291,065  
 
As aforementioned in Note 4, in the asset acquisition of CSI Software, the Company purchased the Software for $1,125,000 during the third quarter of 2011.
 
In connection with the purchase of the Software, the Company determined that it no longer had any need for the related anti-texting software license.  As such, the Company recorded non-cash charges of $82,500 in July 2011.  In June 2011, the Company impaired the $2,053,197 recorded value of the anti-virus software license as it was determined it would no longer market this product. This amount represented $1,917,389 for the impairment of the unamortized balance of the anti-virus software licenseand $135,808 for the prepaid royalties associated with that software license.
 
6. NOTES PAYABLE
 
A summary of notes as of September 30, 2011 and December 31, 2010 is as follows:
 
   
September 30,
2011
   
December 31,
2010
 
Note payable to CSI                                                                            
  $ 400,000     $  
Convertible note payable                                                                            
    166,313        
Convertible promissory note                                                                            
    100,000        
Total notes payable                                                                            
    666,313        
Less amount classified as current                                                                            
    (566,313 )      
Long-term notes payable , net of current portion
  $ 100,000     $  
 
 
 
15

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
The following is a roll-forward of notes payable through September 30, 2011:
 
Balance as of January 1, 2011                                                                                                                 
  $  
Notes payable financing                                                                                                                 
    810,000  
Payments                                                                                                                 
    (93,688 )
Conversions to common stock                                                                                                                 
    (50,000 )
Debt discount – Convertible Note Payable                                                                                                                 
    (19,000 )
Debt discount – Convertible Promissory Note                                                                                                                 
    (55,171 )
Amortization of debt discounts                                                                                                                 
    58,055  
Loss on extinguishment of debt                                                                                                                 
    16,117  
Balance as of September 30, 2011                                                                                                                 
  $ 666,313  
 
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 Notes 1 and 3 for additional information.  During 2011, the Company repaid $50,000, leaving $400,000 outstanding, of which $300,000 was classified as currentas of September 30, 2011.
 
Convertible Note Payable
 
In May 2011, the Company issued to a law firm a $210,000 convertible note which is payable on demand of which $43,687 has been repaid leaving a balance of $166,313 as of September 30, 2011. The note is convertible at $0.011. 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.
 
Convertible Promissory Note
 
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 $55,171for this note (which consisted of the loan fee, legal fees and warrant discount) and amortized $39,055 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.
 
 
16

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
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, leaving $100,000 outstanding principal and $531 of accrued interest as of September 30, 2011.
 
7. STOCKHOLDERS’ DEFICIT
 
Common Stock
 
In February 2011, the Company issued 4,000,000 shares of common stock for prior services rendered. The shares were valued at $0.01 or $40,000 based on a recent private placement sales price and were fully expensed.
 
In April 2011, the Company issued 628,571 shares of common stock for a $15,000 investment, $0.024 per share, which was received in early 2010 and was recorded as a current liability until appropriate documentation was received. The $15,000 was reclassified to equity at the date of issuance.
 
In May 2011, the Company issued 2,000,000 shares of common stock to its new Board Chairman for services rendered. The shares were valued at $0.0125 per share or $25,000 (based on the grant date quoted trading price of the Company's common stock) and were fully expensed as they related to prior services performed.
 
In connection with the Bieber deal discussed in Note 9, the Company issued 18,000,000 shares of common stock with a fair value of $153,000 based on the grant date’s market closing price of $0.0085. The fair value of the grant was recorded as a prepaid and is being amortized over the 3 year term of the agreement.
 
In June 2011, the Company issued 68,035,953 shares of common stock upon the automatic conversion of the Series F preferred stock as described below.
 
In June 2011, the Company issued 5,647,485 shares of common stock for a cashless exercise of 6,000,000 warrants.
 
In July 2011, all 675 shares of Series C preferred stock were converted to 87,499,575 shares of common stock.
 
In July 2011, 337.5 shares of Series E preferred stock were converted to 43,749,787 shares of common stock.
 
In July 2011, the Company issued 25,000,000 shares of common stock in connection with the Asset Purchase Agreement discussed in Note 4.
 
In July 2011, the Company issued 3,420,000 shares of common stock for a $34,200 investment, $0.01 per share, which was received in May 2011 and was recorded as a current liability until appropriate documentation was received. The $34,200 was reclassified to equity at the date of issuance.
 
In July 2011, an investor exercised 6,000,000 warrants on a cashless basis for 5,101,257 shares of common stock.
 
In July 2011, the Company received $200,000 (less $16,000 commission fees) private placement for the purchase of 20,000,000 common shares.
 
In July 2011, the Company issued 1,253,026 shares of common stock as a settlement to a shareholder. The shares were valued at $0.015, or $18,795 (based on a blended, pro rata, price per share of two recent placements).
 
In August 2011, the Company’s Board consented to the issuance of 3,000,000 shares of common stock for services to be rendered from April through October 2011. The shares were valued at $0.013 per share or $39,000 (based on the grant date quoted trading price of the Company’s common stock at the commencement of the service period) and is being amortized over the period of services rendered.
 
In August 2011, 42.1875 shares of Series E preferred stock were converted to 5,468,723 shares of common stock.
 
 
17

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
 
In September 2011, there were 71,400 shares restricted common stock that vested (see “Restricted Stock Grant” section within this footnote for additional details).
 
In September 2011, as a result of the note modification discussed at Note 6, the note holder converted $60,675 ($50,000 principal and $10,675 accrued interest) into 6,067,561 shares of common stock.
 
As of September30, 2011, the Company issued 9,357,570 shares of common stock. The shares were issued among various investors as a result of agreements which required the Company to effectively re-price their shares (currently held from prior offerings) to $0.02 per share and, related to stock options granted in February 2011, to $0.008 per share.
 
During 2011, the Company received $2,074,966 for the issuance of 20,750 Series G preferred stock, which, as of September 30, 2011, were all converted into 207,500,000 shares of common stock.
 
During 2011, the Company issued 32,309,740 shares of common stock for the conversion of 1,373,164 previously issued Series D preferred stock, as stated below.
 
Series A Preferred Stock
 
In June 2011, the Company closed a private placement offering with accredited investors and sold 18,600 shares of Series A Convertible Preferred Stock (“Series A”) with 100% warrant coverage (each convertible to 62,000,000 shares of common stock). This offering raised $1,686,200 in net proceeds after payment of commissions and fees to the placement agent.The Series A is convertible at $0.03 per share and the warrants are exercisable at $0.041 per share over five-years. The Series A provides for a liquidation preference, voting rights equal to the number of shares of common stock that the holder would be entitled to if the Series A were converted, and a 7% dividend per annum. Additionally, the Series A contains anti-dilution, price protection, and piggyback registration rights.
 
Series C Preferred Stock
 
In May 2011, the Company amended the vesting terms of Series C preferred stock granted to Sasso. Previously, the preferred stock vested based upon software sales. The Company’s Board modified the vesting so that (i) one-half of the shares vested upon execution of the Bieber Agreement and (ii) the remaining shares would vest quarterly in equal increments over a two-year period with the first vesting date being three months from the date of the Bieber Agreement, subject to continued employment by each, as applicable, on each applicable vesting date. The 675 shares of Series C preferred stock were valued at $0.0085 per share of common stock (based on the quoted trading price of the Company's common stock on the day the milestone was met) which when converted, amounts to 87,499,575 shares of common stock valued at $743,746. At the time, the 337.5 unvested shares were to be expensed over the vesting terms as applicable. In May 2011, the Company issued the 337.5 vested shares of Series C preferred stock and immediately recorded $371,873 of stock-based compensation expense.
 
During July 2011, the Company’s Board resolved that as consideration for the Settlement and Release Agreement (discussed at Note 4), the Company immediately vested Sasso’s the remaining 337.5 shares of Series C preferred stock. Accordingly, the Company recorded the remaining $345,882 ($25,991 was amortized prior to the settlement agreement)in stock-based compensation expense for a cumulative total of $743,746.At this time, all 675 shares of vested Series C preferred stock were converted into 87,499,575 shares of common stock.
 
Series D Preferred Stock
 
During 2011, 1,373,164 shares of Series D preferred stock converted to 32,309,740 shares of common stock.
 
 
18

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
Series E Preferred Stock
 
In May 2011, the Company amended the vesting terms of Series E preferred stock granted to our Chief Executive Officer (“CEO”)Scott Frohman. Previously, the preferred stock vested based upon software sales. The Company’s Board modified the vesting so that (i) one-half of the shares vested upon execution of the Bieber Agreement and (ii) the remaining shares would vest quarterly in equal increments over a two-year period with the first vesting date being three months from the date of the Bieber Agreement, subject to continued employment by each, as applicable, on each applicable vesting date. The 675 shares of Series E preferred stock were valued at $0.0085 per share of common stock (based on the quoted trading price of the Company's common stock on the day the milestone was met) which when converted, amounts to 87,499,575 shares of common stock valued at $743,746. At the time, the 337.5 unvested shares were to be expensed over the vesting terms as applicable.  In May 2011, the Company issued the 337.5 vested shares of Series C preferred stock and immediately recorded $371,873 of stock-based compensation expense.
 
In July 2011, the 337.5 vested shares of Series E preferred stock were converted to 43,749,787 shares of common stock.
 
During August 2011, 42.1875 shares of Series E preferred stock vested and were immediately converted into 5,468,723 shares of common stock.
 
Series F Preferred Stock
 
In May 2011, the Board designated Series F as a new series of preferred stock consisting of approximately 68,035 shares, par value $0.001 per share, liquidation preference equal to the par value of the Series F preferred stock, voting rights the same as common stock on an as-converted basis, and automatically convertible to common stock at a ratio of 1,000 common shares for each preferred share upon an increase in the Company’s authorized capital stock. The Series F preferred stock was issued to various prior investors in common or other series of preferred stock pursuant to those certain full ratchet anti-dilution provisions contained in their respective agreements.  As a result of these provisions, the Company effectively re-priced the prior investors’ shares (currently held from prior offerings) to $0.05 per share and $0.02 per share, as applicable. As such, the Company issued approximately 68,035 shares of Series F preferred stock under the ratchet provisions.  In June 2011, the Series F automatically converted to 68,035,953 shares of common stock upon the increase in the Company’s authorized capital stock. As of September 30, 2011, there were no shares of Series F outstanding.
 
Series G Preferred Stock
 
In May 2011, the Board designated SeriesG as a new series of preferred stock consisting of 21,000 shares, par value $0.001 per share, liquidation preference equal to the total consideration paid for all shares issued, voting rights the same as common stock on an as-converted basis, and automatically convertible to common stock at a ratio of 10,000 common shares for each preferred share upon increase in the Company’s authorized capital stock. Additionally, the Board approved the sale of up to 21,000 shares of Series G preferred stock at a price of $100 per share ($0.01 for each common share equivalent) convertible into 210,000,000 shares of common stock at such time the Company has the authorized capital. For a period of two-years following the Series G purchase, investors will have full price protection for any issuances of securities below $0.01 per share. As of September 30, 2011, the Company received $2,074,966 and issued 207,500,000 shares of common stock in lieu of issuing Series G certificates.
 
 
19

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
Stock Options
 
A summary of the Company’s stock option activity during the nine months ended September 30, 2011 is presented below:
 
         
Weighted Average Exercise
   
Weighted Average Remaining Contractual
 
   
Quantity
   
Price
   
Term (Years)
 
Balance outstanding at January 1, 2011                                                                   
    28,625,217     $ 0.067       3.97  
Granted                                                                   
    106,050,000     $ 0.028       3.68  
Exercised                                                                   
        $        
Forfeited                                                                   
    (10,881,884 )   $ 0.060       3.87  
Expired                                                                   
        $        
Balance outstanding at September 30, 2011
    123,793,333     $ 0.034       3.59  
Exercisable at September 30, 2011                                                                   
    70,429,028     $ 0.035       2.95  
 
The aggregate intrinsic value of all outstanding options was $563,893 for the nine months ended September 30, 2011. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2011 was $0.025.
 
In January 2011, the Company entered into a verbal employment agreement with its President. He was granted a five year option to purchase 7,000,000 shares of common stock at an exercise price of $0.008 per share under the Options Media 2008 Equity Incentive Plan. There were 250,000 shares that vested immediately, and the remaining 6,750,000 shares will vest monthly (beginning March 1, 2011) over a two year period. Unvested shares are subject to continued employment on each applicable vesting date. The options were valued on the grant date at $0.008 per share or $56,000 using the Black Scholes option pricing model with the following assumptions: stock price of $0.008 (based on the grant date quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 230% (based on historical volatility), and a risk-free interest rate of 2.7%.
 
In February 2011, the Company granted its prior Chief Financial Officer 9,000,000 five year options exercisable at $0.008 per share. There were 250,000 shares that vested immediately, and the remaining 8,750,000 shares will vest monthly (beginning March 1, 2011) over a two year period. Unvested shares are subject to continued employment on each applicable vesting date. The options were valued on the grant date at $0.008 per share or $72,000 using the Black Scholes option pricing model with the following assumptions: stock price of $0.008 (based on the grant date quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 230% (based on historical volatility), and a risk-free interest rate of 2.7%.
 
In April 2011, the Company granted a total of 1,700,000 five-year non-plan stock options to four employees and one director exercisable at $0.011 per share. The options shall vest over a three year period each June 30 and December 31 with the first vesting date being June 30, 2011. Unvested shares are subject to continued service on each applicable vesting date. The options were valued on the grant date at $0.0106 per share or $18,020 using the Black Scholes option pricing model with the following assumptions: stock price of $0.011 (based on the grant date quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 186% (based on historical volatility), and a risk-free interest rate of 2.24%.
 
In April 2011, the Company agreed to issue to a consultant 500,000 stock options exercisable at $0.01. The options were valued at $0.0134 per share or $6,700 using the Black Scholes option pricing model with the following assumptions: stock price of $0.01 (based on agreement date’s quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 175% (based on historical volatility), and a risk-free interest rate of 0.02%. The options were fully expensed.
 
 
 
20

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
In May 2011, the Company issued to its new Chairman of the Board 10,000,000 five year stock options, exercisable at $0.0085 per share. There were 2,500,000 shares that vested immediately, and the remaining 7,500,000 shares will vest in equal increments over a three year period each June 30 and December 31 with the first vesting date being December 31, 2011. Unvested shares are subject continued employment on each applicable vesting date. The options were valued on the grant date at $0.0074 per share or $74,000 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 term of 3.625 years (using the simplified method), volatility of 159% (based on historical volatility), and a risk-free interest rate of 1.84%.
 
In June 2011, the Company issued 40,000,000 five year non-qualified stock options exercisable at $0.0445 per share. There were 20,000,000 shares that vested immediately, and the remaining 20,000,000 shares will vest in equal increments over a three year period each March 31, June 30, September 30, and December 31 with the first vesting date being September 30, 2011. Unvested shares are subject to continued employment on each applicable vesting date. The options were valued on the grant date at $0.04369 per share or $1,747,600 using the Black Scholes option pricing model with the following assumptions: stock price of $0.0445 (based on the grant date quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 210% (based on historical volatility), and a risk-free interest rate of 1.62%.
 
In July 2011, the Company granted a total of 12,350,000 five year non-plan stock options to six employees and one director exercisable at $0.05 per share. The options shall vest quarterly over a three year period with the first vesting date being September 30, 2011. Unvested shares are subject to continued service on each applicable vesting date. The options were valued on the grant date at $0.0471 per share or $582,140 using the Black Scholes option pricing model with the following assumptions: stock price of $0.05 (based on the grant date quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 219% (based on historical volatility), and a risk-free interest rate of 0.66%.
 
In July, 2011, the Company granted its Chairman and CEO a total of 22,500,000 ninety-day non-plan stock optionsexercisable at $0.01 per share. The optionsare exercisable upon demand and expire in October 2011. The options were valued on the grant date at $0.0087 per share or $194,917 using the Black Scholes option pricing model with the following assumptions: stock price of $0.015 (based on a blended, pro rata, price per share of two recent placements), expected term of 90 days, volatility of 254% (based on historical volatility), and a risk-free interest rate of 0.02%.
 
In August 2011, the Company issued to its new Chief Financial Officer 3,000,000 five year stock options, exercisable at $0.0365 per share. The options shall vest quarterly over a three year period with the first vesting date being December 31, 2011. Unvested shares are subject to continued service on each applicable vesting date. The options were valued on the grant date at $0.0352 per share or $105,491 using the Black Scholes option pricing model with the following assumptions: stock price of $0.0365 (based on the grant date quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 216% (based on historical volatility), and a risk-free interest rate of 0.01%.
 
In aggregate, for the three and nine months ended September 30, 2011, the Company recorded stock-based compensation expense of $553,671 and $1,508,257, respectively, related to stock options. At September 30, 2011, there was $1,508,538 of unrecognized compensation expense to non-vested options-based compensation, which will be expensed over the applicable term of the respective stock option grant.
 
 
21

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
Restricted Stock Grants
 
Listed below is a summary of the quantity of employee common stock unvested, granted, vested and cancelled for the nine months ended September 30, 2011.
 
Unvested shares at January 1, 2011                                                                                                                        
    71,400  
Shares granted                                                                                                                        
     
Shares vested                                                                                                                        
    (71,400 )
Unvested shares cancelled                                                                                                                        
     
Unvested shares at September 30, 2011                                                                                                                        
     
 
For the three and nine months ended September 30, 2011, the Company recorded stock-based compensation expense of $4,660 and $15,074, respectively, related to restricted stock grants. As of September 30, 2011, all remaining shares have vested with no further unrecognized compensation expense.
 
Stock Warrants
 
During 2011, the Company issued warrants along with certain debt, the issuance of Series A preferred stock, and the Bieber transaction (see Notes 6 and 9). Listed below is the activity for the nine months ended September 30, 2011.
 
         
Weighted Average Exercise
   
Weighted Average Remaining Contractual
 
   
Quantity
   
Price
   
Term (Years)
 
Balance outstanding at January 1, 2011                                                                   
    6,495,665     $ 0.038       0.30  
Granted                                                                   
    259,920,747     $ 0.018       2.52  
Exercised                                                                   
    (14,064,000 )   $ 0.010        
Forfeited                                                                   
        $        
Expired                                                                   
    (2,308,334 )   $ 0.500        
Balance outstanding at September 30, 2011
    250,044,078     $ 0.023       2.62  
 
The exercise of 14,064,000 warrants occurred on a cashless basis.
 
8. RELATED PARTY TRANSACTIONS
 
As of September 30, 2011, there was $70,000 due to The Big Company LLC (“TBC”), wherein our Chairman was previously a manager. Effective July 1, 2011, our Chairman resigned from that position, and this $70,000 payable is included in the line item “Due to related parties” on the Company’s consolidated balance sheet as of September 30, 2011. As of December 31, 2010, there was no balance owed to this Company. In connection with negotiating the Bieber transaction, the Company entered into an agreement with TBC and issued 18,000,000 shares of common stock (see Note 7) and 62,000,000 warrants (see Note 9).
 
As of December 31, 2010, the Company owed an officer $30,498 for expenses personally advanced on behalf of the Company.  There was no balance owed to any officer as of September 30, 2011.
 
In April 2011, LaunchPad, LLC, a company controlled by our CEO verbally agreed to pay up to $3,000 per month on a month-to-month basis for rental of office space. In May 2011, our Board declined the opportunity to purchase the activation-code server for our software and permitted our CEO and an officer of PhoneGuard to acquire it and offer us a discounted price per activation compared to what we paid the third party seller. As of September 2011, the Company paid $60,014 to this independent company (controlled by our CEO) for 32,440 activation codes.
 
 
22

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
9. BIEBER BRANDS AND ASSOCIATES AGREEMENTS
 
In May 2011, the Company entered into agreements with Justin Bieber Brands, LLC, and certain associates of Justin Bieber (collectively, the “Bieber Agreement”) as well as a related agreement with a company formerly managed our Chairman. The key element is for Justin Bieber to act as a spokesman for our DriveSafe software and its potential to substantially reduce injuries and save lives from traffic accidents. Justin Bieber is committed to reduce texting while driving. Bieber has agreed to endorse DriveSafe in a number of ways, both online and in person over the term of the Bieber Agreement.
 
While we actually entered into agreements with Justin Bieber Brands, LLC and two associates (collectively, the “Bieber Group”), the agreements are identical except with regard to the number of warrants and sales royalties. Each agreement revolves around Justin Bieber’s endorsement of DriveSafe. The key terms are:
 
●   
Three year terms with Justin Bieber having the right to terminate after one year in which case the other two agreements terminate;
 
●   
Originally covered North America, Central America, and South America. In July 2011, the Company purchased all worldwide rights to the anti-texting software including any agreements with Justin Bieber and associates (see Note 1).
 
●   
Warrants to purchase 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, exercisable with full anti-dilution protection rights on both the exercise price and quantity, for sales below the exercise price during the three-year term of the warrant grant, except for exempt issuances as defined within the warrant grant agreement, among which are issuances that are less than 10% of the common stock as of the warrant grant agreement date;
 
●   
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; and sales royalties based on all sales of DriveSafe during the term;
 
●   
The fair value of these warrants 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%;
 
●   
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 new Chairman played a key role in negotiating the Bieber Agreements. As a result, effective May 2011, we also entered into an agreement with TBC.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;
 
●   
Originally covered North America, Central America and South America. In July 2011, the Company purchased all worldwide rights to the anti-texting software including any agreements with Justin Bieber and associates (see Note 1).
 
●   
Issued 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;
 
 
 
23

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
●   
Issued 37,000,000 one year warrants 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%;
 
●   
Issued 25,000,000 one year warrants 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%;
 
●   
Similar pre-emptive rights as the Bieber Group, although not keyed to a percentage and the same anti-dilution protection;
 
●   
A consulting fee of $20,000 per month which accrues until we raise $500,000 or enter into a factoring agreement in which case we pay $10,000 per month with the balance accruing until we raise $5,000,000. The consulting fees will be deducted from the royalties as described below;
 
●   
Sales royalties based upon a percent of adjusted gross profit after deducting activation and software costs and royalties payable to the Bieber Group;
 
●   
Provided an option to take up to 50% of sales royalties due and receive shares of common stock at $0.01 per share with a maximum of 25,000,000 shares issuable.
 
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 September 30, 2011, the unamortized portion was $425,165 current and $683,807 non-current.
 
Due to the price protection provisions in the various warrant grants, the warrant values are treated as derivative liabilities in the 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 day one 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).
 
10. CONCENTRATIONS
 
Concentration of Credit Risk
 
Financial Instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. Management believes the financial risks associated with these financial instruments are not material. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. $581,716 exceeded the federally insured limits at September 30, 2011.
 
Concentration of Revenues
 
During the three months ended September 30, 2011, no individual customer represented more than 10% of the company’s operating revenue. During the nine months ended September 30, 2011, one customer represented approximately 75% of the Company’s operating revenue.
 
Concentration of Accounts Receivable
 
As of September 30, 2011, the Company had no Accounts Receivable from continuing operations.
 
 
24

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
11. SEGMENT INFORMATION
 
The Company operates under two business segments in continuing operations which are evaluated on a revenue and net income basis. Expenses for professional services, stock-based compensation and certain interest costs are considered corporate expenses. The direct marketing segment includes revenue and associated costs for lead generation. The operating results of businesses the Company sold in February 2011 are reported in discontinued operations. PhoneGuard, a single segment, is engaged in the sale of cellular software.
 
The table below presents certain financial information by business segment for the three months ended September 30, 2011:
 
   
Direct
         
Segment
             
   
Marketing
   
PhoneGuard
   
Totals
   
Corporate
   
Consolidated
 
Revenues 
  $     $ 4,052     $ 4,052     $     $ 4,052  
Interest expense 
  $     $     $     $ (7,939 )   $ (7,939 )
Depreciation and amortization
  $ (11,071 )   $ (93,751 )   $ (104,822 )   $     $ (104,822 )
Income tax expense 
  $     $     $     $     $  
Net income (loss) 
  $ (470,577 )   $ (986,058 )   $ (1,456,635 )   $ 2,163,207     $ 706,572  
Fixed assets and intangibles 
  $ 62,908     $ 1,051,250     $ 1,114,158     $     $ 1,114,158  
Fixed assets, intangibles and goodwill additions (disposals), net
  $     $ (82,500 )   $ (82,500 )   $     $ (82,500 )
Total assets 
  $ 136,307     $ 1,146,068     $ 1,282,375     $ 2,094,595     $ 3,376,970  
 
The table below presents certain financial information by business segment for the three months ended September 30, 2010:
 
   
Direct
         
Segment
             
   
Marketing
   
PhoneGuard
   
Totals
   
Corporate
   
Consolidated
 
Revenues 
  $ 293,622     $ 476     $ 294,098     $     $ 294,098  
Interest expense 
  $     $     $     $ (70 )   $ (70 )
Depreciation and amortization
  $ (230,442 )   $ (133,915 )   $ (364,357 )   $     $ (364,357 )
Income tax expense 
  $     $     $     $     $  
Net income (loss) 
  $ (340,196 )   $ (368,892 )   $ (709,088 )   $ (415,747 )   $ (1,124,835 )
Fixed assets and intangibles 
  $ 121,415     $ 2,562,902     $ 2,684,317     $     $ 2,684,317  
Fixed assets, intangibles and goodwill additions (disposals), net
  $ 40,934     $     $ 40,934     $     $ 40,934  
Total assets 
  $ 738,845     $ 2,563,376     $ 3,302,221     $ 97,909     $ 3,400,130  
 
The table below presents certain financial information by business segment for the nine months ended September 30, 2011:
 
   
Direct
         
Segment
             
   
Marketing
   
PhoneGuard
   
Totals
   
Corporate
   
Consolidated
 
Revenues 
  $ 496,532     $ 28,571     $ 525,103     $     $ 525,103  
Interest expense 
  $     $     $     $ (73,889 )   $ (73,889 )
Depreciation and amortization
  $ (31,429 )   $ (364,927 )   $ (396,356 )   $     $ (396,356 )
Income tax expense 
  $     $     $     $     $  
Income (loss) from continuing operations
  $ (1,089,930 )   $ (4,443,904 )   $ (5,533,834 )   $ (6,410,370 )   $ (11,944,204 )
Fixed assets and intangibles 
  $ 62,908     $ 1,051,250     $ 1,114,158     $     $ 1,114,158  
Fixed assets, intangibles and goodwill additions (disposals), net
  $     $ (1,999,889 )   $ (1,999,889 )   $     $ (1,999,889 )
Total assets 
  $ 136,307     $ 1,144,568     $ 1,282,375     $ 2,094,595     $ 3,376,970  
 
 
 
25

 
 
OPTIONS MEDIA GROUP HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(UNAUDITED)
 
The table below presents certain financial information by business segment for the nine months ended September 30, 2010:
 
   
Direct
         
Segment
             
   
Marketing
   
PhoneGuard
   
Totals
   
Corporate
   
Consolidated
 
Revenues 
  $ 632,368     $ 840     $ 633,208     $     $ 633,208  
Interest expense 
  $     $     $     $ (1,986 )   $ (1,986 )
Depreciation and amortization
  $ (326,220 )   $ (245,523 )   $ (571,743 )   $     $ (571,743 )
Income tax expense 
  $     $     $     $     $  
Income (loss) from continuing operations
  $ (1,147,192 )   $ (691,419 )   $ (1,838,611 )   $ (1,006,605 )   $ (2,845,216 )
Fixed assets and intangibles 
  $ 121,415     $ 2,562,902     $ 2,684,317     $     $ 2,684,317  
Fixed assets, intangibles and goodwill additions (disposals), net
  $ 94,359     $ 2,698,425     $ 2,792,784     $     $ 2,792,784  
Total assets 
  $ 738,845     $ 2,563,376     $ 3,302,221     $ 97,909     $ 3,400,130  
 
12. COMMITMENTS AND CONTINGENCIES
 
From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. To our knowledge, no legal proceedings, government actions, administrative actions, investigations, or claims currently pending against or involving the Company that, in the opinion of our management, could reasonably be expected to have material effects on the business and financial condition.
 
13. SUBSEQUENT EVENTS
 
In October 2011, the Company began selling PhoneGuard’s anti-texting Software, which had previously been offered to the public as a free product during the soft launch phase.
 
In October 2011, the Company entered into an agreement with Cellairis Franchise, Inc. a cell phone accessory retail chain, that will offer the PhoneGuard anti-texting Software at its stores throughout the United States.
 
In November 2011, Board of Director Hakan Koyuncu resigned from the Company’s Board.
 
In November 2011, Board of Director Russ Strunk resigned from the Company’s Board.
 
In November 2011, Ervin Braun joined the Company's Board of Directors.  Mr. Braun is a minority owner in TBC.  Additionally, Mr. Braun’s son is the manager of Mr. Bieber, the Company’s celebrity spokesperson.
 
In connection with Mr. Braun’s appointment, the Company issued 5,000,000 five year stock options, exercisable at $0.03 per share. The options vest as follows: 416,674 are vested, and 416,666 shall vest on the last day of each calendar quarter until fully vested commencing March 31, 2012, subject to continued service as a director on each applicable vesting date. Mr. Braun will also receive a stipend of $7,500 per calendar quarter, subject to his continued services as a director of the Company. The options were valued on the grant date at $0.0195 per share or $97,392 using the Black Scholes option pricing model with the following assumptions: stock price of $0.02 (based on the grant date quoted trading price of the company's common stock), expected term of five years (using the simplified method), volatility of 205% (based on historical volatility), and a risk-free interest rate of 0.88%.
 
In November 2011, 42.1875 shares of Series E preferred stock owned by our CEO vested and were immediately converted into 5,468,723 shares of common stock.
 
 
 
26

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Company Overview
 
Options Media had historically been an Internet marketing company providing e-mail services to corporate customers. Additionally, Options Media has a lead generation business and disposed of its SMS text messaging delivery business as discussed below. In 2010, Options Media transitioned by changing its focus to smart phones and acquiring a robust anti-texting program that prohibits people in vehicles from texting, e-mailing, and reading such communications while moving. As part of its focus on mobile software applications, Options Media has also broadened its suite of products by continuing to improve the features of its anti-texting software. In conjunction with this change of focus, in February 2011, Options Media sold its e-mail and SMS businesses as described below. Options Media retained its lead generation business. The unaudited consolidated financial statements contained herein retroactively give effect to the February 2011 sale treating the e-mail and SMS businesses as discontinued operations. The revenues for the three andnine months ended September 30, 2011, consisted almost solely of lead generation revenue.
 
Our anti-textingSoftware, when active on a mobile phone, prevents the user from texting while driving thereby allowing them to focus on the road. Our anti-texting application is designed to keep teenagers, family members, and people who drive for businesses safe while driving by disabling texting, instant messaging, calling, web browsing, and other phone-based distractions that should not be used while driving. PhoneGuard protects drivers from the dangerous temptation to use their phone while driving.
 
In May 2011, we entered into agreements with Justin Bieber Brands, LLC and certain associates which led to Justin Bieber agreeing to act as spokesperson for PhoneGuard’s anti-texting product. Although the soft launch occurred in July, during the second quarter we finalized our marketing strategy in conjunction with Mr. Bieber’s advisors. This led to Options Media offering the base anti-texting product free in order to maximize enrollment in our campaign to reduce the very damaging effects of texting, e-mailing, and talking while driving.
 
In this soft launch phase, management was extremely encouraged by the fact that there were approximately 15,000 unique downloads of the free product in the first two weeks of launch.  At the time of the soft launch, a public safety announcement (“PSA”) video featuring Justin Bieber was broadcast via the Internet.  The consumer response was extremely positive as there were more than 500,000 YouTube views of this PSA video and nearly 1,000,000 Facebook page views.
 
We expect that revenue from the PhoneGuard Software will be principally derived from advertising services and subscription fees.Beginning in October 2011, the Company began selling its anti-texting Software via the following offerings:
 
·  
PhoneGuard: this version is targeted towards teens and is offered to the user via a one-time download cost and provides standard product offerings.  It is an advertising supported model.
 
·  
PhoneGuard Family:this version is targeted towards parents and is offered to the user via a one-time download cost.  It is a step up from the PhoneGuard model as it provides additional functionality not included within the PhoneGuard model.  It is not an advertising supported model.
 
·  
PhoneGuard Family Pro:this version is targeted towards parents and is offered to the user via an annual subscription cost.  It is a step up from the PhoneGuard Family model as it provides additional functionality via a web portal that is not included within the PhoneGuard Family model.  It is not an advertising supported model.
 
·  
PhoneGuard Enterprise:this version is targeted towards businesses and is offered via an annual subscription cost.  It is a model that has access to the all of the product’s available offerings and is customizable to meet the specific needs of each of our client’s business.  It is not an advertising supported model.
 
 
27

 
 
The aforementioned offerings have the following functionalities:
 
   
PhoneGuard
PhoneGuard
PhoneGuard
 
PhoneGuard
Family
Family Pro
Enterprise
Text block: Keeps you and everyone safe while driving by preventing you from surfing the web, texting, BBMing or reading emails
X
X
X
X
Custom auto-reply:Alerts whoever sends you a text message while you’re driving with a customized message of why you are unavailable to answer.
X
X
X
X
Panic button: Immediately sends a text message with a panic message and GPS coordinates that will open a map with available administrative phone numbers to call, or 911
X
X
X
X
Override: Allows administrative user to enter passcode to unblock the phone for 30 minutes, even while driving or in timeout mode
X
X
X
X
Advertising enabled: Advertisements will occur through auto-reply texts and banners
X
     
Speed control: Allows administrative user to set a speed limit to help monitor how fast you drive.
 
X
X
X
Emergency call: Shows a list of administrative phone numbers to call, including 911.
 
X
X
X
Request permission: Sends a message from the phone to the administrative phone requesting an override to unblock the phone
 
X
X
X
Administration control: Allows administrative user to enter new administrative phone numbers and remove old ones
 
X
X
X
Speed violation alert: Sends a message from the phone to the administrative phone with alerts of excessive speed with a map link to the violation location
 
X
X
X
Remember passcode: Allows administrative user to remember the passcode so the phone will bypass the login for all administrative functions
 
X
X
X
Custom timeout auto-reply: Allows administrative user to customize timeout messages on the phone
 
X
X
X
Timeout: Allows administrative user to set timeout periods and custom timeout messages on the phone.
 
X
X
X
Web portal: Users will have access to additional functionalities offered through a web portal
   
X
X
Locator/Tracker: Enables the end user to locate/track their mobile phone in the event it is lost or stolen
   
X
X
Family/Enterprise View: Enables administrator to view the locations of all phones registered to their portal
   
X
X
Geo-fencing: The administrator may set perimeters and receive alerts if the cell phone leaves the designated perimeter.
   
X
X
Customizable reporting: Enterprise’s administrator will have the ability of customizing canned reports
     
X
 
 
28

 
 
Industry Overview
 
Currently there are thirty-four (34) states along with the District of Columbiathat ban text messaging for all drivers.  Twelve (12) of these laws were enacted in 2010 alone.  Nine (9) states along with the District of Columbia prohibit drivers from using handheld cell phones while driving.  New research from the Insurance Institute for Highway Safety shows the number of accidents caused by distracted driving actually increased after these laws were passed.   We believe these laws strengthen the public’s need for our anti-texting Software.
 
Additionally, research on distracted driving, as reportedon the United States Department of Transportation’s official US Government website for distracted driving (http://www.distraction.gov/stats-and-facts/index.html) reveals some surprising facts:
 
·  
20 percent of injury crashes in 2009 involved reports of distracted driving (NHTSA).
 
·  
Of those killed in distracted-driving-related crashed 995 involved reports of a cell phone as a distraction (18% of fatalities in distraction-related crashes) (NHTSA).
 
·  
In 2009, 5,474 people were killed in U.S. roadways and an estimated additional 448,000 were injured in motor vehicle crashes that were reported to have involved distracted driving (FARS and GES).
 
·  
The age group with the greatest proportion of distracted drivers was the under-20 age group – 16 percent of all drivers younger than 20 involved in fatal crashes were reported to have been distracted while driving (NHTSA).
 
·  
Drivers who use hand-held devices are four times as likely to get into crashes serious enough to injure themselves (Source: Insurance Institute for Highway Safety).
 
·  
Using a cell phone while driving, whether it’s hand-held or hands-free, delays a driver's reactions as much as having a blood alcohol concentration at the legal limit of .08 percent (Source: University of Utah).
 
Critical Accounting Estimates
 
This discussion and analysis of our consolidated financial condition presented in this section is based upon our unaudited consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our unaudited consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our unaudited consolidated financial statements and, therefore, consider these to be our critical accounting policies.  On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, allowance for accounts receivable, estimates of depreciable lives and valuation of property and equipment, valuations of discounts on debt,valuation of derivative liabilities, valuation of beneficial conversion features in convertible debt, valuation and amortization periods of intangible assets and software, valuation of goodwill, valuation of stock based compensation and the deferred tax valuation allowance. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
Stock Based Compensation
 
We adopted the provisions of ASC 718-20-10 Compensation–Stock Compensation Awards Classified as Equity whichestablishes the financial accounting and reporting standards for stock-based compensation plans. As required by ASC 718-20-10, we recognize the cost resulting from all stock-based payment transactions.  Stock based compensation is measured at fair value at the time of the grant.
 
 
29

 
 
Valuation of Long-Lived and Intangible Assets and Goodwill
 
Pursuant to ASC 350-10-05 Intangibles–Goodwill and Other, we assess the impairment of identifiable intangibles, long-lived assets and goodwill annually or whenever events or circumstances indicate that the carrying value of these assets may not be recoverable. Factors we consider include and are not limited to the following:
 
·  
Significant changes in performance relative to expected operating results
 
·  
Significant changes in the use of the assets or the strategy of our overall business
 
·  
Significant industry or economic trends
 
As determined in accordance with the ASC, if the carrying amount of an intangible asset exceeds its estimated undiscounted future cash flows, the impairment loss is measured as the amount by which the carrying amount exceeds the fair market value of the assets.
 
Revenue Recognition
 
We recognize revenue when: (i) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (ii) delivery has occurred or services have been provided; (iii) the fee is fixed or determinable; and (iv) collection is reasonably assured.
 
In accordance with ASC 605-45-05,we report revenues for transactions in which we are the primary obligor on a gross basis and revenues in which we act as an agent on and earn a fixed percentage of the sale on a net basis, net of related costs.  Credits or refunds are recognized when they are determinable and estimable.
 
Our revenue will principally be derived from advertising services and subscription fees.
 
Advertising Revenue. We expect to generate advertising revenue primarily from display, audio and video advertising. The Company will generate its advertising revenue through the delivery of advertising impressions sold on a cost per thousand, or CPM, basis. In determining whether an arrangement exists, we ensure that a binding arrangement, such as an insertion order or a fully executed customer-specific agreement, is in place. We generally recognize revenue based on delivery information from its campaign trafficking systems. In addition, we will also generate referral revenue from performance-based arrangements, which may include a user or recipient of an “auto reply” performing some action such as clicking on an advertisement and signing up for a membership with that advertiser. We record revenue from these performance-based actions when it receives third-party verification reports supporting the number of actions performed in the period. We generally have audit rights to the underlying data summarized in these reports.
 
Subscription and Other Revenue. We will generate subscription services revenue through the sale of its PhoneGuard’s anti-texting software. For one-time download fees, revenue will be recognized at the time of payment.  For annual subscription fees, subscription revenue will be recognized on a straight-line basis over the subscription period.Options Media offers lead generation programs to assist a variety of businesses with customer acquisition for the products and services they are selling.  Options Media pre-screens the leads to meet its clients' exact criteria.  Revenue from generating and selling leads to customers is recognized at the time of delivery and acceptance by the customer.
 
We offer lead generation programs to assist a variety of businesses with customer acquisition for the products and services they are selling. We pre-screen the leads to meet its clients' exact criteria. Revenue from generating and selling leads to customers is recognized at the time of delivery and acceptance by the customer.
 
PhoneGuard previously sold an older version of anti-texting mobile software under a licensing agreement. Sales to distributors and retailers were recognized at the time of shipment as the software licenses has an indefinite term except if the sale is under a consignment arrangement in which case, we recognize the sale only upon the distributor reselling the software. Sales to consumers over the Internet are recognized on a pro rata basis over the term of the subscription period.
 
 
30

 
 
Options Media sold its e-mail business in February 2011 and receives commission from the purchaser on sales made to Options Media’s previous customers. Revenue is recorded when commission is received as there is not enough collection history to record accruals with true-ups to actual. These commissions are reported in discontinued operations.  During the three months ended September 30, 2011, the Company has not received any commissions from the purchaser.
 
Software Costs
 
The anti-texting software acquired from CSI is not considered to be internally developed software as the anti-texting software did not meet the provisions of the ASC Topic 350 whereinwe purchased such software with the intent to market it to the public.  As such, we note that treatment of the cost of the software and future product enhancements are governed by the provisions of ASC 985, Software.At the time the software purchase was finalized,we had a free version of the software released in the app markets for Android and Blackberry.  Thus, we determined that it had met the provisions of ASC 985, as (i) it deemed the software to be technologically feasible; and (ii) there were no on-going research and development (“R&D”).  Accordingly, we recorded the cost of the software in the line item “Intangible assets, net”.
 
Pursuant to the provisions of ASC 985, we will amortize the capitalized cost utilizing the straight-line method over the three-year estimated useful life of the software.Amortization commenced at the acquisition date, as a free version of the product was available to customers.  Future product maintenance and customer support, for the software, will be expensed as incurred.  Should the Company begin to enter a product enhancement phase, it will determine at that time if post-R&D phase costs should be capitalized.
 
Recently Issued Accounting Standards
 
See Note 2 to our unaudited consolidated financial statements included herein for a discussion of recently issued accounting standards.
 
Results of Operations
 
Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010
 
Overview
 
Key highlights for the three months ended September 30, 2011 were as follows:
 
·  
In July 2011, the Company received $300,000 for the purchase of 3,000 shares of Series G Preferred Stock. As of September 30, 2011, all 3,000 shares of Series G preferred stock were converted to 30,000,000 shares of common stock.
 
·  
In July 2011, the Company received $200,000 (less $16,000 commission fees) in a private placement for the purchase of 20,000,000 shares of common stock.
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Revenues                                                        
  $ 4,052     $ 294,098     $ (290,046 )     (99 )%
 
The decrease in revenues was due primarily to lower direct marketing revenues in 2011 compared to 2010. We have turned our attention to the PhoneGuard anti-texting software that was released for sale to the public in October 2011.
 
 
31

 
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Cost of revenues                                                        
  $     $ 144,524     $ (144,524 )     100 %
Percentage of revenues                                                        
    0 %     49 %                
 
There were no costs of revenues in the three month period ended September 30, 2011.  The decrease from the comparable prior year period is due to the decrease in direct marketing revenue.
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Gross profit                                                        
  $ 4,052     $ 149,574     $ (145,522 )     (97 )%
Percentage of revenues                                                        
    100 %     51 %                
 
The decrease in gross profit was due to the aforementioned decrease in revenue and cost of revenues.
 
               
Period-over-Period
   
Period-over-Period
 
Operating expenses:
 
2011
   
2010
   
$ Change
   
% Change
 
Compensation and related costs 
  $ 1,632,643     $ 492,396     $ 1,140,247       232 %
Commissions 
          29,763       (29,763 )     (100 )%
Advertising 
    319,614       90,801       228,813       252 %
Rent 
    49,290       50,094       (804 )     (2 )%
General and administrative 
    625,693       611,285       14,408       2 %
Impairment of software license 
    82,500             82,500       100 %
Total operating expenses 
  $ 2,709,740     $ 1,274,339     $ 1,435,401       113 %
 
Compensation and related costs include salaries, payroll related taxes, and stock-based compensation. These expenses increased by $1,140,247 primarily due to an increase in non-cash stock-based compensationof $1,042,717from the following items: (i) the vesting of 337.5 and 42.1875 shares of Series C and Epreferred stock, respectively (discussed in Note 7); (ii) amortization of employee stock option grants made during the prior twelve month period; (iii) stock options granted to our Chairman and Chief Executive Officer; (iv) stock related grants pertaining to the Bieber Agreements and our Chairman, who played a key role in negotiating the Bieber agreements; (v)amortizationof warrants issued to third parties that assisted in the negotiations of the Bieber Agreements; (vi) amortization of stock-based compensation issued to a third party marketing firm that will promote our product; and (vii) amortization of restricted stock.
 
Commissions declined $29,763 due to the aforementioned decline in revenues.
 
Advertising expenses increased by $228,813 primarily due tothe following items: (i) an increase in advertisement agency fees; (ii) the creation of a video production with Justin Bieber and the Brown family, and(iii)  the creation of a sweepstakes promotion.
 
Rent expense declined a nominal $804 due to a renegotiation of our lease agreement.
 
General and administrative expenses increased $14,408 due to an increase in consulting fees (comprised of independent software programmers, consultants and our interim Chief Operating Officer) and higher legal fees to support new activity, partially offset by decreases investor relations, merchant fees and outside services.
 
Impairment of software license of $82,500 represented a non-cash charge that resulted from a full impairment of the anti-texting software license pertaining to rights in North, Central, and South Americas. The anti-texting software license was originally acquired for $110,000 in August 2010, and $27,500 had been amortized as of July 2011, leaving a remaining net book balance of $82,500. This software license was disposed and replaced with the purchase of all worldwide rights; see Note 4 for additional information.
 
 
32

 
 
 
               
Period-over-Period
 
Period-over-Period
Other income (expense):
 
2011
   
2010
   
$ Change
 
% Change                 
Change in fair market value of warrant liability
  $ 3,442,611     $     $ 3,442,611  
NM
Other income
    12,500             12,500  
NM
Interest expense
    (7,939 )     (70 )     (7,869 )
NM
Settlement loss
    (18,795 )           (18,795 )
NM
Loss on extinguishment of debt
    (16,117 )           (16,117 )
NM
Total other income (expense), net
  $ 3,412,260     $ (70 )   $ 3,412,330  
NM
 
Change in fair market value of warrant liability increased $3,442,611. Due to the price protection provisions in outstanding warrants, the values were treated as derivative liabilities in our unaudited consolidated financial statements. This results in non-cash gains or losses each quarter during the term of the warrants. We will report a non-cash loss if our common stock price from day one to the last day of a quarter increases. Conversely, we will report a gain if our common stock price decreases. The losses or gains may be substantial. As of September 30, 2011, the closing price of our common stock decreased from the closing price at June 30, 2011, the date we valued the Justin Bieber and associates' warrants. This resulted in a non-cash gain of $3,442,611 from the change in fair market value of the warrant liability. Options Media accounts for the outstanding warrants under guidance of ASC Topic 815 (see Note 2: Accounting for Derivatives).
 
Other income increased $12,500 due to sublease income that commenced in 2011.
 
Interest expense increased $7,869 due to the Company entering into notes payable during 2011.
 
Settlement loss increased $18,795 due to the Company issuing common stock as a single settlement.
 
Loss on extinguishment of debt increased $16,117 due to an amendment made to a note payable. The debt modification was treated as a debt extinguishment and is discussed in further detail at Note 6.
 
Income taxes: No tax benefit or expense was recorded for the three months ended September 30, 2011 and 2010.
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Income (loss) from continuing operations
  $ 706,572     $ (1,124,835 )   $ 1,831,407       163 %
 
Income from continuing operations for the three months ended September 30, 2011, increased $1,831,407 from the loss from continuing operations for the comparable prior year period due to the aforementioned factors.
 
 
33

 
 
 
               
Period-over-Period
   
Period-over-Period
 
Non-cash activity:
 
2011
   
2010
   
$ Change
   
% Change
 
Non-cash change in the fair market value of a warrant liability resulting from the change in the trading price of our common stock
  $ 3,442,611     $     $ 3,442,611       100 %
Non-cash stock compensation related to restricted common stock, stock options, vested shares of Series C and Epreferred stock, and prepaid marketing expense
    (1,104,689 )     (61,972 )     (1,042,717 )  
NM
 
Non-cash charges from amortization, depreciation, debt discount, and debt extinguishment
    (120,939 )     (364,357 )     243,418       67 %
Non-cash impairment of software license and prepaid royalties
    (82,500 )           (82,500 )     (100 )%
Total non-cash gains (charges), included in income (loss) from continuing operations
  $ 2,134,483     $ (426,329 )   $ 2,560,812       601 %

               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Income (loss) from discontinued operations, net of income taxes of $0
  $ 3,597     $ (1,350,599 )   $ 1,354,196       (100 )%
 
Income from discontinued operations for the three months ended September 30, 2011 was nominal as compared to the loss from discontinued operations for the comparable prior year period as there was minimal activity related to discontinued operations. This relates to the sale of our email and postal direct marketing business. We expected nominal wind-down activity for the three months ended September 30, 2011, as compared to the threemonths ended September 30, 2010.
 
Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010
 
Overview
 
Key highlights for the nine months ended September 30, 2011 were as follows:
 
·  
We now focus 100% of our efforts to develop and market mobile software applications;
 
·  
In Q2 2011, we entered into endorsement agreements with Justin Bieber and his associates to promote our PhoneGuard offerings software;
 
·  
In Q2 2011, we appointed a new Chairman of the Board;
 
·  
We contracted with two large advertisement agencies to promote our PhoneGuard offerings and boost public relations;
 
·  
We raised $1,860,000 from our Series A preferred stock offering;
 
·  
We raised $2,074,966 from our Series G preferred stock offering; all 20,750 shares of Series G preferred stock were converted to 207,500,000 shares of common stock;
 
·  
In July 2011, the Company received $200,000 (less $16,000 commission fees) private placement for the purchase of 20,000,000 shares of common stock;
 
·  
For the nine months ended September 30, 2011, our net loss from continuing operations was $11,944,204 compared to $2,845,216 for the comparable prior year period. The net loss for year-to-date 2011 included four significant non-cash charges (presented in further detail below) that made up 71% of this net loss while the net loss for the comparable prior year period included two significant non-cash charges (also presented in further detail below) that made up 46% of the net loss for the period;
 
·  
We made significant progress in the enhancement of PhoneGuard’s anti-texting Software, and we launched the Software for sale to the public in October 2011.
 
34

 
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Revenues                                                        
  $ 525,103     $ 633,208     $ (108,105 )     (17 )%
 
The decrease in revenues was primarily due to lower direct marketing revenues in 2011 compared to 2010. We have turned our attention to the PhoneGuard anti-texting software that was released for sale to the public in October 2011.
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Cost of revenues                                                        
  $ 324,046     $ 379,808     $ (55,762 )     (15 )%
Percentage of revenues                                                        
    62 %     60 %                
 
The cost of revenues included fees due to outsourced data and data services. The decrease of $55,762 was due to the aforementioned decrease in revenues. The increase in cost of revenues as a percentage of revenues was due to increased costs from outsourced data and data services.
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Gross profit                                                        
  $ 201,057     $ 253,400     $ (52,343 )     (21 )%
Percentage of revenues                                                        
    38 %     40 %                
 
The decrease in gross profit was due to the aforementioned decrease in revenue and cost of revenues.
 
               
Period-over-Period
   
Period-over-Period
 
Operating expenses:
 
2011
   
2010
   
$ Change
   
% Change
 
Compensation and related costs                                                        
  $ 4,343,443     $ 1,424,854     $ 2,918,589       205 %
Commissions                                                        
    41,084       85,153       (44,069 )     (52 )%
Advertising                                                        
    655,294       136,102       519,192       381 %
Rent                                                        
    149,842       159,948       (10,106 )     (6 )%
General and administrative                                                        
    2,069,140       1,388,655       680,485       49 %
Impairment of software license                                                        
    2,135,697             2,135,697       100 %
Server hosting and technology services
          5,500       (5,500 )     (100 )%
Total operating expenses                                                        
  $ 9,394,500     $ 3,200,212     $ 6,194,288       194 %
 
Compensation and related costs include salaries, payroll related taxes, and stock-based compensation. These expenses increased by $2,918,589 primarily due to an increase in non-cash stock-based compensationof $2,870,209 from the following items: (i) the vesting of 675 and 379.6875 shares of Series C and Epreferred stock, respectively (discussed in Note 7); (ii)stock related grants pertaining to the Bieber Agreements and our Chairman, who played a key role in negotiating the Bieber agreements; (iii) rights to purchase stock granted to our Chairman and CEO; (iv) amortizationof warrants to third parties that assisted in the negotiations of the Bieber Agreements; (v) amortization of stock-based compensation issued to a third party marketing firm that will promote our product; (vi) amortization of restricted stock; these items were partially offset by a decrease in the amortization of employee stock options.
 
Commissions declined $44,069 due to the aforementioned decline in revenues.
 
Advertising expenses increased by $519,192 primarily due to the following items: (i) the creation in fiscal year 2011 of various video productions with Justin Bieber and the Brown family; (ii) an increase in advertisement agency fees; and (iii) an increase in tradeshow expenses.
 
Rent expense declined by $10,106 due to a renegotiation of our lease agreement.
 
 
35

 
 
General and administrative expenses increased $680,485due to an increase in consulting fees (comprised offees directly attributable to negotiating and signing the Bieber agreements,fees arising from an anti-dilution price adjustment to outstanding warrants,fees to independent software programmers and consultants,fees to our interim Chief Technology Officer and since hired as an employee, and fees to our interim Chief Operating Officer), higher legal fees to support new activity, partially offset by decreases in investor relations, merchant fees and outside services.
 
Impairment of software license of $2,135,697 represented a non-cash charge that resulted from a full impairment of the anti-virus software license, prepaid royalties associated with that software license, and the anti-texting software license pertaining to rights in North, Central, and South Americas.The anti-virus software license was originally acquired for $2,528,426 in April 2010, and $611,037 had been amortized through June 2011, leaving a remaining net book balance of $1,917,389. At the time we purchased the sublicense, we also acquired the prepaid royalties to the software owner. The net book value of the prepaid royalties in June 2011 was $135,808.We are devoting all resources to developing and marketing PhoneGuard’s anti-texting software and decided not to exploit the anti-virus software license it acquired in April 2010. After careful analysis, we determined to no longer market the anti-virus product. As a result, we expensed the entire net book balance of the license and prepaid royalties associated with that license. The anti-texting software license was originally acquired for $110,000 in August 2010, and $27,500 had been amortized as of July 2011, leaving a remaining net book balance of $82,500. This software license was disposed and replaced with the purchase of all worldwide rights; see Note 4 for additional information.
 
               
Period-over-Period
   
Period-over-Period
 
Other income (expense):
 
2011
   
2010
   
$ Change
   
% Change
 
Change in fair market value of warrant liability
  $ (2,670,194 )   $     $ (2,670,194 )     (100 )%
Other income
    28,234             28,234       100 %
Interest expense
    (73,889 )     (1,986 )     (71,903 )  
NM
 
Settlement gain (loss)
    (18,795 )     103,582       (122,377 )     (118 )%
Loss on extinguishment of debt
    (16,117 )           (16,117 )     (100 )%
Total other income (expense), net
  $ (2,750,671 )   $ 101,596     $ (2,852,357 )  
NM
 
 
Change in fair market value of warrant liability increased $2,670,194. Due to the price protection provisions in outstanding warrants, the values were treated as derivative liabilities in the unaudited consolidated financial statements. This results in non-cash gains or losses each period during the term of the warrants. We will report a non-cash loss if our common stock price from day one to the last day of a period increases. Conversely, we will report a gain if our common stock price decreases. The losses or gains may be substantial. As of September 30, 2011, the closing price of our common stock increased from the closing price at May 9, 2011, the date we valued the Justin Bieber and associates warrants. This resulted in a non-cash loss of $2,670,194 from the change in fair market value of the warrant liability. Options Media accounts for the outstanding warrants under guidance of ASC Topic 815 (see Note 2: Accounting for Derivatives).
 
Other income increased $28,234 due to sublease income that commenced in 2011.
 
Interest expense increased $71,903 due to the Company entering into notes payable during 2011.
 
Settlement gain (loss) decreased $122,377 because there were no settlement gains in 2011 while there were in the comparable prior year period.  We incurred a settlement loss in 2011 wherein we issued common stock as a single settlement.
 
Loss on extinguishment of debt increased $16,117 due to an amendment made to a note payable. The debt modification was treated as a debt extinguishment and is discussed in further detail at Note 6.
 
Income taxes: No tax benefit or expense was recorded for the nine months ended September 30, 2011 and 2010.
 
 
36

 
 
               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Loss from continuing operations 
  $ (11,944,204 )   $ (2,845,216 )   $ (9,098,988 )     320 %
 
Loss from continuing operations for the nine months ended September 30, 2011, increased $9,098,988 from the loss from continuing operations for the comparable prior year period due to the aforementioned factors.
 
               
Period-over-Period
   
Period-over-Period
 
Non-cash activity:
 
2011
   
2010
   
$ Change
   
% Change
 
Non-cash stock compensation related to restricted common stock, stock options, vested shares of Series C and E preferred stock, and prepaid marketing expense
  $ (3,198,203 )   $ (726,773 )   $ (2,471,430 )     (340 )%
Non-cash change in the fair market value of a warrant liability resulting from the change in the trading price of our common stock
    (2,670,194 )           (2,670,194 )     (100 )%
Non-cash impairment of software license and prepaid royalties
    (2,135,697 )           (2,135,697 )     (100 )%
Non-cash charges from amortization, depreciation, debt discount, and debt extinguishment;
    (470,528 )     (571,743 )     101,215       18 %
Total non-cash charges, included in the loss from continuing operations
  $ (8,474,622 )   $ (1,298,516 )   $ (7,176,106 )     (553 )%

               
Period-over-Period
   
Period-over-Period
 
   
2011
   
2010
   
$ Change
   
% Change
 
Income (loss) from discontinued operations, net of income taxes of $0
  $ 13,941     $ (2,949,249 )   $ 2,963,190       (100 )%
 
Income from discontinued operations for the nine months ended September 30, 2011 was nominal as compared to the loss from discontinued operations for the comparable prior year period as there was minimal activity related to discontinued operations. This relates to the sale of our email and postal direct marketing business. We expected nominal wind-down activity for the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010.
 
Liquidity and Capital Resources
 
For the nine months ended September 30, 2011, we used $2,875,389 in cash from continuing operations.The cash used in operating activities consisted of our net loss of $11,930,263 offset by a change in operating assets and liabilitiesof $500,191 and non-cash items comprised of the following(i) combined stock and stock option compensation of $3,198,203;(ii) change in fair market value of warrant liability of $2,670,194; (iii) asset impairment of $1,999,889; (iv) depreciation and amortization of $396,356;(v) write-off of prepaid royalties of $135,808;(vi) bad debt of $61,266;(vii) debt discount of $58,055; (viii) loss on extinguishment of debt of $16,117; and (ix) stock granted for settlement of $18,795.
 
For the nine months ended September 30, 2011, we used $139,987 for investing activities related to:(i) the purchase of our anti-texting Software of $300,000; and (ii) the purchase of property and equipment of $14,987, partially offset by (iii) proceeds from the sale of the E-mail business of $175,000.
 
 
37

 
 
For the nine months ended September 30, 2011, we were provided with $3,919,443 from financing activities related to: (i) proceeds from Series G preferred stock private placement of $2,074,966; (ii) proceeds from Series A preferred stock private placement of $1,860,000; (iii) proceeds from sales of common stock of $234,200;and (iv) proceeds from a promissory note which is secured by all of Options Media’s assets of $145,500; partially offset by (v) financing costs associated with the various stock offerings of $259,800; (vi) payments of notes payable of $93,688; and (vii) dividend payments on the Series A preferred stock of $41,735.
 
As of November 10, 2011, we had approximately $350,000 in available cash and no balance in net accounts receivable. We previously issued two convertible notes with an aggregate outstanding balance of $266,313.A third note payable has an outstanding balance at September 30, 2011 of $400,000 and it requires monthly payments of $25,000. To remain operational through the next 12 months, we will need to complete another financing through issuance of equity or debt instruments and improve our cash flows.Our management team is focusing on various financing alternatives.  In addition to raising additional capital, our management is focused on generating sales from our PhoneGuard Software offeringsin addition to reducing our discretionary expenses. Any additional financing may not be available on terms that are favorable to us, if at all.Any additional equity financing may be very dilutive to our existing shareholders. If we are unsuccessful in our efforts to raise capital initially and also increase cash flows from operations to cover our expenditures, we may not remain operational over the next 12 months.
 
We invest excess cash predominately in liquid marketable securities to support our growing infrastructure.We expect to spend $100,000 on additional capital expenditures for the remainder of 2011 for the development of additional software functions and to purchase equipment.
 
The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of Options Media to continue as a going concern. There are no assurances that Option Media will be able to achieve and sustain profitable operations or continue as a going concern.
 
Related Party Transactions
 
For information on related party transactions and their financial impact, see Note 8 to the unaudited consolidated financial statements.
 
Cautionary Note Regarding Forward-Looking Statements
 
This report contains forward-looking statements including our liquidity and capital expenditures and expectations regarding our revenues.
 
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the impact of intense competition, the continuation or worsening of current economic conditions and the condition of the domestic and global credit and capital markets, failure to gain market acceptance of the software from consumers and retail outlets, any unanticipated changes to the working relationship between Justin Bieber and PhoneGuard, the willingness and the ability of consumers to pay for our PhoneGuard offerings.
 
Further information on our risk factors is contained in our filings with the SEC, including our Form 10-K for the year ended December 31, 2010. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
 
 
38

 
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable to smaller reporting companies
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures.Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 15d-15(e) under the Exchange Act.Based on their evaluation, our management has concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under SEC rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting.There were no changes in our internal control over financial reporting as defined in Rule 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
39

 
 
 PART II - OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
There have been no material changes to any previously disclosed litigation.
 
ITEM 1A.  RISK FACTORS
 
Not applicable to smaller reporting companies.
 
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
In addition to those unregistered securities previously disclosed in reports filed with the SEC, we have sold securities without registration under the Securities Act of 1933 (the “Securities Act”), as described below.
 
Name or Class of Investor
 
Date of Sale
 
Number. of Securities
 
Reason for Issuance of Stock
Series E holder (1)                                      
 
7/7/11
  43,749,787  
Conversion of Series E preferred stock
Warrant holder (1)                                      
 
7/14/11
  5,101,257  
Cashless exercise of 6,000,000 warrant
CSI Shareholder                                      
 
7/15/11
  1,253,026  
Settlement of dispute
Series E holder (1)                                      
 
8/10/11
  5,468,723  
Conversion of Series E preferred stock
Consultant                                      
 
8/11/11
  3,000,000  
Services rendered under consulting agreement
Investor (2)                                      
 
8/13/11
  20,000,000  
Investment of $200,000
Investor (1)                                      
 
8/30/11
  3,420,000  
Investment of $34,200
Convertible note holder (1)
 
9/14/11
  6,067,561  
Partial conversion of convertible note
Series D holders (1)                                      
 
7/15/11 – 8/25/11
  11,956,658  
Conversion of Series D preferred stock by three holders
___________
(1)
The securities were issued in reliance upon the exemption provided by Section 3(a)(9) under the Securities Act.
(2)
The securities were issued in reliance upon the exemption provided by Section 4(2) and Rule 506 under the Securities Act.  There was no general solicitation and the investors were accredited.
 
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.   REMOVED AND RESERVED
 
ITEM 5.   OTHER INFORMATION
 
None.
 
ITEM 6.   EXHIBITS
 
See the Exhibit Index.
 
 
40

 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  OPTIONS MEDIA GROUP HOLDINGS, INC.  
       
November 14, 2011
By:
/s/ Scott Frohman
 
   
Scott Frohman,
 
   
Chief Executive Officer
(Principal Executive Officer)
 
       
November 14, 2011
By:
/s/ Jeff Yesner
 
   
Jeff Yesner,
 
   
Chief Financial Officer
(Principal Financial Officer)
 
 
 
41

 
 
Exhibit Index
 
                   
Filed or
       
Incorporated by Reference
 
Furnished
Exhibit #
 
Exhibit Description
 
Form
 
Date
 
Number
 
Herewith
3.1  
Amended and Restated Articles of Incorporation
    8-K  
6/25/08
    3.1    
3.2  
Certificate of Amendment – Name Change
    8-K  
6/25/08
    3.2    
3.3  
Certificate of Change
    8-K  
6/25/08
    3.3    
3.4  
Certificate of Designation - Series A & Series B
    10-K  
3/31/10
    3.4    
3.5  
Amendment to Certificate of Designation - Series B
    10-K  
3/31/10
    3.5    
3.6  
Certificate of Amendment - Increased Capital
    10-K  
3/31/10
    3.6    
3.7  
Certificate of Amendment - Increased Capital
    10-Q  
8/13/10
    3.4    
3.8  
Certificate of Amendment - Increased Capital
    10-Q  
8/22/11
    3.8    
3.9  
Certificate of Designation - Series C & Series D
    10-Q  
8/13/10
    3.7    
3.10  
Certificate of Correction - Series D
    10-Q  
8/13/10
    3.8    
3.11  
Amendment to Certificate of Designation – Series D
    10-Q  
8/13/10
    3.9    
3.12  
Amendment to Certificate of Designation – Series A
    10-Q  
11/15/10
    3.10    
3.13  
Amendment to Certificate of Designation – Series C
    10-Q  
11/15/10
    3.11    
3.14  
Certificate of Designation – Series E
    10-Q  
11/15/10
    3.12    
3.15  
Bylaws
 
     SB-2
 
11/8/07
    3.2    
3.16  
First Amendment to Bylaws
    8-K  
9/25/08
    3.1    
3.17  
Second Amendment to Bylaws
    10-K  
3/31/10
    3.9    
3.18  
Third Amendment to Bylaws
    10-Q  
8/22/11
    3.18    
10.1  
Cellular Spyware Asset Purchase Agreement
                 
Filed
10.2  
Cellular Spyware Promissory Note
                 
Filed
10.3  
Jeff Yesner Employment Agreement*
                 
Filed
10.4  
Jeff Yesner Option Agreement*
                 
Filed
31.1  
Certification of Principal Executive Officer (Section 302)
                 
Filed
31.2  
Certification of Principal Financial Officer (Section 302)
                 
Filed
32.1  
Certification of Principal Executive Officer and Principal Financial Officer (Section 906)
                 
Furnished
101.INS
 
XBRL Instance Document **
                   
101.SCH
 
XBRL Taxonomy Extension Schema Document **
                   
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document **
                   
101.LAB
 
XBRL Taxonomy Labels Linkbase Document **
                   
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document **
                   
101.DEF
 
XBRL Definition Linkbase Document **
                   
______________
*
Management Compensatory Plan or Arrangement.
**
Attached as Exhibit 101 to this report are the Company’s financial statements for the quarter ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language).  The XBRL-related information in Exhibit 101 to this report shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of those sections.

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to: Options Media Group Holdings, Inc., 123 NW 13th Street, Suite 300, Boca Raton, Florida 33432, Attention: Robin Roimi.
 
 
 
42