Imagination TV, Inc.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern “. The amendments in this update provide guidance in U.S. GAAP about management’s responsibilities to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity’s management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans); (2) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The amendments in this update are effective for interim and annual reporting periods after December 15, 2016 and early application is permitted. The Company is currently assessing this guidance for future implementation.

The Company determined that the estimated derivative liability associated with this convertible note on the date of issuance (September 2011) was $666,666 (see Note 9 – DERIVATIVE LIABILITIES for more details). Accordingly, the Company recorded a $666,666 non-cash derivative liability and a $666,666 non-cash interest expense to fully expense the debt discount, as the note had a two (2) year term which meant that all related debt discount was to be fully amortized by September 2013. In conjunction with the recording of the $666,666 derivative liability, the Company also reversed the $83,840 beneficial conversion feature (“BCF”) expense that was incorrectly recorded during prior periods by debiting its Additional Paid-In Capital (“APIC”) balance sheet account $83,840 while also crediting interest expense $83,840. In accordance with ASC Topic 815, the Company remeasured the derivative liability at each subsequent reporting period and at the time of conversion of principal by the Holder of the convertible note payable, with the results of these remeasurements detailed in the table below. As previously stated, any expense, gain, and/or loss related to the derivative value of the Greystone Note is non-cash. The Company also reclassified $698,670 of related derivative liability to its additional paid-in capital (“APIC”) balance sheet account in relation to the conversion of $94,400 of principal into shares of the Company’s common stock during the period from date of issuance through June 30, 2014.

On July 1, 2014, the Company also recorded the $666,666 derivative liability related to the $250,000 convertible note payable that was issued to Greystone Funding, LLC (“Greystone”) in September 2011. The $666,666 represents the value of the derivative liability on the date of its September 2011 issuance and was recorded by crediting the Company’s derivative liability balance sheet account $666,666 with a corresponding debit of $666,666 to non-cash interest expense. The $666,666 non-cash interest expense represents the full amortization of the debt discount related to this note, as the note carries a two (2) year term from the date of its September 2011 issuance. In conjunction with the recording of the $666,666 derivative liability, the Company also reversed $83,840 of beneficial conversion feature (“BCF”) expense that was erroneously recorded upon the issuance of this note by debiting the Company’s Additional Paid-In Capital (“APIC”) balance sheet account $83,840 while crediting interest expense $83,840. The Company also reclassified $698,670 of related derivative liability to its additional paid-in capital (“APIC”) balance sheet account due to the conversion of $94,400 of principal into shares of the Company’s common stock during the period from date of issuance through June 30, 2014. Pursuant to ASC Topic 815, the Company remeasured/recalculated the value of this derivative financial instrument on both the date of each reporting period and on the date that principal and/or interest was converted into shares of the Company’s common stock for the period from date of issuance through June 30, 2014. As a result, on July 1, 2014, the Company recorded a $444,881 non-cash change in fair value of derivative expense to reflect the net change in derivative value during this period of time. The net affect of the July 1, 2014 transactions recorded in relation to the derivative liability associated with the $250,000 convertible note payable issued to Greystone was (i) a $1,027,707 net loss which is attributable to the period from date of issuance through June 30, 2014, (ii) a $329,351 increase to the Company’s derivative liability balance sheet account (the $329,351 represents the derivative value as of June 30, 2014), and (iii) a $614,830 ($698,670 - $83,840) increase to the Company’s Additional Paid-In Capital (“APIC”) balance sheet account.

On April 9, 2014, the Holder of the Original Issue Discount (the “April OID Note”) convertible note payable mentioned in the preceding paragraph purchased the $20,937 of principal related to the promissory note that was originally issued in September 2013 Company (see “Note 5 - CORRECTION OF ERROR”). Pursuant to the terms of the Securities Exchange and Settlement Agreement (the “Agreement”), the Buyer purchased the $20,937 principal only and all rights and interest related to the original promissory note from the original note holder. There is no stated term in this Agreement and the interest rate is eighteen (18%) percent per annum. However, pursuant to the terms of the Agreement, the Buyer now has a convertible feature whereby the Buyer can, at his sole discretion, convert the $20,937 principal and any accrued and unpaid interest from the date of this Agreement into shares of the Company’s common stock at a conversion price equal to 45% of the lowest traded stock price during the ten (10) trading days immediately preceding the date upon which the Buyer shall have delivered notice of conversion to the Company. Due to the significantly revised terms in the Agreement, specifically the conversion feature that did not exist in the original promissory note, the Company treated this debt purchase as a debt extinguishment transaction (see Note 10 – LOSS ON EXTINGUISHMENT OF DEBT). During the nine month period ended September 30, 2014, the Buyer converted $4,000 of principal into 22,039 (reflects 1 for 300 reverse stock split – see Note 15 - SUBSEQUENT EVENTS) shares of the Company’s common stock. As of September 30, 2014, the outstanding balance on this convertible note payable is $16,937. In September 2014, this Note was amended to change the conversion price to $0.00001 per share. As a result of this amendment, the Company treated this transaction as a debt extinguishment as discussed in Note 10 – LOSS ON EXTINGUISHMENT OF DEBT.

On April 9, 2014, the Company issued warrants to Beaufort Capital Partners, LLC (“Beaufort”) in conjunction with the issuance of a $75,000 face value Original Issue Discount (“OID”) convertible note payable (see Note 10 – CONVERTIBLE NOTES PAYABLE) whereby Beaufort could, at their sole discretion, at any time on or after April 9, 2014 but no later than 5:00 PM Eastern Time on April 9, 2019, purchase 16,667 (reflects 1 for 300 reverse stock split – see Note 15 - SUBSEQUENT EVENTS) shares of the Company’s common stock at an exercise price of $3.00 per share, with certain dilution adjustments as noted below. The warrants had a five (5) year term and were fully earned and exercisable as of April 9, 2014, the date of grant. The Company valued the warrants using the Black-Scholes-Merton option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 385%; (iii) risk free rate of 0.03%, (iv) a stock price of $0.01, which represents the stock price on April 9, 2014, and (v) an expected term of 5 years. This resulted in a value of $50,000, which the Company recorded as a non-cash interest expense and a corresponding credit to the Company’s derivative liability account on its balance sheet. In September 2014, the OID note issued in conjunction with these warrants was amended to change the conversion price to $0.00001 per share, which resulted in the exercise price of these warrants also being changed to $0.00001 per share and the number of exercisable shares increasing to 5,000,000,000 (50,000/0.00001). As a result of this amendment/modification, the derivative value of these warrants was remeasured on the date of amendment using both the original conversion price and the amended conversion price, with the difference in the derivative values being recorded as a loss on extinguishment of debt (see Note 10 – LOSS ON EXTINGUISHMENT OF DEBT). Pursuant to ASC Topic 815-40, “Derivative Instruments and Hedging: Contracts in Entity’s Own Equity”, the Company remeasured the value of the related derivative liability as of September 30, 2014 using the Black-Scholes-Merton option pricing model using the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 385%; (iii) risk free rate of 0.02%, (iv) a stock price of $0.00019, which represents the stock price on September 30, 2014, and (v) an expected term of 4.5 years. This resulted in a value of $935,334, which represents a $49,144 non-cash gain in the change of derivative value as compared to the $984,478 value on the date of amendment. Accordingly, the Company recorded a $49,144 non-cash gain in the change of derivative value while also recording a $49,144 reduction to the amount of the derivative liability recorded on its balance sheet. Note that these warrants were not recorded prior to this filing, and because, as of September 30, 2014, the Company was obligated to issue more shares of common stock than the 4,000,000,000 that it is currently authorized to issue, these warrants were valued as a derivative liability.