UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
| THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter year ended September 30, 20082010
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
---------------------------------------------------------------
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 November 23, 2009,22, 2010, there were 42,400,00063,525,662 common stock of the registrant issued and 63,468,488 shares outstanding.
1
CMG HOLDINGS, INC.
FORM 10-Q
| Item # | Description | Page Numbers | ||||
| (UNAUDITED) | F-1 | |||||
| 3 | ||||||
| 5 | ||||||
| 11 | ||||||
| ITEM 1 | LEGAL PROCEEDINGS | 11 | ||||
| ITEM 1A | RISK FACTORS | 11 | ||||
| ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 11 | ||||
| ITEM 3 | DEFAULTS UPON SENIOR SECURITIES | 14 | ||||
| ITEM 4 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 14 | ||||
| ITEM 5 | OTHER INFORMATION | 14 | ||||
| ITEM 6 | EXHIBITS | 14 | ||||
| SIGNATURES | 14 | |||||
| EXHIBIT31.1 | SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER | |||||
| EXHIBIT 31.2 | SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER | |||||
| EXHIBIT 32.1 | CHIEF EXECUTIVE OFFICER | |||||
| EXHIBIT 32.2 | ||||||
2
PART I
CMG HOLDINGS, INC.
UNAUDITED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 20092010 AND 20082009
CONTENTS
______________________________________________________________________________________
| Consolidated Balance Sheets as of September 30, |
| Consolidated Statements of Operations for the three months and nine months ended September 30, |
| Consolidated Statements of Cash Flows for the nine months ended September 30, |
| Notes to Consolidated Financial Statements (Unaudited) |
F-1
3
| CMG HOLDINGS, INC | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| (unaudited) | ||||||||
| September 30, 2009 | December 31, 2008 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 125,159 | $ | 13,934 | ||||
| Accounts receivable | 620,303 | 1,050 | ||||||
| Prepaid an other | 10,366 | -- | ||||||
| Total current assets | 755,828 | 14,984 | ||||||
| Software licenses, net accumulated depreciation of $4,333 and $-, respectively | 47,667 | -- | ||||||
| Intangible assets, net accumulated amortization of $149,167 and $-, respectively | 745,831 | -- | ||||||
| Leasehold Improvements, net accumulated amortization of $59,328 and $-, respectively | 711,942 | -- | ||||||
| Deposits | 300,000 | 300,000 | ||||||
| TOTAL ASSETS | $ | 2,561,268 | $ | 314,984 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Client payable | $ | 137,817 | $ | 8,000 | ||||
| Accounts payable | 701,477 | 29,320 | ||||||
| Accrued liabilities | 663,661 | 415,359 | ||||||
| Short Term Debt, net of unamortized discount $16,208 and $-, respectively | 233,792 | -- | ||||||
| Line of credit | 163,994 | 108,231 | ||||||
| Advance from related party | 25,000 | -- | ||||||
| Total current liabilities | 1,925,741 | 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 33,026,518 and 31,726,518 shares outstanding respectively | 33,027 | 31,727 | ||||||
| Additional paid-in-capital | 4,992,363 | 4,449,863 | ||||||
| Shares held in reserve, 9,373,482 and 10,673,482 shares held, respectively. | 9,373 | 10,673 | ||||||
| Accumulated deficit | (4,399,236 | ) | (4,738,189 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | 635,527 | (245,926 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 2,561,268 | $ | 314,984 | ||||
| CMG HOLDINGS, INC | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| (unaudited) | ||||||||
| September 30, 2010 | December 31, 2009 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 151,755 | $ | 32,968 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $105,673 and $0, respectively | 373,318 | 207,789 | ||||||
| Marketable trading securities | 136,750 | -- | ||||||
| Non marketable investments available for sale | 658,142 | -- | ||||||
| Prepaid and other current assets | 122,530 | 18,182 | ||||||
| Deferred financing fees, net of accumulated amortization of $51,509 and $0, respectively | 99,118 | -- | ||||||
| Total current assets | 1,541,613 | 258,939 | ||||||
| Property and equipment, net of accumulated depreciation of $20,802 and $0, respectively | 284,872 | -- | ||||||
| Intangible assets, net accumulated amortization of $447,499 and $223,750 respectively | 447,499 | 671,248 | ||||||
| TOTAL ASSETS | $ | 2,273,984 | $ | 930,187 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Client payable | $ | 11,317 | $ | 11,317 | ||||
| Accounts payable | 1,270,571 | 1,145,467 | ||||||
| Accrued liabilities | 182,092 | 360,328 | ||||||
| Deferred revenue | 95,626 | 19,600 | ||||||
| Short term debt, net of unamortized discount of $0 and $11,010 respectively | -- | 113,990 | ||||||
| Line of credit | 182,064 | 175,746 | ||||||
| Advances from related parties | 127,438 | 42,500 | ||||||
| Total current liabilities | 1,869,288 | 1,868,948 | ||||||
| Long-term debt, net of unamortized discount of $95,980 | 1,838,222 | -- | ||||||
| Deferred revenue | 637,023 | -- | ||||||
| TOTAL LIABILITIES | 4,344,533 | 1,868,948 | ||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred stock: | ||||||||
| 5,000,000 shares authorized par value $0.001 per share; none issued outstanding | -- | -- | ||||||
| Common stock: | ||||||||
| 150,000,000 shares authorized, par value $0.001 per share; 42,400,000 issued 42,362,826 and 38,207,626 shares outstanding respectively | 42,363 | 38,208 | ||||||
| Additional paid in capital | 5,786,620 | 5,429,522 | ||||||
| Treasury stock, 37,174 and 4,192,374 shares held, respectively. | 37 | 4,192 | ||||||
| Accumulated deficit | (7,899,569 | ) | (6,410,683 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (2,070,549) | (938,761 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 2,273,984 | $ | 930,187 | ||||
See accompanying notes to consolidated financial statements
F-2
4
| CMG HOLDINGS, INC | CMG HOLDINGS, INC | CMG HOLDINGS, INC | ||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | CONSOLIDATED STATEMENTS OF OPERATIONS | CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||||
| Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
| (Restated) | (Restated) | |||||||||||||||||||||||||||||||
| Gross revenues | $ | 933,742 | $ | 303,547 | $ | 2,991,493 | $ | 702,714 | ||||||||||||||||||||||||
| Cost of goods sold | 155,160 | -- | 609,160 | -- | ||||||||||||||||||||||||||||
| Net revenues | 778,582 | 303,547 | 2,382,333 | 702,714 | ||||||||||||||||||||||||||||
| Amortization expense | 74,583 | -- | 153,500 | -- | ||||||||||||||||||||||||||||
| Depreciation expense | 29,664 | -- | 59,328 | -- | ||||||||||||||||||||||||||||
| Revenues | $ | 1,005,237 | $ | 933,742 | $ | 3,859,490 | $ | 2,991,493 | ||||||||||||||||||||||||
| Cost of revenues | 297,663 | 155,160 | 1,735,964 | 609,160 | ||||||||||||||||||||||||||||
| Gross profit | 707,574 | 778,582 | 2,123,526 | 2,382,333 | ||||||||||||||||||||||||||||
| Operating expenses | 684,070 | 405,867 | 2,200,708 | 2,937,282 | 1,650,557 | 757,584 | 3,773,338 | 2,349,875 | ||||||||||||||||||||||||
| Operating income (loss) | (9,735) | (102,320 | ) | (31,203) | (2,519,418 | ) | (942,983) | 20,998 | (1,649,812) | 32,458 | ||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on marketable trading securities | 13,500 | -- | 3,500 | -- | ||||||||||||||||||||||||||||
| Realized loss on trading securities | (23,474) | -- | (23,474 | ) | -- | |||||||||||||||||||||||||||
| Bargain purchase gain | -- | -- | 904,886 | -- | -- | -- | 405,759 | 81,616 | ||||||||||||||||||||||||
| Gain on extinguishment of debt | 19,565 | -- | 19,565 | -- | ||||||||||||||||||||||||||||
| Gain on Extinguishment of Debt | -- | -- | -- | 19,565 | ||||||||||||||||||||||||||||
| Interest expense | (508,357) | (56 | ) | (615,857 | ) | (84,900 | ) | (144,708) | (485,528 | ) | (224,908 | ) | (615,857 | ) | ||||||||||||||||||
| Interest income | 9,255 | 1,389 | 61,562 | 17,145 | -- | 9,255 | 49 | 61,562 | ||||||||||||||||||||||||
| Net income (loss) | $ | (489,272) | $ | (100,987 | ) | $ | 338,953 | $ | (2,302,323 | ) | $ | (1,097,665) | $ | (455,275) | $ | (1,488,886) | $ | (420,656) | ||||||||||||||
| Basic and diluted income (loss) per common share | $ | (0.01 | ) | $ | (0.00 | ) | $ | 0.01 | $ | (0.10 | ) | |||||||||||||||||||||
| Basic and diluted loss per common share | $ | (0.03) | $ | (0.01) | $ | (0.04) | $ | (0.01) | ||||||||||||||||||||||||
Basic weighted average common shares outstanding | 32,638,475 | 28,115,690 | 32,033,844 | 22,430,854 | ||||||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 32,638,475 | 28,115,690 | 34,892,415 | 22,430,854 | ||||||||||||||||||||||||||||
| Basic and diluted weighted average common shares outstanding | 42,355,761 | 32,638,474 | 40,775,906 | 32,033,844 | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
F-3
5
| CMG HOLDINGS, INC | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (unaudited) | ||||||||
| Nine months ended | ||||||||
| September 30, | ||||||||
| 2009 | 2008 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Gain (Loss) | $ | 338,953 | $ | (2,302,323 | ) | |||
| 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 | (904,886 | ) | -- | |||||
| Gain on extinguishment of debt | (19,565) | -- | ||||||
| Warrant expense | 462,500 | -- | ||||||
| Depreciation expense | 59,328 | -- | ||||||
| Amortization expense – debt discount | 3,357 | -- | ||||||
| Amortization expense – intangible assets | 153,500 | -- | ||||||
| Changes in: | ||||||||
| Accounts receivable | (410,934 | ) | (304,165 | ) | ||||
| Prepaid expense | (10,366 | ) | 17,454 | |||||
| Consulting Payable | -- | 243,750 | ||||||
| Client Payable | 129,817 | 266,772 | ||||||
| Accounts payable | 672,157 | (109,906 | ) | |||||
| Accrued expense | 397,846 | -- | ||||||
| Deferred revenue | (771,245) | -- | ||||||
| Net cash provided by (used in) operating activities | 100,462 | (634,176 | ) | |||||
| CASH FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for acquisition of Pebble Beach Enterprises, Inc. | -- | (600,000 | ) | |||||
| Deposit related to acquisition | (300,000) | |||||||
| Cash paid to acquire a bank loan | (250,000 | ) | -- | |||||
| Net cash used in investing activities: | (250,000 | ) | (900,000 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Advance from a related party | 25,000 | -- | ||||||
| Net borrowings on line of credit | 55,763 | (57,069 | ) | |||||
| Contributions to capital | -- | 30,000 | ||||||
| Stock for cash | 80,000 | 137,975 | ||||||
| Borrowing on notes payable | 100,000 | -- | ||||||
| Borrowing on convertible notes | -- | 314,000 | ||||||
| Net cash provided by financing activities | 260,763 | 424,907 | ||||||
| Net increase (decrease) in cash | 111,225 | (1,109,269 | ) | |||||
| Cash, beginning of period | 13,934 | 1,213,035 | ||||||
| CASH BALANCE AT END OF PERIOD | $ | 125,159 | $ | 103,766 | ||||
| Supplemental cash flow information: | ||||||||
| Income tax paid | $ | -- | $ | -- | ||||
| Interest paid | -- | -- | ||||||
| Non-cash investing and financing activities: | ||||||||
| Assets acquired after foreclosing on bank loan | $ | -- | $ | 1,492,000 | ||||
| Assets acquired after foreclosing on bank loan | $ | 979,589 | -- | |||||
CMG HOLDINGS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2010 | 2009 | |||||||
| (Restated) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (1,488,885 | ) | $ | (420,656) | |||
| Adjustments to reconcile net income (loss) to net cash | ||||||||
| provided by (used in) operating activities: | ||||||||
| Bargain purchase gain | (405,759 | ) | (81,616 | ) | ||||
| Shares issued for services | 101,040 | -- | ||||||
| Amortization of intangible assets | 223,749 | 149,167 | ||||||
| Gain on Extinguishment of Debt | -- | (19,565) | ||||||
| Revenue for receipt of securities | (103,301 | ) | -- | |||||
| Amortization of deferred financing fees | 51,509 | -- | ||||||
| Warrant expense | -- | 425,000 | ||||||
| Amortization of debt discount | 57,961 | 40,857 | ||||||
| Depreciation expense | 20,802 | -- | ||||||
| Realized (gain) loss on trading securities | 23,474 | -- | ||||||
| Unrealized (gain) loss on marketable trading securities | (3,500 | ) | -- | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 30,590 | (410,934 | ) | |||||
| Prepaid expense and other current assets | (104,348 | ) | (10,366 | ) | ||||
| Deferred revenue | 1,208 | (771,245 | ) | |||||
| Accrued liabilities | -- | 397,846 | ||||||
| Client payable | 679,002 | 129,817 | ||||||
| Accounts payable | 106,784 | 672,157 | ||||||
| Net cash provided by (used) by operating activities | (809,675 | ) | 100,462 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of fixed assets | (11,287 | ) | -- | |||||
| Cash for sale of marketable securities | 32,776 | -- | ||||||
| Acquisition of Audio Eye, Inc., net of cash received | (26,783 | ) | -- | |||||
| Cash paid to acquire a bank loan | -- | (250,000 | ) | |||||
| Net cash used in investing activities | (5,294 | ) | (250,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Advances from related parties | 84,938 | 25,000 | ||||||
| Net borrowings on line of credit | 6,318 | 55,763 | ||||||
| Proceed from issuance of debt | 1,075,000 | 100,000 | ||||||
| Stock for cash | -- | 80,000 | ||||||
| Payment of financing fees | (107,500 | ) | -- | |||||
| Payments of debt | (125,000 | ) | -- | |||||
| Cash provided by financing activities | 933,756 | 260,763 | ||||||
| Net increase in cash | 118,787 | 111,225 | ||||||
| Cash, beginning of year | 32,968 | 13,934 | ||||||
| Cash end of the year | $ | 151,755 | $ | 125,159 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 16,307 | $ | -- | ||||
| Income taxes paid | -- | -- | ||||||
| Non-cash investing activity: | ||||||||
| Acquisition of Audio Eye, Inc | $ | 523,006 | $ | -- | ||||
| Assets acquired after foreclosing on bank loan | -- | 331,616 | ||||||
| Securities received for deferred revenue | 732,642 | -- | ||||||
| Conversion of accrued salaries to long term notes payable | 859,202 | -- | ||||||
| Warrants issued recorded as debt discount | 142,931 | -- | ||||||
| Warrants issued recorded as deferred financing cost | 43,127 | -- | ||||||
See accompanying notes to consolidated financial statements
F-4
6
CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION 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 resultsre sults to be expected for the full year. Our future 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.
In September 2010, AudioEye, Inc., a wholly owned subsidiary of the Company formed Empire Technologies, LLC (“Empire”) as part of a joint venture with LVS Health Innovations, Inc. (“LVS”) whereby AudioEye owns 50% of Empire. Empire had no transactions as of September 30, 2010.
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., Empire Technologies, LLC and CMGO Events Marketing, Inc, Creative Management Group, Logistics, Inc. after elimination of all significant inter-company accounts and transactions.
Principles of consolidation
Licensing revenue
The Company recognizes revenue from licensing arrangements when the price is fixed or determinable, persuasive evidence of an arrangement exists, collectability is reasonably assured and the license has been delivered to the customer. The revenue is recognized over the term of the license agreement with any amounts received upfront being deferred and recognized over the remaining life of the license.
NOTE 2 – RESTATEMENTS
In the third quarter of fiscal 2009, the Company’s management determined that $100,000 of notes payable with 1 million warrants attached to the notes were not recorded at costduring the six months ended June 30, 2009. The note matured on June 15, 2009 and amortized onadditional $50,000 in fees and 400,000 warrants were issued to the straight-line method over their estimated useful lives. Goodwill is reviewed annually. Intangible valuationnote holder as of June 30, 2009 but not timely recorded as originally filed. The adjustment to correct the above resulted in an increase in liability of $150,000 to record the notes and Goodwill impairment are determined using similar processes. For intangibles, the first step isfees, $57,500 in additional paid-in-capital to comparerecord the fair value of the intangible to its carrying amount. For Goodwill, the first step is to compare the fair value of a reporting unit with its carrying amount, including goodwill. Inova determines the fair value of both intangibles1.4 million warrants and reporting units by using a discounted cash flow (“DCF”) analysis approach. Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows. The cash flows employed$107,500 in the DCF analyses are based on Inova’s budget and long-term business plan, and various growth rates have been assumed for years beyond the long-term business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units.
In Maythe fourth quarter of fiscal 2009, the FASB issued ASC 855, Subsequent Events. This standard is intended to establish general standards ofCompany’s management determined that there were errors in the accounting for and disclosuresthe acquisition of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date duringXA The Experiential Agency, Inc, which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosureresulted in the financial statements,overstatement of intangibles, leasehold improvements, amortization related to the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statementsintangibles and leaseholder improvements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. FASB ASC 855 is effective for fiscal years and interim periods ended after June 15, 2009. The Company adopted this standard effective June 15, 2009, and has evaluated any subsequent events through November 23, 2009. The Company has no significant subsequent events for the period from October 1, 2009 through November 23, 2009.bargain purchase gain.
7
Therefore, the Company is adjusting its previously reported September 30, 2009 consolidated statements of Contentoperations and cash flows in this September, 2010 quarterly filing. The following tables reflect the impact of the above errors to the consolidated statements of operations for the three and nine months ended September 30, 2009:
| Consolidated Statements of Operations | Nine months ended September 30, 2009 | |||||||||||
| As Previously Reported | Adjustments | As Adjusted | ||||||||||
| Revenues | $ | 2,991,493 | $ | -- | $ | 2,991,493 | ||||||
| Cost of revenues | 609,160 | -- | 609,160 | |||||||||
| Gross profit | 2,382,333 | -- | 2,382,333 | |||||||||
| Operating expenses | 2,413,536 | (63,661) | 2,349,875 | |||||||||
| Operating income (loss) | (31,203 | ) | (63,661) | 32,458 | ||||||||
| Other income (expense) | ||||||||||||
| Bargain purchase gain | 904,886 | (823,270 | ) | 81,616 | ||||||||
| Gain on extinguishment of debt | 19,565 | -- | 19,565 | |||||||||
| Interest expense | (615,857 | ) | -- | (615,857 | ) | |||||||
| Interest income | 61,562 | -- | 61,562 | |||||||||
| Net income (loss) | $ | 338,953 | $ | (759,609 | ) | $ | (420,656) | |||||
| Basic and diluted income (loss) per common share | $ | 0.01 | $ | (0.02 | ) | $ | (0.01) | |||||
| Basic weighted average common shares outstanding | 32,033,844 | -- | 32,033,844 | |||||||||
| Consolidated Statements of Operations | Three months ended September 30, 2009 | |||||||||||
| As Previously Reported | Adjustments | As Adjusted | ||||||||||
| Revenues | $ | 933,742 | $ | -- | $ | 933,742 | ||||||
| Cost of revenues | 155,160 | -- | 155,160 | |||||||||
| Gross profit | 778,582 | -- | 778,582 | |||||||||
| Operating expenses | 788,317 | (30,733) | 757,584 | |||||||||
| Operating income (loss) | (9,735 | ) | 30,773 | 20,998 | ||||||||
| Other income (expense) | ||||||||||||
| Bargain purchase gain | -- | -- | -- | |||||||||
| Gain on extinguishment of debt | 19,565 | (19,565) | -- | |||||||||
| Interest expense | (508,357) | 22,829 | (485,528 | ) | ||||||||
| Interest income | 9,255 | -- | 9,255 | |||||||||
| Net income (loss) | $ | (489,272) | $ | 43,252 | $ | (455,275) | ||||||
| Basic and diluted income (loss) per common share | $ | (0.01) | $ | (0.00 | ) | $ | (0.01) | |||||
NOTE 3: ACQUISITIONS
On March 31, 2010, the Company acquired all outstanding shares of Audio Eye, Inc. in exchange for $30,000 cash, 1.5 million shares, warrants to purchase 250,000 shares at an exercise price of $0.07 per share and a term of 5 years plus other contingent consideration. Audio Eye develops 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 distribution to end users on any network conne cted device.
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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) | $ | 30,000 | ||
| Common stock (2) | 60,000 | |||
| Warrants to purchase common stock (3) | 10,000 | |||
| Contingent consideration (4) | - | |||
| Total consideration | $ | 100,000 |
| Recognized amount of identifiable assets acquired and liabilities assumed : | ||||
| Cash | $ | 3,217 | ||
| Accounts receivable | 196,119 | |||
| Property and equipment | 294,387 | |||
| Other assets | 32,500 | |||
| Accounts payable | (18,500 | ) | ||
| Accrued liabilities | (1,964 | ) | ||
| Total identifiable net assets and liabilities assumed | $ | 505,759 | ||
| Bargain purchase gain (5) | $ | 405,579 | ||
| (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 was determined based on the closing price 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 contrib ution, the amount 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 had also loaned XAThe Experiential Agency, Inc. $100,000 in March 2009 (see note 5 below) 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. The Experiential Agency, Inc. offers a full degree 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. 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.
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Unaudited pro forma operation results for the nine months ended September 30, 2009.2010 and 2009, as though the Company had acquired Audio Eye and The following table summarizesExperiential Agency, Inc. on the consideration paidfirst day of fiscal year 2009, are set forth below. The unaudited pro forma operating results are not necessarily indicative of what would have occurred had the
transaction take place on the first day of fiscal year 2009.
| Pro Forma | ||||||||
| Nine months ended September 30 | ||||||||
| 2010 | 2009 | |||||||
| Revenues | $ | 3,929,391 | $ | 3,393,202 | ||||
| Cost of revenues | (1,735,964 | ) | (674,521 | ) | ||||
| Operating expenses | (3,812,959 | ) | (2,527,752 | ) | ||||
| Other income (expense) | 160,926 | (453,114 | ) | |||||
| Net loss | $ | (1,458,606 | ) | $ | (262,185) | |||
NOTE 4: DEBT
During nine months ended September 30, 2010, the Company borrowed $1,075,000 under five 13% Senior Secured Convertible Extendible Notes from third parties that will mature on July 1, 2011. The Company has the option to extend the maturity date of the notes for acquisitionthree months by paying an extension fee of 5% of the principal amounts, provided that the Company is not in default, In the event of default, the annual interest rate increases to 18%. As of September 30, 2010, the company has elected to extend the maturity date and has accrued the 5%. The notes are convertible into common shares at any time after the maturity date at $0.10 per share. In connection with the issuance of the notes, the Company issued warrants to purchase 5,375,000 common shares. The warrants have an exerci se price of $0.10 per share and a term of 7 years. The conversion price of the notes and the exercise price of the warrants contain reset provisions. If the closing market price of the stock is less than the conversion and exercise price for a period of 90 consecutive trading days, then the conversion and exercise price in effect shall be reduced to the closing market price on such 90th trading days but both conversion and exercise price shall not be reduced to less than $0.07 per share. The notes are secured by a security interest in all of the assets and the amount of the assets acquired at the acquisition date as well as theCompany and its subsidiaries. The relative fair value atof these warrants was calculated using Black-Scholes Model using these assumptions (1) 2.4% to 3.3% discount rate, (2) warrant life of seven years (3) expected volatility of 343% to 347% and (4) zero expected dividend. The relative fair value of the acquisition date.
| Cash Consideration for purchase of Bank of America note | $ | 150,000 | ||
| Cash loaned to XA (see note 5 below) | 100,000 | |||
| Total | $ | 250,000 | ||
| Acquisition-related costs | $ | -- | ||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||
| Accounts receivable | 208,319 | |||
| Software licenses | 52,000 | |||
| Leasehold improvements | 771,270 | |||
| Identifiable intangible assets | 894,998 | |||
| Accounts payable | (456) | |||
| Deferred revenue | (771,245) | |||
| Total identifiable net assets | 1,154,886 | |||
| Bargain purchase gain | (904,886 | ) | ||
| Total | $ | 250,000 |
| Revenues | Earnings | |||||||
| Supplemental pro forma from 01/01/09 – 09/30/09 | $ | 3,389,374 | $ | (302,508 | ) | |||
| Supplemental pro forma for 01/01/08 – 09/30/08 | 6,768,454 | (2,188,098 | ) | |||||
On April 1, 2010, and April 1, 2010. In the event that the company fails to pay JTV a cash fee on the date that the fee is due, atCompany fully paid its sole option JT Venture will defer the cash fee to June 30, 2010 and CMG agrees to deliver to JTV a warrant (Fee Warrant) for 500,000 shares of CMG common stock. The exercise price for the Fee Warrant shall be $0.05 per share and they expire in 7 years. Fee Warrants shall contain a “net exercise” provision in form and substance satisfactory$125,000 loan to JT Ventures, and shall have Piggyback Registration Rights to registerLLC.
NOTE 5: EQUITY
Common Stock:
On January 25, 2010, 350,000 shares were issued for services provided by third parties valued at $31,500.
On March 31, 2010, 1,500,000 shares were issued for the common stockacquisition of Audio Eye valued at $60,000. See Note 3 for details.
On May 1, 2010, 685,200 shares were issued pursuant to the fee warrants as part of any registration filing by CMG Holdings, Inc. and or its successors and assignors. In addition to the cash feesfor services to be paid to JT ventures,provided by a third party over a period of 1 year and were valued at $19,871. The Company recognized share-based compensation cost for the company will deliver a warrant for 1 million sharesnine months ended September 30, 2010 of CMG common stock on August 17, 2009, October 1, 2009, January$8,280, leaving $11,591 in unrecognized cost.
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On April 1, 2010, 970,000 shares were issued to Audio Eye executives and Aprilthe Company recognized $32,010 of stock based compensation.
On July 1, 2010. 2010, 650,000 shares were issued for advisory services and the Company recognized $29,250 of stock based compensation.
Warrants:
During the nine months ended September 30, 2010, 250,000 warrants were issued in connection with the acquisition of Audio Eye and 6,772,500 warrants were issued in connection with the 13% Senior Secured Convertible Extendible Notes. See Notes 3 and 4 for details on the valuation of these warrants.
A summary of warrant activity for the nine months ended September 30, 2010 is as follows:
| Outstanding | Weighted Average | |||||||
| and Exercisable | Exercise Price | |||||||
| December 31, 2009 | 2,400,000 | $ | 0.01 | |||||
| Granted | 7,022,500 | $ | 0.10 | |||||
| Exercised | - | - | ||||||
| Forfeited | - | - | ||||||
| September 30,2010 | 9,442,500 | $ | 0.08 | |||||
The warrants have a weighted average remaining life of 6.2 years and an exercise price of $.001 and expire in 7 years. The fairaggregate intrinsic value of these warrants was calculated using the Black-Scholes Model using these assumptions (1) 3.3% discount rate, (2) warrant life of 7 years, (3) expected volatility of 366%, and (4) zero expected dividends. The fair value of the warrants under the forbearance agreement was $405,000 which has been accounted for as interest expense.
NOTE 6: RELATED PARTY TRANSACTIONS
On January 1, 2010, the Company and its executive management entered into employment agreements, effective up to 2016, regarding base salary compensation, incentive bonus consideration and expense reimbursement. The agreements provide for the deferral of payment of a portion of the annual base salary until such time that the Company has sufficient working capital, but in no case later than December 31, 2012. The agreements also provide that the 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 common stock at a conversion price that is based on the one hundred eighty (180) da y 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. On September 30, 2010 the Company and its executive management entered into a deferred salary conversion agreement regarding 2010 salary payables and 2009 deferred salary payables consideration in order to assist with the working capital needs of the Company. The Company and its executive management agreed that the salary payables and deferred salary payables of $859,202 will be converted into a note payable due to the executives on March 31, 2012 which carries an interest rate of 1% and is unsecured. In the event the Company has sufficient working capital to operate, the Company agreed to pay the executives an amount not to exceed 25% of the Note Payable during any quarterly period through maturity. The notes are convertible by the executives at the average closing price of the Company stock from January 1, 2010 through September 30, 2010 which was $0.057 per share. The executives have agreed to amend the agreements to increase the interest rate to a market rate and increase the conversion price to the closing price at September 30, 2010.
Related parties advanced the Company $84,938 for working capital purposes during the nine months ended September 30, 2010.
We have three reportable segments: Event marketing, Commercial rights and Consulting services, which are comprised within our specialist marketing service offerings. The profitability measure employed for allocating resources to operating divisions and assessing operating division performance are revenues and operating income, excluding the impact of Contentrestructuring and other reorganization-related charges (reversals) and long-lived asset impairment and other charges, if applicable. Summarized financial information concerning our reportable segments is shown in the following table.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Revenue: | ||||||||||||||||
| Event marketing | $ | 590,117 | $ | 790,733 | $ | 2,944,868 | $ | 2,282,954 | ||||||||
| Commercial rights | $ | 119,777 | $ | - | $ | 187,243 | $ | - | ||||||||
| Consulting services | 295,343 | 143,009 | 727,379 | 708,539 | ||||||||||||
| Total | $ | 1,005,237 | $ | 933,742 | $ | 3,859,490 | $ | 2,991,493 | ||||||||
| Operating income (loss) | ||||||||||||||||
| Event marketing | $ | (407,095) | $ | 280,130 | $ | (953,084) | $ | (133,466) | ||||||||
| Commercial rights | $ | (153,411) | $ | - | $ | (513,192) | $ | - | ||||||||
| Consulting services | (382,477) | (259,132 | ) | (183,536 | ) | 165,923 | ||||||||||
| Total | $ | (942,983) | $ | 20,998 | $ | (1,649,812 | ) | $ | 32,458 | |||||||
| Assets | September 30, 2010 | December 31, 2009 | ||||||
| Event marketing | $ | 1,056,149 | $ | 910,741 | ||||
| Commercial rights | 1,022,589 | -- | ||||||
| Consulting services | 195,246 | 19,446 | ||||||
| Total | $ | 2,273,984 | $ | 930,187 | ||||
NOTE 8 - FAIR VALUE MEASUREMENTS AND INVESTMENTS
In September 2006, the FASB issued ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008. ASC 820 delays the effective date for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measureme nt) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this catego ry generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
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Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of September 30, 2010. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable trading securities | $ | 136,750 | $ | - | $ | - | $ | 136,750 | ||||||||
| Non marketable investments available for sale | - | - | 658,142 | 658,142 | ||||||||||||
| $ | 136,750 | $ | - | $ | 658,142 | $ | 794,892 | |||||||||
Securities and Investments
The Company applies the provisions of Accounting Standards Codification 320, “Investments – Debt and Equity Securities”, regarding marketable securities. The Company invests in securities that are intended to be bought and held principally for the purpose of selling them in the near term, and as a result, classifies such investments as trading securities. Trading securities are recorded at fair value on the balance sheet with changes in fair value being reflected as unrealized gains or losses in the current period. In addition, the Company classifies the cash flows from purchases, sales, and maturities of trading securities as cash flows from operating activities.
Details of the Company's marketable trading securities as of September 30, 2010 are as follows:
| Aggregate fair value | $ | 136,750 | ||
| Gross unrealized holding gains | - | |||
| Gross unrealized holding losses | 3,500 |
| Proceeds from sales | $ | 32,776 | ||
| Gross realized gains | - | |||
| Gross realized losses | 23,474 | |||
| Other than temporary impairment | - |
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NOTE 9 – SECURITIES RECEIVED FOR REVENUE TRANSACTIONS
The Company received equity holdings in other companies in the following transactions:
| a. | During the three months ended September 30, 2010, Audio Eye completed a licensing transaction with Roth Kline Inc., an organization that will be creating an Interactive Talking Coupon utilizing Audio Eye’s technology. Audio Eye in exchange for the licensing its technology received a 19.5% equity ownership position of Roth Kline as well as 2.5% licensing royalty on gross revenues of Roth Kline. Roth Kline is currently a privately held company. The Company recorded the non marketable investment at its fair value of $658,142 and is accounting for the investment using the cost method. The license expires at the expiration of the patents associated with the license therefore the revenue is being recognized over the life of the license for which 154 months remains at September 30, 2010. $16,662 was recognized in the three and nin e months ended September 30, 2010 with $641,480 deferred as of September 30, 2010. |
| b. | During the three months ended September 30, 2010, CMG signed a branding agreement with XenaCare Holdings, Inc. (“XEN”), and the Company received 500,000 shares of XEN. XEN is publicly traded. The Company recorded the marketable securities at their fair value of $74,500. The agreement is for three years therefore the revenue is being recognized over the life of the agreement. $4,139 was recognized in the three and nine months ended September 30, 2010 with $70,361 deferred as of September 30, 2010. |
| c. | In 2007, CMG signed a consulting agreement with XEN and the Company was to receive 330,000 shares of XEN. Due to concerns over collectability in 2007, the Company did not recognize revenue related to this agreement. The Company received the shares in the three months ending September 30, 2010. The Company recorded the marketable securities at their fair value of $82,500. The services under the agreement were previously performed therefore the entire amount of revenue is being recognized in the three month period ended September 30, 2010 with $0 deferred as of September 30, 2010. |
NOTE 10: SUBSEQUENT EVENTS
The Company has evaluated events and transactions that occurred subsequent to September 30, 2010, for possible disclosure or recognition in the consolidated financial statements. The Company has determined that there were events or transactions that warrant disclosure or recognition in the consolidated financial statements.
Audio Eye – Empire Technologies, LLC
Subsequent to September 30, 2010, Audio Eye and LVS through their Joint Venture company, Empire, completed a five year licensing transaction of its technology to Vail School District in Arizona, related to the use of Audio Eye’s technology within a technology product, The Bio Metric Display System (BDS). Audio Eye CEO Nathaniel Bradley is a named inventor on a provisional application filed with the United States Patent Office (USPTO) along with LVS Health Innovations CEO, Richard Francis. The Bio Metric Display System (BDS) technology will provide students and parents within public, private, technology, and other schools to access a “3D Talking Avatar” display of their own overall health and wellness. In exchange for licensing its technology, Empir e will receive Thirty (30%) percent of net profits from the sale, lease or licensing of products related to the license.
Warrants – Conversion:
On November 5, 2010, CMGO Investors, LLC, a Delaware limited liability company, exercised its cumulative warrants to purchase 5,375,000 common shares, pursuant to the 2010 Note Purchase Agreement between the Company and CMGO Investors, LLC providing for the sale and issuance of $1,075,000 of its 13% Senior Secured Convertible Extendible Notes due 2011. The cumulative warrants to purchase the 5,375,000 shares were transferred and exercised on a cashless basis for a total of 3,695,310 shares, of which 1,015,314 shares were assigned to AtoZ Holdings, LLC, 1,906,560 shares stock were assigned to Infinite Alpha, Inc. and 773,438 shares were assigned to Grassy Knolls, LLC.
On November 5, 2010, Intermerchant Securities, LLC a Delaware limited liability company, exercised its cumulative warrants to purchase 1,397,000 common shares pursuant to the 2010 Note Purchase Agreement between the Company and CMGO Investors, LLC as to the sale and issuance of $1,075,000 of its 13% Senior Secured Convertible Extendible Notes due 2011. Intermerchant Securities acted as the placement agent and received compensation payments of 10% of the gross proceeds of $1,075,000 and cumulative warrants to purchase 1,397,000 shares. The cumulative warrants to purchase 1,397,000 shares were transferred and exercised on a cashless basis for a total of 960,779 shares, of which 759,686 shares were assigned to AtoZ Holdings, LLC, and 201,093 shares were assign ed to Grassy Knolls, LLC.
On November 5, 2010, JT Ventures LLC, an Illinois limited liability company, exercised its cumulative warrants to purchase 2,400,000 common shares pursuant to the March 16, 2009 Warrant Purchase Agreement between the Company and JT Ventures, LLC. The cumulative warrants to purchase 2,400,000 shares were transferred and exercised on a cashless basis for a total of 2,325,000 shares, of which 275,000 shares were assigned to AtoZ Holdings, LLC, and 2,050,000 shares were assigned to Prime Equity IV, LLC.
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Escrow Agreement – CMGO Investors LLC:
On October 29, 2010, the Company and CMGO Investors, LLC, a New York limited liability company, entered into an Escrow Agreement regarding the $1,075,000 13% Senior Secured Convertible Extendible Notes due 2011 in which the Company and CMGO Investors, LLC agreed not to convert these Convertible Notes until July 1, 2011. The Company issued 5,375,000 shares to CMGO Investors, LLC, and 1,397,500 shares to InterMerchant Securities, LLC in consideration for CMGO Investors, LLC agreement not to convert its Convertible Notes until July 1, 2011, of which 952,381 issued shares are to be issued in the name of CMGO Investors, LLC and which 247,619 issued shares are to be issued in the name of InterMerchant Securities LLC. The balance of 4,422,619 shares to CMGO Investors, LLC and balance of 1,149,881 shares to InterMerchant Securities, LLC. These 4,422,619 shares to CMGO Investors, LLC and 1,149,881 shares to InterMerchant Securities, LLC shall be delivered and held by an Escrow Agent and will only to be delivered to CMGO Investors, LLC and InterMerchant Securities, LLC in the event upon non-payment by CMG the total amount due including principal, interest, pre-payment penalties and other fees on or before July 1, 2011, which has been extended to October 1, 2011 for a 5% fee in accordance with the terms of the Convertible Notes. In the event of a non-payment by CMG to CMGO Investors, LLC, of the Amount Due by April 1, 2011 , five-percent (5%) of the CMGO Investors, LLC, Escrow Shares shall be delivered to CMGO Investors, LLC, and five-percent (5%) of the InterMerchant Escrow Shares shall be delivered to InterMerchant.
Shares for Services and for Working Capital
On October 5, 2010, 2,302,073 common shares were issued for services to be provided by third parties. On November 8, 2010, 5,250,000 shares were issued for cash of $175,000.
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FORWARD LOOKING STATEMENTS
RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIODMONTHS ENDED SEPTEMBER 30, 2010 AND 2009
Gross revenues increased from $702,714 in the nine months period ending September 30, 2008 to $2,991,493 $2,991,493 for the nine months period endingended September 30, 2009.2009 to $3,859,490 for the nine months ended September 30, 2010. The increase in revenues is mainly due to morethe revenues generated infrom the event marketing, public relations, marketing services and event marketing consulting business. Also, beginningbusiness of, The Experiential Agency, Inc (“XA”), a wholly-owned subsidiary acquired in the second quarter of 2009 afterthat has build up new business pipeline of new clients. The increase in revenues also includes revenues from new business generated from licensing of the acquisitionpatented technology from the Audio Eye, Inc. a wholly-owned subsidiary acquired in 2010.
Cost of assetsrevenues increased from $609,160 for the nine months ended September 30, 2009 to $1,735,964 for the nine months ended September 30, 2010. The increase is related to the increase in the revenues which is mainly due to the new business generated from the event marketing, public relations, consulting business of The Experiential Agency, Inc. (“XA”), we started to generate and recognize revenues from thisa wholly-owned subsidiary acquired in the second quarter of 2009 that has build up new linebusiness pipeline of business. new clients.
Operating expenses decreasedincreased from $2,937,282$2,349,875 for the nine months endingended September 30, 20082009 to $2,200,708$3,773,338 for the same periodnine months ended September 30, 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, bad debt expenses and includes additional operating expenses from months of activity from the inclusion of the purchase of Audio Eye, Inc. a wholly-owned subsidiary acquired in 2010
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The net loss for the nine months ended September 30, 2009 is $420,656 which increased to a net loss of $1,488,886 for the nine months ended September 30, 2010. This wasis mainly due to the Company recognized significant stock-based compensation costs in 2008 and in 2009 the Company did not have any of this type of expense. The expenses for 2009 mainly incurred for marketing services, public relations, consulting services and event marketing. Net income increased from a net loss of $2,302,323 for the nine months ending September 30, 2008 to net income of $338,953 for the same period in 2009. The increase in net income is mainly duethe legal expenses pertaining to more revenues generatedthe acquisition of Audio Eye, Inc., bad debt expenses, operating expenses regarding the lead generation related to new business pipeline of new clients in the sectors of internet accessibility, licensing, and not having any stock-based compensation expense in 2009 compared to 2008.interactive marketing.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODMONTHS ENDED SEPTEMBER 30, 2010 AND 2009
Cost of The Experiential Agency, Inc., we started to generate and recognize revenues from this new line of business. Operating expenses increased from $405,867$155,160 for the three months endingended September 30, 20082009 to $684,070 for the same period in 2009. This was mainly due to the Company recognized expenses for marketing services, public relations, consulting services and event marketing. Net loss increased from $100,987$297,663 for the three months endingended September 30, 2008 to $489,272 for the same period in 2009.2010. The increase in net loss is mainly due to the new business generated from the event marketing, public relations, consulting business of The Experiential Agency, Inc, a wholly-owned subsidiary acquired in the second quarter of 2009 that has build up new business pipeline of new clients. The increase in cost of revenue also includes three months of activity of new business generation regarding the purchase of Audio Eye, Inc forecasted to generate revenues into the remainder of the calendar year.
Operating expenses increased from $757,584 for the three months ended September 30, 2009 to $1,650,557 for the three months ended September 30, 2010. The decrease in operating expenses is mainly due to decreased personnel for Creative Management Group and reduced marketing, professional fees at public relations, consulting business of XA. This decrease in operating expenses are offset by the inclusion of additional personnel from the purchase of Audio Eye, Inc.
The net loss increased from $455,275 for the three months ended September 30, 2009 to a net loss of $1,097,665 for the three months ended September 30, 2010. This is mainly due to the decrease in revenues due to delay in implementation activity of new business associated with the forbearancepurchase of Audio Eye, Inc. and the delay in the generation of new business related to Creative Management Group. The new business for Audio Eye and Creative Management is forecasted to be reflected in the remainder of the JT Ventures debt.calendar year. The decrease in net income generated is offset by the event marketing, public relations, consulting business of, The Experiential Agency, Inc. (“XA”), a wholly-owned subsidiary acquired in the second quarter of 2009 that has build up new business pipeline of new clie nts.
LIQUIDITY AND CAPITAL RESOURCES.:
As of September 30, 2009,2010, the Company’s cash on handbalance was $125,159. $151,755.
Cash provided by operations for the nine months period ended September 30, 2009 was $100,462, as compared to cash used byin operations of $634,176$809,675 for the nine months ended September 30, 2008. The2010. This change is primarily due to amortization of intangible assets, shares issued for services, and increase in cash provided by operating activities is mainlyaccrued expenses due to more revenues generated inincreased operating expenses resulting from increased personnel and operations from the event marketing, public relations, marketing services and event marketing consulting business during nine months ended September 30, 2009. of XA and the purchase of the business operations of Audio Eye, Inc.
Cash used in investing activities for the nine month periodmonths ended September 30, 2009 was $250,000, as compared to $900,000cash used in investing activities of $5,294 for the nine months ended September 30, 2008.2010. For the nine months ended September 30, 2008,2009, the Company incurred $600,000$250,000 for the acquisition of Pebble Beach Enterprises, Inc.assets of XA to obtain a note receivable from a financial institution and for the nine month ended September 30, 2009,2010, the Company paid $150,000incurred $30,000 for to obtain a note receivable regardingacquisition of Audio Eye, Inc. and purchase of fixed assets of $11,287 and cash received of $3,217 resulted from the note purchase agreement to purchase the senior secured debt obligationsacquisition of The Experiential Agency, Inc and loaned The Experential Agencey,Audio Eye, Inc. $100,000.
Cash provided by financing activities for the nine month periodmonths ended September 30, 2009 was $260,763, as compared to $424,907$933,756 provided for the nine months ended September 30, 2008.2010. 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 management executives. In 2010, the Company secured a total of five 13% Senior Secured Convertible Extendible Notes from third parties totaling $1,075,000, for the purchase of Audio Eye, Inc. and for working capital purposes.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of November 22, 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 vo te or direct the voting of the security or the power to dispose 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 November 23, 2009, 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.
SECURITY OWNERSHIP OF MANAGEMENT:
| Title of Class | Name | Shares | Percent | ||||||
| Common Stock | Alan Morell | 10,107,000 | 15.91% | ||||||
| Common Stock | James J. Ennis | 3,500,000 | 5.51% | ||||||
| Common Stock | Michael Vandetty | 1,000,000 | 1.57% | ||||||
| All Directors and Executive Officers | 14,607,700 | 22.99% | |||||||
These tables are based upon 63,525,662 shares outstanding as of November 23, 2009:22, 2010 and information derived from our stock records. Unless otherwise indicated in the footnotes to these tables and subject to community property laws where applicable, we believe unless otherwise noted that each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned.
| Title of Class | Name | Shares | Percent (1) | ||||||
| Common Stock | CMG Acquisitions, Inc. | 14,085,789 | 33.22 | % | |||||
| Alan Morell | 10,107,000 | 23.84 | % | ||||||
| James J. Ennis | 2,500,000 | 5.89 | % | ||||||
| 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 | % | ||||||
| (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 |
| (2) | Mr. Morell owns 3,500,000 shares of |
| (3) | Mr. Ennis owns |
18
RISKS RELATED TO OUR BUSINESS
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.
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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
In the aggregate, the directors and executive officers as a group collectively own approximately 35% of the Company’s outstanding shares. The interests of the Company’s management may differ from the interests of other stockholders and as a result, the Company’s executive management may have the ability to control virtually all corporate actions requiring stockholder approval, irrespective of how the Company’s other stockholders may vote, including electing or defeating the election of directors; amending or preventing amendment of the Company’s certificate of incorporation or bylaws; effecting or preventing a merger, sale of assets or other corporate transaction; and controlling the outcome of any other matter submitted to the stockholders for vote. The Company’s manag ement’s stock ownership may discourage a potential acquirer from seeking to acquire shares of the Company’s common stock or otherwise attempting to obtain control of the Company, which in turn could reduce the Company’s stock price or prevent the Company’s stockholders from realizing a premium over the Company’s stock price.
20
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 e xtend 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 wit h stock splits, dividends, mergers, reclassifications and similar transactions. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 942,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amende d.
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 tr ansactions. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 162,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended.
On June 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) $150,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 750,000 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 September 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 f ee 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. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 195,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended.
21
On June 18, 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) $50,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 250,000 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 September 18, 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. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 65,000 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended.
On June 30, 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) $20,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 125,000 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 September 30, 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. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 32,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended
The Sarbanes-Oxley Act of Content2002 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.
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.
23
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
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 fiduciary 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 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.
2010, that materially affected, or is reasonably likely to materially affect, the Company s internal control over financial reporting.
Registrant is a smaller reporting company and is therefore not required to provide this information.
CAPITAL INVESTMENT CMGO INVESTORS, LLC.
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 outs tanding 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. In addition, if at any time the closing m arket price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 942,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended.
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 tr ansactions. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 162,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended.
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On June 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) $150,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 750,000 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 September 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 f ee 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. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 195,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended.
On June 30, 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) $20,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 125,000 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 September 30, 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. In addition, if at any time the closing market price of the Common Stock is less than the conversion price or exercise price for a period of 90 consecutive trading days, then the conversion price or exercise price in effect shall be reduced to the closing market price of the Common Stock on such 90th trading day; provided that in no event shall the conversion price or exercise price be reduced to less than $0.07 per share pursuant to this provision. The investors also received certain registration rights pursuant to a Registration Rights Agreement. In connection with this transaction, the Company paid the placement agent 10% of the gross proceeds and warrants to purchase 32,500 shares of Common Stock. The sale of securities discussed above was made solely to accredited investors and was exempt from registration under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended.
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Exhibit No.Document Description
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
Reports on Form 8-K:
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
| CMG HOLDINGS, INC. | ||
| (Registrant) | ||
| Date: November 22, 2010 | ||
| By: | ||
| Alan Morell | ||
| Chief Executive Officer and | ||
| Chairman of the Board | Chief Executive Officer and Chairman of the Board | |
| Date: November | By: | |
| James J. Ennis | ||
| Chief Financial Officer and | ||
| Director | ||
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | NAME | TITLE | DATE | |||
| /s/Alan Morell | Alan Morell | |||||
| CEO & Chairman of the Board | November 22, 2010 | |||||
| /s/James I. Ennis | James I. Ennis | November | ||||