Commission file number 000-51770
| CMG HOLDINGS, INC. |
| (Exact name of registrant as specified in its charter) |
| Nevada | 87-0733770 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 5601 Biscayne Boulevard | ||
Miami, Florida, USA | 33137 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number including area code (305) 751-1667
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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 x No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or small reporting company. See the definition of "large accelerated filer," "accelerated filer" and "small reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No x
As of August 18, 2009,May 21, 2010, there were 42,400,000 common stock of the registrant issued and 40,057,626 shares outstanding.
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CMG HOLDINGS, INC.
FORM 10-Q
2
CMG HOLDINGS, INC.
UNAUDITED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30,MARCH 31, 2010 AND 2009 AND 2008
CONTENTS
______________________________________________________________________________________
| Consolidated Balance Sheets as of | 4 |
| Consolidated Statements of Operations for the three months ended March 31, 2010 and | 5 |
| Consolidated Statements of Cash Flows for the | 6 |
| Notes to Consolidated Financial Statements (Unaudited) | 7 |
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| CMG HOLDINGS, INC | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| (unaudited) | ||||||||
| June 30, 2009 | December 31, 2008 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 87,553 | $ | 13,934 | ||||
| Accounts receivable | 531,594 | 1,050 | ||||||
| Prepaid an other | 6,130 | -- | ||||||
| Total current assets | 625,277 | 14,984 | ||||||
| Software licenses, net accumulated depreciation of $4,333 and $-, respectively | 47,667 | -- | ||||||
| Intangible assets, net accumulated amortization of $74,584 and $-, respectively | 820,414 | -- | ||||||
| Deposits | 300,000 | 300,000 | ||||||
| TOTAL ASSETS | $ | 1,793,358 | $ | 314,984 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Client payable | $ | 123,036 | $ | 8,000 | ||||
| Accounts payable | 660,280 | 29,320 | ||||||
| Accrued liabilities | 752,571 | 415,359 | ||||||
| Line of credit | 150,406 | 108,231 | ||||||
| Advance from related party | 25,000 | -- | ||||||
| Total current liabilities | 1,711,293 | 560,910 | ||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred Stock: | ||||||||
| 5,000,000 shares authorized par value $0.001 per share; none issued and outstanding | ||||||||
| Common Stock: | ||||||||
| 150,000,000 shares authorized par value $0.001 per share; 42,400,000 issued, and 31,726,518 and 31,726,518 shares outstanding respectively | 31,727 | 31,727 | ||||||
| Additional paid-in-capital | 4,449,863 | 4,449,863 | ||||||
| Shares held in reserve, 10,673,482 and 10,673,482 shares held, respectively. | 10,673 | 10,673 | ||||||
| Accumulated deficit | (4,410,198 | ) | (4,738,189 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | 82,065 | (245,926 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,793,358 | $ | 314,984 | ||||
| CMG HOLDINGS, INC | ||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
| (unaudited) | ||||||||||||||||
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Gross revenues | $ | 1,074,112 | $ | -- | $ | 1,286,506 | $ | 399,167 | ||||||||
| Cost of goods sold | 201,517 | -- | 201,517 | -- | ||||||||||||
| Net revenues | 872,575 | -- | 1,084,989 | 399,167 | ||||||||||||
| Operating expenses | 1,480,470 | 796,920 | 1,844,774 | 2,531,415 | ||||||||||||
| Operating loss | (607,875 | ) | (796,920 | ) | (759,785 | ) | (2,132,248 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Brgain purchase gain | 1,038,733 | -- | 1,038,733 | -- | ||||||||||||
| Interest expense | (1,878 | ) | (62,464 | ) | (3,264 | ) | (84,844 | ) | ||||||||
| Interest income | 53,692 | 3,416 | 52,307 | 15,757 | ||||||||||||
| Net income (loss) | $ | 482,672 | $ | (855,968 | ) | $ | 327,991 | $ | (2,201,335 | ) | ||||||
| Basic and diluted income (loss) per common share | $ | 0.02 | $ | (0.04 | ) | $ | 0.01 | $ | (0.11 | ) | ||||||
Basic and diluted weighted average common shares outstanding | 31,726,518 | 23,998,549 | 31,726,518 | 19,709,450 | ||||||||||||
CMG HOLDINGS, INC | |||||||||
| CONSOLIDATED BALANCE SHEETS | |||||||||
| (unaudited) | |||||||||
| March 31, 2010 | December 31, 2009 | ||||||||
| ASSETS | |||||||||
| CURRENT ASSETS: | |||||||||
| Cash | $ | 279,050 | $ | 32,968 | |||||
| Accounts receivable | 441,283 | 207,789 | |||||||
| Prepaid and other current assets | 15,182 | 18,182 | |||||||
| Total current assets | 735,515 | 258,939 | |||||||
| Property and equipment | 294,387 | -- | |||||||
Intangible assets, net accumulated amortization of $298,333 and $223,750, respectively | 596,665 | 671,248 | |||||||
| Other assets | 32,500 | -- | |||||||
| TOTAL ASSETS | $ | 1,659,067 | $ | 930,187 | |||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |||||||||
| CURRENT LIABILITIES: | |||||||||
| Client payable | $ | 11,317 | $ | 11,317 | |||||
| Accounts payable | 1,459,323 | 1,145,467 | |||||||
| Accrued liabilities | 587,427 | 360,328 | |||||||
| Deferred revenue | - | 19,600 | |||||||
| Short term debt, net of unamortized discount of $5,610 and $11,010, respectively | 119,390 | 113,990 | |||||||
| Line of credit | 177,930 | 175,746 | |||||||
Due to sellers | 30,000 | - | |||||||
| Advances from related parties | 42,500 | 42,500 | |||||||
| TOTAL CURRENT LIABILITIES | 2,427,887 | 1,868,948 | |||||||
| STOCKHOLDERS’ DEFICIT | |||||||||
| Preferred stock: | |||||||||
5,000,000 shares authorized par value $0.001 per share; none issued and outstanding | -- | -- | |||||||
| Common stock: | |||||||||
150,000,000 shares authorized, par value $0.001 per share; 42,400,000 issued; 40,057,626 and 38,207,626 shares outstanding respectively | 40,058 | 38,208 | |||||||
| Additional paid in capital | 5,531,022 | 5,429,522 | |||||||
| Treasury stock, 2,342,374 and 4,192,374 shares held, respectively. | 2,342 | 4,192 | |||||||
| Accumulated deficit | (6,342,242 | ) | (6,410,683 | ) | |||||
| TOTAL STOCKHOLDERS’ DEFICIT | (768,820 | ) | (938,761 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,659,067 | $ | 930,187 | |||||
| CMG HOLDINGS, INC | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (unaudited) | ||||||||
| Six months ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Gain (Loss) | $ | 327,991 | $ | (2,201,335 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Shares issued for services | -- | 1,491,778 | ||||||
| Additional shares issued for interest expense | -- | 62,464 | ||||||
| Bargain purchase gain | (1,038,733 | ) | -- | |||||
| Amortization | 78,917 | -- | ||||||
| Changes in: | ||||||||
| Accounts receivable | (288,353 | ) | (304,167 | ) | ||||
| Prepaid expense | (6,130 | ) | 17,454 | |||||
| Accounts payable | 630,960 | (124,826 | ) | |||||
| Accrued expense | 451,792 | 510,522 | ||||||
| Net cash provided by (used in) operating activities | 156,444 | (548,110 | ) | |||||
| CASH FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for acquisition of Pebble Beach Enterprises, Inc. | -- | (600,000 | ) | |||||
| Cash paid to acquire a bank loan | (150,000 | ) | -- | |||||
| Net cash used in investing activities: | (150,000 | ) | (600,000 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Advance from a related party | 25,000 | -- | ||||||
| Net borrowings on line of credit | 42,175 | (132,763 | ) | |||||
| Contributions to capital | -- | 30,000 | ||||||
| Borrowing on convertible notes | -- | 314,000 | ||||||
| Net cash provided by financing activities | 67,175 | 211,237 | ||||||
| Net increase (decrease) in cash | 73,619 | (936,873 | ) | |||||
| Cash, beginning of period | 13,934 | 1,213,035 | ||||||
| CASH BALANCE AT END OF PERIOD | $ | 87,553 | $ | 276,162 | ||||
| Supplemental cash flow information: | ||||||||
| Income tax paid | $ | -- | $ | -- | ||||
| Interest paid | -- | -- | ||||||
| Non-cash investing and financing activities: | ||||||||
| Assets acquired after foreclosing on bank loan | $ | 242,191 | -- | |||||
See accompanying notes to consolidated financial statements
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| CMG HOLDINGS, INC | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
| (unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| Gross revenues | $ | 1,286,599 | $ | 212,394 | ||||
| Cost of revenue | 709,006 | -- | ||||||
| Gross margin | 577,593 | 212,394 | ||||||
| Amortization expense | 74,583 | -- | ||||||
| Operating expenses | 832,744 | 365,689 | ||||||
| Operating loss | (329,734) | (153,295) | ||||||
| Other income (expense) | ||||||||
| Bargain purchase gain | 405,759 | -- | ||||||
| Interest expense | (7,584) | (1,386) | ||||||
| Net income (loss) | $ | 68,441 | $ | (154,681 | ) | |||
| Basic income (loss) per common share | $ | 0.00 | $ | (0.00 | ) | |||
| Diluted income (loss) per common share | 0.00 | (0.00 | ) | |||||
| Basic weighted average common shares outstanding | 38,460,404 | 31,726,518 | ||||||
Diluted weighted average common shares outstanding | 40,591,654 | 31,726,518 | ||||||
See accompanying notes to consolidated financial statements
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CMG HOLDINGS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | 68,441 | $ | (154,681 | ) | |||
| Adjustments to reconcile net loss | ||||||||
| to net cash used in operating activities: | ||||||||
| Bargain purchase gain | (405,759) | -- | ||||||
| Shares issued for services | 31,500 | -- | ||||||
| Amortization of intangible assets | 74,583 | -- | ||||||
| Amortization of debt discount | 5,400 | -- | ||||||
| Changes in: | ||||||||
| Accounts receivable | (37,375) | -- | ||||||
| Prepaid expense and other current assets | 3,000 | -- | ||||||
| Deferred revenue | (19,600) | -- | ||||||
| Accrued liabilities | 225,135 | 98,462 | ||||||
| Client payable | -- | 100,036 | ||||||
| Accounts payable | 295,356 | 53,498 | ||||||
| Net cash provided by operating activities | 240,681 | 97,315 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash received from acquisition of Audio Eye, Inc. | 3,217 | -- | ||||||
| Cash paid to acquire a bank loan | -- | (150,000) | ||||||
| Cash advance for acquisition of assets for Experiential Agency Inc. | -- | (100,000) | ||||||
| Net cash provided (used in) by investing activities | 3,217 | (250,000) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Advances from related parties | -- | 25,000 | ||||||
| Net borrowings on line of credit | 2,184 | 20,750 | ||||||
| Proceed from issuance of debt | -- | 100,000 | ||||||
| Cash provided by financing activities | 2,184 | 145,750 | ||||||
| Net increase (decrease) in cash | 246,082 | (6,935) | ||||||
| Cash, beginning of year | 32,968 | 13,934 | ||||||
| Cash, end of the year | $ | 279,050 | $ | 6,999 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | -- | $ | 1,386 | ||||
| Income taxes paid | $ | -- | $ | -- | ||||
| Non-cash investing activity: | ||||||||
| Acquisition of Audio Eye, Inc. . | $ | 502,542 | $ | -- | ||||
See accompanying notes to consolidated financial statements
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CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION–BASIS OF BUSINESS AND BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of CMG Holdings, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in its 20082009 annual report on Form 10-K. In the opinion of management, these interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Our futur e results of operations may change materially from the historical results of operations reflected in our historical financial statements. The unaudited consolidated financial statements should be read in conjunction with the historical audited consolidated financial statements and notes theretofootnotes of the Company and management’s discussion and analysis of financial condition and results of operations included in the Company’s Annual Report for the year ended December 31, 20082009 as filed with the Securities and Exchange Commission on Form 10-K. Notes to the financial statements that would substantially duplicate the disclosure contained in the audited financial statements for fiscal year 2008,2009, as reported in the Form 10-K, have been omitted.
Principles of consolidation
The consolidated financial statements include the accounts of CMG Holdings, Inc., Creative Management Group and CMG Acquisitions,Acquisition, Inc., CMGO Capital, Inc., The Experiential Agency, Inc, Audio Eye, Inc., CMGO Logistics, Inc. and CMGO Events Marketing, Inc, Creative Management Group, Logistics, Inc. after elimination of all significant inter-company accounts and transactions.
NOTE 2 –2: GOING CONCERN
As shown in the accompanying financial statements, theThe Company has an accumulated deficit and a working capital deficit as of June 30, 2009.March 31, 2010. These conditions raise substantial doubt as to ourthe Company’s ability to continue as a going concern. In response to these conditions, the Company may raisehas raised additional capital through the sale of equity securities, through an offering of debt securities or through borrowings from financial institutions or individuals. The financial statements do not include any adjustments that might be necessary if we arethe Company is unable to continue as a going concern.
NOTE 3: ACQUISITIONS
On March 31, 2010, the Company acquired all outstanding shares of Audio Eye, Inc. (“Audio Eye”) in exchange for $30,000 cash, 1.5 million shares of the Company’s common stock, warrants to purchase 250,000 shares of the Company’s common stock at an exercise price of $0.07 per share and a term of 5 years plus other contingent consideration. Audio Eye developed patented internet content publication and distribution software enabling conversion of any media into accessible formats and allowing for real time distribution to end users on any internet connected device. With this acquisition, the Company expects to be a leading provider in the Internet content publication and distribution software enabling the conversion of any media into accessible formats and allows for real time distri bution to end users on any network connected device.
The fair value of consideration transferred in the acquisition, the assets acquired and the liabilities assumed are set forth in the following table:
Consideration: Cash (1) Common stock (2) Warrants to purchase common stock (3) Contingent consideration (4) | $ 30,000 60,000 10,000 - | |
| Total consideration | $100,000 |
Recognized amount of identifiable assets acquired and liabilities assumed Cash Accounts receivable Property and equipment Other assets Accounts payable Accrued liabilities | $ 3,217 196,119 294,387 32,500 (18,500) (1,964) | |
| Total identifiable net assets and liabilities assumed | $505,759 | |
| Bargain purchase gain(5) | $405,579 |
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CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – NOTE RECEIVABLE AND ASSET ACQUISITION3: ACQUISITIONS (CONTINUED)
| (1) | This was paid on April 1, 2010 and as such as of March 31, 2010, the Company recognized this as a liability which is reported as “Due to sellers” in the consolidated balance sheets. |
| (2) | The fair value of the 1.5 million shares issued by the Company was determined based on the closing price of the Company’s stock at the acquisition date. |
| (3) | The fair value of the 250,000 warrants were determined using a Black-Scholes option valuation model using the following key assumptions: exercise price of $0.07 per share, stock price of $0.04, term of 5 years, expected volatility of 343% and a discount rate of 2.55% |
| (4) | The contingent consideration is based on the average net income of Audio Eye over a period of 4 years starting in 2010 after applying a multiple based on the average growth rate less any amounts of working capital contributions made by the Company to Audio Eye. The amount of working capital contribution to be made by the Company is a combination of a fixed amount of $470,000 plus a deferred working capital contribution payable within a period of 3 years and is based on the greater of Audio Eye’s achievement of certain sales targets or $1,000,000. The fair value of the contingent consideration was determined based on Audio Eye’s projected net income from 2010 and 2013 and the application of a discount rate to the future payment to be made. After deducting the amount of working capital contribution, the amoun t of contingent consideration was deemed to be zero. At the end of each reporting period after the acquisition date, the contingent payment will be remeasured to its fair value, with changes in fair value recorded in earnings. |
| (5) | The amount of bargain purchase gain recognized is provisional pending receipt of the final valuation of all identifiable assets acquired. |
On March 6, 2009, the Company, through a newly formed wholly owned subsidiary CMGO Capital, Inc., a Nevada corporation, completed a Note Purchase Agreement with Bank of America to purchase the senior secured debt obligations of The Experiential Agency, Inc. The purchase price of the Note Purchase Agreement with Bank of America to purchase the senior secured debt obligations of The Experiential Agency, Inc. was a total of $150,000.
CMG also loaned The Experiential Agency, Inc. $100,000 in March 2009 which has been accounted for as part of the purchase price. On April 1, 2009, CMG Holdings, Inc. foreclosed on the note and completed the acquisition of the assets of The Experiential Agency, Inc.
Unaudited pro forma operation results for the three months ended March 31, 2010 and 2009, as though the Company had acquired Audio Eye and The Experiential Agency, Inc. offers a full degreeon the first day of solutions, services and consulting expertise comprisingfiscal year 2009, are set forth below. The unaudited pro forma operating results are not necessarily indicative of management, creation, and executionwhat would have occurred had the transaction take place on the first day of entertainment event for corporate clients and individual clients general service areas of event marketing, interactive marketing, event production, public relations, talent representation, corporate consulting, digital media. The Experiential Agency, Inc. earns consulting fees when it provides general consulting services and generates revenues for services for event marketing and communications assignments. As a result of the acquisition of the assets of Experiential Agency, Inc., the Company is expected to be the premier provider of solutions, services and consulting expertise comprising of management, creation, and execution of entertainment event for corporate clients and individual clients general service areas of event marketing, interactive marketing, event production, public relations, talent representation, corporate consulting, digital media and services in those markets. The Company also expects to reduce costs through economies of scale.fiscal year 2009.
Pro Forma Three months ended March 31 | ||||
| 2010 | 2009 | |||
Revenues Cost of revenue Operating expenses Interest expense | $ 1,356,301 (709,006) (1,041,458) (7,584) | $ 517,180 (485,287) (932,762) (2,667) | ||
| Net loss | $ (401,747) | $ (903,536) | ||
| Cash Consideration | $ | 150,000 | ||
| Total | $ | 150,000 | ||
| Acquisition-related costs | $ | -- | ||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||
| Accounts receivable | 242,191 | |||
| Software licenses | 52,000 | |||
| Identifiable intentangible assets | 894,998 | |||
| Total identifiable net assets | 1,188,733 | |||
| Bargain purchase gain | (1,038,733 | ) | ||
| Total | $ | 150,000 |
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NOTE 4: EQUITY
| Revenues | Earnings | |||||||
| Actual from April 1, 2009 to June 30, 2009 | $ | 872,595 | $ | 482,672 | ||||
| Supplemental pro forma from 04/01/08 – 06/30/08 | 1,788,887 | (727,025 | ) | |||||
| Supplemental pro forma from 01/01/09 – 06/30/09 | 2,310,681 | 579,120 | ||||||
| Supplemental pro forma for 01/01/08 – 06/30/08 | 4,095,829 | (2,077,434 | ) | |||||
On March 2009,31, 2010, 1,500,000 shares were issued, out of treasury stock held in reserve held by CMG Acquisition, Inc. ,for the acquisition of Audio Eye valued at $60,000. See Note 3 for details.
Warrants:
During the three months ended March 31, 2010, 250,000 warrants were issued in connection with the acquisition of Audio Eye. See Note 3 for details on the valuation of the warrants.
A summary of warrant activity for the three months ended March 31, 2010 is as follows:
| Outstanding and | Weighted average | ||
| Exercisable | Exercise Price | ||
| December 31, 2009 | 2,400,000 | $ | 0.01 |
| Granted | 250,000 | $ | 0.07 |
| Exercised | - | - | |
| Forfeited | - | - | |
| March 31,2010 | 2,650,000 | $ | 0.02 |
The warrants have a weighted average remaining life of 4.9 years and an aggregate intrinsic value of $72,000.
NOTE 5: COMMITMENTS AND CONTINGENCIES
On January 1, 2010, the Company receivedand the executive management entered into executive employment agreements, effective up to 2016, regarding base salary compensation, executive incentive bonus consideration and expense reimbursement. The agreements provide for the deferral of payment of a totalportion of $25,000 advances from one of its officer/directors. The funds were used bythe annual base salary until such time that the Company forhas sufficient working capital, purposes.but in no case later than December 31, 2012. The payable bears 0% interest,agreements also provide that the executive bonus consideration and expense reimbursement shall be earned upon achievement of certain performance conditions. The executives have the option to convert the deferred base salary and any incentive bonuses and expense reimbursements earned to restricted shares of the Company’s common stock at a conversion price that is unsecured and is duebased on demand.the one h undred eighty (180) day average closing price of the Company’s stock prior to the conversion.
On May 19, 2010, the above agreements were amended to reflect a conversion price that will be based on the one hundred and eighty (180) day average closing price of the Company stock prior to the conversion but not to a exceed $1.00 or below $0.10.
9
CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6: SUBSEQUENT EVENTS
On April 1, 2010, the Company fully paid its $125,000 loan to JT Ventures, LLC.
In connection with the above transaction, , the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 1,105,000 shares of the Company’s common stock.
On May 1, 2010, 685,200 shares were issued from treasury stock held in reserve held by CMG Acquisition, Inc. for services provided by third parties.
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In addition to historical information, containedthis Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which includes, but are not limited to, statements concerning expectations as to our revenues, expenses, and net income, our growth strategies and plans, the timely development and market acceptance of our products and technologies, the competitive nature of and anticipated growth in our markets, our ability to achieve cost reductions, the status of evolving technologies and their growth potential, the adoption of future industry standards, expectations as to our financing and liquidity requirements and arrangements, the need for additional capital, and other matte rs that are not historical facts. These forward-looking statements are based on our current expectations, estimates, and projections about our industry, management’s beliefs, and certain assumptions made by it. Words such as “anticipates”, “appears”, “believe,”, “expects”, “intends”, “plans”, “believes, “seeks”, “assume,” “estimates”, “may”, “will” and variations of these words or similar expressions are intended to identify forward-looking statements. All statements in this Management’s DiscussionQuarterly Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, and Analysis of Financial Conditionresults that might be obtained by pursuing management’s current plans and Results of Operation contains “forward lookingobjectives are forward-looking statements.” Actual Therefore, actual results maycould differ materially differand adversely from those projectedresults expressed in the forward lookingany forward-lookin g statements, as a result of certain risks and uncertainties set forth invarious factors. Readers are cautioned not to place undue reliance on forward-looking statements, which are based only upon information available as of the date of this report. AlthoughYou should not place undue reliance on our management believes thatforward-looking statements because the assumptions madematters they describe are subject to known and expectations reflected in the forward lookingunknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are reasonable, there is no assurance thatbased on the underlying assumptionsinformation currently available to us and speak only as of the date on which this Quarterly Report was filed with the Securities and Exchange Commission (“SEC”). We expressly disclaim any obligation to revise or update publicly any forward-looking statements even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will in fact, prove to be correct or that actual future results will not be materially differentlikely differ from the expectationsanticipated results, performance or achievements that are expressed in this Annual Report.or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders. Unless the context indicates otherwise, the terms “Company”, “Corporate”, “CMGO”, “our”, and “we” refer to CMG Holdings, Inc. and its subsidiaries.
RESULTS OF OPERATIONS
FOR THE SIXTHREE MONTH PERIOD ENDED JUNE 30, 2009MARCH 31, 2010
Cost of assets of The Experiential Agency, Inc., we started to generate and recognize revenuesrevenue increased from this new line of business.
Operating expenses increased from $796,920$365,689 for the three months ending June 30, 2008ended March 31, 2009 to $1,480,470$832, 744 for the same periodthree months ended March 31, 2010. The increase in 2009.operating expenses is mainly due to increased personnel, marketing, professional fees and operations from the event marketing, public relations, consulting business of XA.
The net loss of $154,681 for the three months ended March 31, 2009 increased to a net income of $68,441 for the three months ended March 31, 2010. This wasis mainly due to the Company recognized expenses for marketing services, public relations, consulting services and event marketing.bargain purchase gain resulting from the acquisition of Audio Eye, Inc.
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LIQUIDITY AND CAPITAL RESOURCES.:
As of June 30, 2009,March 31, 2010, the Company’s cash on hand was $87,553.$279,050.
Cash provided by operations for the sixthree months period ended June 30,March 31, 2009 was $156,444,$97,315, as compared to cash usedprovided by operations of $548,110$240,681 for the sixthree months ended June 30, 2008. TheMarch 31, 2010. This change is primarily due to amortization of intangible assets, stock expenses for services, and accrued expenses related to the increase in cash provided by operating activities is mainlyexpenses due to more revenues generated inthe increased personnel and operations from the event marketing, public relations, marketing services and event marketing consulting business during six months ended June 30, 2009.of XA.
Cash used in investing activities for the six month periodthree months ended June 30,March 31, 2009 was $150,000,$250,000, as compared to $600,000cash provided by investing activities of $3,217 for the sixthree months ended June 30, 2008.March 31, 2010. For the sixthree months ended June 30, 2008,March 31, 2009, the Company incurred $600,000$150,000 for the acquisition of Pebble Beach Enterprises, Inc. and for the six month ended June 30, 2009, the Company paid $150,000assets of XA to obtain a note receivable regardingfrom a financial institution and for the note purchase agreement to purchasethree month ended March 31, 2010, the senior secured debt obligationscash received of The Experiential Agency,$3,217 resulted from the acquisition of Audio Eye, Inc.
Cash provided by financing activities for the six month periodthree months ended June 30,March 31, 2009 was $67,175,$145,750, as compared to $1,029,830$2,184 provided for the sixthree months ended June 30, 2008.March 31, 2010. In 2008,2009, the Company obtained $314,000borrowed $20,750 from selling convertible notes.its line of credit and also borrowed $25,000 from one of the executives of executive management
The following table sets forth as of May 20, 2010, information with respect to the beneficial ownership of the Company’s Common Stock by (i) each person known by the Company to own beneficially 5% or more of such stock, (ii) each Director of the Company who owns any Common Stock, and (iii) all Directors and Officers as a group, together with their percentage of beneficial holdings of the outstanding shares. The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a "beneficial owner" of a security if that person has or shares the power to vote or direct the voting of the security or the power to di spose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within 60 days through the conversion or exercise of any convertible security, warrant, option or other right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. Except as otherwise indicated below and under applicable community property laws, we believe that the beneficial owners of our common stock beneficially owned on August 7, 2008, following consummation oflisted below have sole voting and investment power with respect to the Reorganization by Each person who is known by us to beneficially own 5% or more of the Registrant’s common stock; Each of the Registrant’s directors and named executive officers; and All of the Registrant’s directors and executive officers as a group.shares shown.
| Title of Class | Name | Shares | Percent (1) | Name | Shares | Percent | ||||||||||||
| Common Stock | CMG Acquisitions, Inc. | 14,085,789 | 33.22 | % | Alan Morell | 10,107,000 | 23.83 | % | ||||||||||
| Common Stock | James J. Ennis | 3,500,000 | 8.25 | % | ||||||||||||||
| Alan Morell | 10,107,000 | 23.84 | % | |||||||||||||||
| Common Stock | Michael Vandetty | 1,000,000 | 2.36 | % | ||||||||||||||
| James J. Ennis | 2,500,000 | 5.89 | % | |||||||||||||||
| All Directors and Executive Officers | All Directors and Executive Officers | 14,607,000 | 34.45 | % | ||||||||||||||
| Title of Class | Name | Shares | Percent (1) | ||||||
| Common Stock | Alan Morell | 10,107,000 | (2 | ) | 23.84 | % | |||
| James J. Ennis | 2,500,000 | (3 | ) | 5.89 | % | ||||
| Michael Vandetty | 1,000,000 | 2.35 | % | ||||||
| All Directors and Executive Officers as a Group | 13,607,000 | 32.09 | % | ||||||
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| (1) | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned, subject to community property laws where applicable. The number and percentage of shares beneficially owned are based on 42,400,000 shares of common stock |
| (2) | Mr. Morell owns 3,500,000 shares of |
| (3) | Mr. Ennis owns |
CURRENT ECONOMIC CONDITIONS AND THE GLOBAL FINANCIAL CRISIS MAY HAVE AN IMPACT ON OUR BUSINESS AND FINANCIAL CONDITION IN WAYS THAT WE CURRENTLY CANNOT PREDICT
The global economy has experienced a significant contraction, with an unprecedented lack of consumer credit within the credit markets and the shift away from discretionary spending within the marketing, communications. The decrease in the economic activity in the United States and in the commercial sectors in which we conduct business could adversely affect our financial condition and results of operations. Continued tightness within the credit markets, volatility, instability and economic weakness of our clients marketing budgets and decrease in discretionary consumer spending associated with our clients business spending may result in a reduction in our revenues.
BUSINESS COULD BE ADVERSELY AFFECTED IF IT LOSES KEY CLIENTS AND KEY MANAGEMENT
The Company’s loss of one or more significant clients could materially affect results of the Company on a consolidated basis. Our Management is critically important to ongoing results of the Company because, as in any service business, success of the Company is mainly dependent upon the leadership of key executives and management. If key executives were to leave any of our operating divisions, the relationships that the Company has with its clients could be adversely affected.
COMPETITION FOR CLIENTS IN HIGHLY COMPETITIVE INDUSTRIES
The Company operates in a very competitive industry characterized by numerous firms of varying sizes, with no group of firms having dominant positions in the marketplace. Competitive factors include creative expertise, executive management’s, personal relationships, quality and reliability of service and expertise in particular niche areas of the marketplace. In addition, our company’s principal asset is its people, barriers to entry are minimal, and relatively small firms may be on occasion able to take some portion of a client’s business from a larger competitor. While many of the Company’s client relationships are long-standing, clients may at times place their marketing services businesses up for competitive review from time to time, including at times when clients enter into strategic transactions. To the extent that the Company fails to maintain existing clients or attract new clients, the Company’s business, financial condition and operating results may be affected in a materially adverse manner.
ABILITY TO GENERATE NEW BUSINESS FROM NEW AND EXISTING CLIENTS MAY BE LIMITED
To increase revenues, the Company needs to obtain additional clients, generate demand for additional services from existing clients and partner with external marketing firms to mutually service as single or multiple of clients. The company’s ability to generate demand for its services from new clients, additional demand from existing clients partner with external marketing firms to mutually service as single or multiple of clients is subject to clients’ requirements, pre-existing vendor relationships, financial condition, strategic plans and internal resources, as well as the quality of the Company’s employees, services and reputation and the breadth of its services. To the extent the Company cannot generate new business from new and existing clients due to these limitations; it will li mit the Company’s ability to grow its business and to increase its revenues.
REVENUES ARE SUSCEPTIBLE TO DECLINES AS A RESULT OF GENERAL ADVERSE ECONOMIC DEVELOPMENTS
The marketing communications services industry is cyclical and is subject to the negative effects of economic downturns. The Company’s marketing services operations are also exposed to the risk of clients changing their business plans and/or reducing their marketing budgets. As a result, if the U.S. markets and economies continue to weaken, our businesses, financial condition and gross revenues are likely to be negatively affected may be suspect to declines from quarter to quarter or from year to year.
BENEFITS EXPECTED FROM CURRENT ACQUISITION OR PRIOR ACQUISITIONS MADE IN THE FUTURE MAY NOT BE REALIZED
The Company’s business strategy includes ongoing efforts to engage in material acquisitions of ownership interests in entities in the marketing communications services industry. The Company intends to finance these acquisitions by using any available cash from operations, through incurrence of debt or bridge financing or by issuing equity, which may have a dilutive impact on its existing shareholders. At any given time the Company may be engaged in a number of discussions that may result in one or more material acquisitions. These opportunities require confidentiality and may involve negotiations that require quick responses by the Company. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transactions, the announcement of any such transaction may lead to in creased volatility in the trading price of its securities.
The success of acquisitions or strategic investments depends on the effective integration of newly acquired businesses into the Company’s current operations. Such integration is subject to risks and uncertainties, including realization of anticipated synergies and cost savings, the ability to retain and attract personnel and clients, the diversion of management’s attention from other business concerns, and undisclosed or potential legal liabilities of the acquired company. The Company may not realize the strategic and financial benefits that it expects from any of its past acquisitions, or any future acquisitions.
BUSINESS COULD BE ADVERSELY AFFECTED IF IT LOSES OR FAILS TO ATTRACT KEY EMPLOYEES
Our executive management and our employees, including creative, research, media, account and their skills and relationships with clients, are among the Company’s most critically important assets. An important aspect of the Company’s competitiveness is its ability to retain key employee and executive management. The compensation for these key employees is an essential factor in attracting and retaining them and the Company may not offer a level of compensation sufficient to attract and retain these key employees. If the Company fails to hire and retain a sufficient number of these key employees, it may not be able to compete effectively.
BUSINESS EXPOSED TO THE RISK OF CLIENT MEDIA ACCOUNT DEFAULTS
The Company often incurs expenses on behalf of its clients in order to secure a variety of opportunities in exchange for which it receives a fee. While the Company acts to prevent against default on payment for these services and have historically had a very low incidence of default, the Company is still exposed to the risk of significant uncollectible receivables from our clients.
SUBJECT TO REGULATIONS THAT COULD RESTRICT ITS ACTIVITIES OR NEGATIVELY IMPACT ITS REVENUES
Marketing communications businesses are subject to government regulation, both domestic and foreign. There has been an increasing tendency in the United States on the part of advertisers to resort to litigation and self-regulatory bodies to challenge comparative advertising on the grounds that the advertising is false and deceptive. Moreover, there has recently been an expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to advertising for certain products. Representatives within government bodies, both domestic and foreign, continue to initiate proposals to ban the advertising of specific products and to impose taxes on or deny deductions for advertising which, if successful, may have an adverse effect on advertising expenditures and consequently the Company’s revenues.
COMPANY DIRECTORS AND EXECUTIVE OFFICERS BENEFICIALLY OWN A SUBSTANTIAL PERCENTAGE OF THE COMPANY’S OUTSTANDING COMMON STOCK, WHICH GIVES THEM CONTROL OVER CERTAIN MAJOR DECISIONS ON WHICH STOCKHOLDERS MAY VOTE, WHICH MAY DISCOURAGE AN ACQUISITION OF THE COMPANY
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OUTSTANDING INDEBTEDNESS; SECURITY INTEREST AND UNREGISTERED SALES OF EQUITY SECURITIES
On April 1, 2010, the Company entered into a Note Purchase Agreement with CMGO Investors, LLC, a Delaware limited liability company, providing for the sale and issuance of (i) $725,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 3,625,000 shares of the Company’s Common Stock. The Note bears interest at a rate of 13% per annum payable quarterly. The entire amount of the Note, together with all accrued but unpaid interest thereon, is due and payable in full on July 1, 2011; provided that, so long as there is no continuing Event of Default, the Company may in its sole discretion extend the Maturity Date for a period of three months by paying an extension fee equal to 5% of the principal amount of the outstanding Notes. In the event of Default on the Note, the Note shall bear interest at the rate per annum equal to 18%. The Notes rank senior in right of payment with all indebtedness of the Company, whether currently existing or issued in the future. The Notes are secured by a security interest in all of the assets of the Company and the Company's subsidiaries pursuant to a Security Agreement and Subsidiary Guarantee. The Notes are convertible into shares of Common Stock of the Company at any time after the Maturity Date at an initial conversion price of $0.10 per share. The warrants are exercisable for seven years at an exercise price of $0.10 per share. The conversion price of the Notes and the exercise price of the warrants will be adjusted in connection with stock splits, dividends, mergers, reclassifications and similar transactions.
On April 23, 2010, the Company entered into a Note Purchase Agreement with CMGO Investors, LLC, a Delaware limited liability company, providing for the sale and issuance of (i) $125,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 625,000 shares of the Company’s Common Stock. The Note bears interest at a rate of 13% per annum payable quarterly. The entire amount of the Note, together with all accrued but unpaid interest thereon, is due and payable in full on July 28, 2011; provided that, so long as there is no continuing Event of Default, the Company may in its sole discretion extend the Maturity Date for a period of three months by paying an extension fee equal to 5% of the principal amount of the outstanding Notes. In the event of Default on the Note, the Note shall bear interest at the rate per annum equal to 18%. The Notes rank senior in right of payment with all indebtedness of the Company, whether currently existing or issued in the future. The Notes are secured by a security interest in all of the assets of the Company and the Company's subsidiaries pursuant to a Security Agreement and Subsidiary Guarantee. The Notes are convertible into shares of Common Stock of the Company at any time after the Maturity Date at an initial conversion price of $0.10 per share. The warrants are exercisable for seven years at an exercise price of $0.10 per share. The conversion price of the Notes and the exercise price of the warrants will be adjusted in connection with stock splits, dividends, mergers, reclassifications and similar transactions.
PUBLIC COMPANY COMPLIANCE MAY MAKE IT MORE DIFFICULT TO ATTRACT AND RETAIN OFFICERS AND DIRECTORS
The Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public entity, the Company expects these new rules and regulations to increase compliance costs in 2009 and beyond and to make certain activities more time consuming and costly. As a public entity, the Company also expects that these new rules and regulations may make it more difficult and expensive for the Company to obtain director and officer liability insurance in the future and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for the Company to attract and retain qualified persons to serve as directors or as executive officers.
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THERE IS CURRENTLY NO LIQUID TRADING MARKET FOR THE COMPANY’S COMMON STOCK AND THE COMPANY CANNOT ENSURE THAT ONE WILL EVER DEVELOP OR BE SUSTAINED
The Company’s common stock is currently approved for quotation on the OTC Bulletin Board trading under the symbol CMGO.OB. However, there is limited trading activity and not currently a liquid trading market. There is no assurance as to when or whether a liquid trading market will develop, and if such a market does develop, there is no assurance that it will be maintained. Furthermore, for companies whose securities are quoted on the Over-The-Counter Bulletin Board maintained by the National Association of Securities Dealers, Inc. (the “OTCBB”), it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) to obtain needed capital. As a result, pur chasers of the Company’s common stock may have difficulty selling their shares in the public market, and the market price may be subject to significant volatility.
THE COMPANY’S STOCK PRICE MAY BE VOLATILE
The market price of the Company’s common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond the Company’s control, including the following: technological innovations or new products and services by the Company or its competitors; additions or departures of key personnel; limited “public float” following the Reorganization , in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for the common stock; the Company’s ability to execute its business plan; operating results that fall below expectations; loss of any strategic relationship; industry developments; economic and other external factors; and period-to-period fluctuations in the Compan y’s financial results. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the Company’s common stock.
OFFERS OR AVAILABILITY FOR SALE OF A SUBSTANTIAL NUMBER OF SHARES OF THE COMPANY’S COMMON STOCK MAY CAUSE THE PRICE OF THE COMPANY’S COMMON STOCK TO DECLINE OR COULD AFFECT THE COMPANY’S ABILITY TO RAISE ADDITIONAL WORKING CAPITAL
If the Company’s current stockholders seek to sell substantial amounts of common stock in the public market either upon expiration of any required holding period under Rule 144 or pursuant to an effective registration statement, it could create a circumstance commonly referred to as “overhang,” in anticipation of which the market price of the Company’s common stock could fall substantially. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for the Company to raise additional financing in the future through sale of securities at a time and price that the Company deems acceptable.
THE COMPANY’S COMMON STOCK IS CURRENTLY DEEMED TO BE “PENNY STOCK”, WHICH MAKES IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES
The Company’s common stock is currently subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have de cided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.
THE ELIMINATION OF MONETARY LIABILITY AGAINST THE COMPANY’S DIRECTORS, OFFICERS AND EMPLOYEES UNDER NEVADA LAW AND THE EXISTENCE OF INDEMNIFICATION RIGHTS TO THE COMPANY’S DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL EXPENDITURES BY THE COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST THE COMPANY’S DIRECTORS, OFFICERS AND EMPLOYEES
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The Company’s certificate of incorporation does not contain any specific provisions that eliminate the liability of directors for monetary damages to the Company and the Company’s stockholders; however, the Company is prepared to give such indemnification to its directors and officers to the extent provided by Nevada law. The Company may also have contractual indemnification obligations under its employment agreements with its executive officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which the Company may be unable to recoup. These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors and officers for breaches of their fid uciary duties and may similarly discourage the filing of derivative litigation by the Company’s stockholders against the Company’s directors and officers even though such actions, if successful, might otherwise benefit the Company and its stockholders.
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in the coming year for additional accounting staff to addressCompany’s internal control weaknesses associated with lack of segregation of duties.