CMG HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited pro forma operation results(Unaudited)
A summary of warrant activity for the ninethree months ended September 30, 2010 and 2009,March 31, 2011 is as though the Company had acquired Audio Eye and The Experiential Agency, Inc. on the first 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.follows:
| | 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) | |
| | Outstanding and | | | Weighted average | |
| | Exercisable | | | Exercise Price | |
December 31, 2010 | | | 250,000 | | | $ | 0.07 | |
Granted | | | 448,000 | | | | 0.38 | |
Exercised | | | - | | | | - | |
Forfeited | | | - | | | | - | |
March 31,2011 | | | 698,000 | | | $ | 0.27 | |
The warrants have a weighted average remaining life of 3.0 years and an aggregate intrinsic value of approximately $5,000.
NOTE 4: DEBT3: Notes Payable
Asher Enterprises, Inc.
On March 15, 2011 the company issued a convertible promissory note for $75,000 to Asher Enterprises, Inc. The note bears interest at 8% and is due on December 17, 2011. The convertible promissory note calls 4,510,826 shares to be reserved for issuance upon conversion of the note and any amount not paid by December 17, 2011 will incur a 22% interest rate. The note is convertible at 58% of the average of the lowest three trading prices for the Company’s common stock during the ten trading day period prior to the conversion date.
The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the instrument should be classified as liabilities due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The instrument is measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The fair value of the embedded conversion option resulted in a full discount to the note on March 15, 2011 of $75,000. The discount will be amortized over the term of the note to interest expense. As of March 31, 2011, $4,167 of the discount had been amortized to interest expense. See Note 4 for additional information on the derivative liability.
CMGO Investors, LLC
During nine monthsyear ended September 30,December 31, 2010, the Company borrowed $1,075,000 under five 13% Senior Secured Convertible Extendible Notesconvertible 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 three 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 withDuring the issuancethree months ended March 31, 2011, the Company amortized $30,841 of the original discount recorded on these notes and $31,803 of the original deferred financing costs to interest expense.
The note agreements have various covenants. The agreements require the purchaser provide the Company issued warrants to purchase 5,375,000 common shares. The warrants have an exerci se price of $0.10 per sharewith notice 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 acure period of 10 days prior to an event qualifying as an event of default under the agreement. The agreements require a) the Company
within 90 consecutive trading days thenafter 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 allclose of the assetseach fiscal year of the Company, and its subsidiaries. The relative fair value of these warrants was calculated using Black-Scholes Model using these assumptions (1) 2.4%deliver 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 valuethe note holders the balance sheet of the warrants was determined to be $142,931 and was recordedCompany as a debt discount. The debt discount is being amortized and recorded as in terest expense over the term of the notes usingend of such fiscal year and the effective interest method. Amortizationrelated statements of income and retained earnings and statement of cash flows for such fiscal year certified by an independent registered accounting firm of recognized national standing, accompanied by an opinion of such accounting firm (which opinion shall be without any qualification or exception as to scope of audit) stating that in the nine months ended September 30, 2010course of its regular audit of the financial statements of the Company, which audit was $46,951. In connectionconducted in accordance with GAAP, such accounting firm obtained no knowledge of any Default or an Event of Default relating to financial or accounting matters which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof, and management’s discussion and analysis of the important operational and financial developments during such fiscal year. The timely public filing of the items described on EDGAR shall satisfy the delivery requirement under this provision but only with respect to the financial statements but not the opinion of the independent registered public accounting firm; and b) the Company deliver written Notice to the Purchaser within three Business Days after any Officer of the Company has knowledge of the occurrence of any event that, with the above transaction,giving of notice or the lapse of time or both, would become an Event of Default under the agreement. As of May 24, 2011, the Company paidhas not delivered to the placement agent 10%purchaser the aforementioned information under a) or notice under b). As of the gross proceeds and warrants to purchase 1,397,000 common shares. The fair value of 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% (4) zero expected dividend. The fair value of the warrants was determined to be $43,127 and was recorded as a deferred financing cost. The total deferred financing cost which includes the $107,500 of placement agent fees is being amortized and recorded as interest expense over the term of the note using the effective interest method. Amortization for the nine months ended September 30, 2010 was $51,509. We analyzed the convertible note and warrants issued for derivative accounting consider ation and determined that derivative accounting is not applicable for these instruments.
On April 1, 2010,May 24, 2011, the Company fully paid its $125,000 loan to JT Ventures, LLC.
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 forhas not received notice of default from the acquisition of Audio Eye valued at $60,000. See Note 3 for details.purchaser.
On May 1, 2010, 685,200 shares were issued for services to be 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 nine months ended September 30, 2010 of $8,280, leaving $11,591 in unrecognized cost.
On April 1, 2010, 970,000 shares were issued to Audio Eye executives and
CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4: Derivative Liabilities
Garlette LLC
As discussed in Note 2, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The fair value of the instruments was determined to be $246,314 using the Black-Scholes option pricing model. Because the number of shares to be issued upon settlement cannot be determined under this instrument, the Company cannot determine whether it will have sufficient authorized shares at a given date to settle any other of its share-settleable instruments. As a result of this, under ASC 815-15 “Derivatives and Hedging”, all other share-settleable instruments must be reclassified from equity to liabilities. The company had conversion options embedded in related parties notes payable agreements and accrued expenses and 298,000 warrants to purchase the Company’s common stock that were classified in equity as of the date that the Company entered in to the convertible note. The fair value of these instruments on January 7, 2011 was $7,940,752 of which $7,694,438 was reclassified to liabilities, $50,000 recorded as debt discount and $196,314 was recognized $32,010 of stock based compensation.as loss on derivatives.
On July 1, 2010, 650,000 shares were issued for advisory servicesAs a result of the note conversion in January 2011, under ASC 815-15 “Derivatives and Hedging”, the instrument is measured at fair value at the date of termination with the change in fair value recorded to earnings. The fair value of these instruments on January 18, 2011 was $7,894,220 and this value was reclassified out of liabilities to equity and $46,532 was recognized as a gain on derivatives during the three months ended March 31, 2011.
Asher Enterprises, Inc.
As discussed in Note 3, the Company determined that the instruments embedded in the convertible note should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The fair value of the instruments was determined to be $85,106 using the Black-Scholes option pricing model. Because the number of shares to be issued upon settlement cannot be determined under this instrument, the Company cannot determine whether it will have sufficient authorized shares at a given date to settle any other of its share-settleable instruments. As a result of this, under ASC 815-15 “Derivatives and Hedging”, all other share-settleable instruments must be reclassified from equity to liabilities. The company had conversion options embedded in related parties notes payable agreements and accrued expenses and 698,000 warrants to purchase the Company common stock that were classified in equity as of the date that the Company entered in to the convertible note. The fair value of these instruments on March 15, 2011 was $3,213,345 of which $3,128,239 was reclassified to liabilities, $75,000 recorded as debt discount and $10,106 was recognized $29,250 of stock based compensation.as loss on derivatives.
Warrants:
DuringUnder ASC 815-15 “Derivatives and Hedging” the nine months ended September 30, 2010, 250,000 warrantsliabilities were issued in connectionsubsequently measured at fair value at the end of each reporting period with the acquisition of Audio Eye and 6,772,500 warrants were issuedchange in connection with the 13% Senior Secured Convertible Extendible Notes. See Notes 3 and 4 for details on the valuationfair value recorded to earnings. The fair value of these warrants.
A summary of warrant activity for the nine months ended September 30, 2010 isinstruments on March 31, 2011 was $2,146,247 and $1,067,098 was recognized 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 | |
gain on derivative.
The warrants have a weighted average remaining life of 6.2 years and an aggregate intrinsic value of $197,000.following table summarizes the derivative liabilities included in the consolidated balance sheet:
Derivative Liabilities | | | |
Balance at December 31, 2010 | | $ | - | |
ASC 815-15 additions (Garlette, LLC) | | | 7,940,752 | |
Change in fair value (Garlette, LLC) | | | (46,532 | ) |
ASC 815-15 deletion (Garlette, LLC) | | | (7,894,220 | ) |
ASC 815-15 additions (Asher Enterprises, LLC) | | | 3,213,345 | |
Change in fair value (Asher Enterprises, LLC) | | | (1,067,098 | ) |
Balance at March 31, 2011 | | $ | 2,146,247 | |
The following table summarizes the derivative gain or loss recorded as a result of the derivative liabilities above:
| | Three Months | |
| | Ended | |
Gain/(Loss) on derivative liabilities | | March 31, 2011 | |
Change in fair value (Garlette, LLC) | | $ | 46,532 | |
Excess of fair value of liabilities over note payable (Garlette, LLC) | | | (196,314 | ) |
Change in fair value (Asher Enterprises, LLC) | | | 1,067,098 | |
Excess of fair value of liabilities over note payable (Asher Enterprises, LLC) | | | (10,106 | ) |
Total | | $ | 907,210 | |
The company values its warrant derivatives and all other share settleable instrument using the Black-Scholes option pricing model. Assumption used include (1) 0.19% to 1.96% risk-free interest rate, (2) life is the remaining contractual life of the instrument (3) expected volatility 252% to 488%, (4) zero expected dividends, (5) exercise price as set forth in the agreements, (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.
CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: Legal Proceedings
We are subject to certain claims and litigation in the ordinary course of business. It is the opinion of management that the outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. In February, 2011, the Company was served with a lawsuit filed by a former employee in the United States District Court for the Southern District of Florida. The complaint alleges breach of employee contract and entitlement to additional equity in the Company. The Company disagrees with the allegations contained in the Complaint and intends to vigorously defend the matter and otherwise enforce its rights with respect to the matter. The Company has retained counsel and is prepared to defend this lawsuit. A motion to dismiss the complaint has been filed and said motion is presently pending a ruling by the Court. The Company believes that all of the employee's claims are frivolous or are barred pursuant to the terms of the contract or various releases executed in favor of the Company by the employee. The Company intends to seek damages against the former employee regarding breach of his employment agreement, his non-compete agreements and other causes of action. The case is still ongoing and the matter remains unresolved.
On April 21, 2011, the company was served with a lawsuit that was filed in Clark County, Nevada against the company by A to Z Holdings, LLC and seven other individuals or entities. The complaint alleges, among other things, that the company’s Board of Directors did not have the power to designate series A and B preferred stock without amending the articles of incorporation. The complaint also alleges any such amendment would require shareholder approval and filing of a proxy statement. The company has retained counsel in Nevada to represent it in this matter and intends to vigorously defend same. The company believes that most, if not all, of the allegations contained in the lawsuit is moot and/or not actionable and further believes that the Plaintiffs lack standing to pursue their claim against the company. The company, through counsel, is in the process of conducting discovery to ascertain the validity of the Plaintiffs’ claims and their standing to bring this lawsuit and, upon completion of discovery, will file appropriate pleadings with the Nevada court to attempt to have the complaint, as filed, dismissed.
The management believes the likelihood of a loss to the pending litigations is remote.
NOTE 6: COMMITMENTS AND CONTINGENCIES
On February 25, 2011, The Company’s subsidiary XA Scenes and XA, The Experiential Agency, Inc. signed a separation agreement with Waterfront NY Realty Corporation regarding their office space located at 640 West 28th Street, New York NY. The separation agreement included the vacating of the premises on February 25, 2011, the payment of $50,000 on February 25, 2011, the full release from all of obligations under the Lease for &e. subject commercial premises located at 636-.642 West 28th Street, New York, NY 10001. The $50,000 payment was accrued as of March 31, 2011.
NOTE 6:7: RELATED PARTY TRANSACTIONS
On January 1, 2010,From time to time the company borrows money from its officers. These advances from the officers bear no interest and they are due on demand. During the three months ended March 31, 2011, $306,749 was advanced from and $50,000 was paid back to the officers. As of March 31, 2011, the Company owes $384,187 as related party debt to three officers and its executive management entered into employment agreements, effective upone management. There were a total of related party payables of $127,438 due 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 thanofficers at 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. 2010.
On September 30, 2010 and December 31, 2010, the Company and its executive management entered into a deferred salary conversion agreement regarding 2010 salary payables and 2009 deferred salary payables considerationagreements in order to assistassists 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$1,046,702 unsecured notes 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.with a maturity date on March 31, 2012. The notes areis convertible byinto the executivesCompany’s common shares at $0.06 and $0.02 for the average closing price of the Company stock from January 1, 2010 throughagreements entered on September 30, 2010 which was $0.057 per share.and December 31, 2010 respectively. The executives have agreed to amend the agreements to increase the interest rate to a market rate and increaseCompany analyzed the conversion priceoption under ASC 470-20 “Debt with Conversion and Other Options” and determined there was a beneficial conversion feature resulting in a discount to the closing price at September 30, 2010.
Related parties advancednote of $879,161. During the Company $84,938 for working capital purposes during the ninethree months ended September 30, 2010.March 31, 2011, $67,683 of the discount was amortized to interest expense. As of March 31, 2011 and December 31,2010, the principal balance for the related parties debt is $1,046,702, net of amortized discount of $774,141 and $841,824, respectively.
NOTE 7: SEGMENTS
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 restructuring 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.
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 | | | - | |
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 10:8: 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 transactionOn April 18, 2011, the Company assigned $41,398 of its technologyaccounts payable from a third party to Vail School District in Arizona, related toAware Capital Consultants, Inc. On May 6, 2011 the use of Audio Eye’s technology withinCompany modified the payables into a technology product,convertible debenture. The Bio Metric Display System (BDS). Audio Eye CEO Nathaniel Bradleydebenture 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 5,375,000convertible into common shares pursuant toat 50% of the 2010 Note Purchase Agreement betweenaverage of the Company and CMGO Investors, LLC providingclosing prices for the sale and issuancecompany's stock during the previous 30 trading days. $20,000 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 3,695,310Note amount was immediately converted into 655,737 shares of which 1,015,314 shares were assigned to AtoZ Holdings, LLC, 1,906,560 sharescommon stock were assigned to Infinite Alpha, Inc. and 773,438 shares were assigned to Grassy Knolls, LLC.on May 6, 2011.
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.
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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which includes, but are not limited to, statements concerning expectations as to our revenues, expenses, and net income, our growth strategies and plans, the timely development and market acceptance of our products and technologies, the competitive nature of and anticipated growth in our markets, our ability to achieve cost reductions, the status of evolving technologies and their growth potential, the adoption of future industry standards, expectations as to our financing and liquidity requirements and arrangements, the need for additional capital, and other matte rsmatters that are not historical facts. These forward-looking statements are based on our current expectations, estimates, and projections about our industry, management’s beliefs, and certain assumptions made by it. Words such as “anticipates”, “appears”, “believe,”, “expects”, “intends”, “plans”, “believes, “seeks”, “assume,” “estimates”, “may”, “will” and variations of these words or similar expressions are intended to identify forward-looking statements. All statements in this Quarterly Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. Therefore, actual results could differ materially and adversely from those results expressed in any forward-lookin gforward-looking statements, as a result of various factors. Readers are cautioned not to place undue reliance on forward-looking statements, which are based only upon information available as of the date of this report. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Quarterly Report was filed with the Securities and Exchange Commission (“SEC”). We expressly disclaim any obligation to revise or update publicly any forward-looking statements even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders. Unless the context indicates otherwise, the terms “Company”, “Corporate”, “CMGO”, “our”, and “we” refer to CMG Holdings, Inc. and its subsidiaries.
RESULTS OF OPERATIONS FOR THE NINE MONTHSTHREE MONTH PERIOD ENDED SEPTEMBER 30,MARCH 31, 2010 AND 2009
Gross revenues increaseddecreased from $2,991,493 $1, 286,599 for the ninethree months ended September 30, 2009March 31, 2010 to $3,859,490$787,483 for the ninethree months ended September 30, 2010.March 31, 2011. The increasedecrease in revenues iswas mainly due to new client business generated that was secured during the revenues generated from the event marketing, public relations, consulting businessfirst quarter of The Experiential Agency, Inc (“XA”), a wholly-owned subsidiary acquired in2011 but was serviced during the second quarter of 2009 that has build up new business pipeline of new clients. The increase2011 in revenues also includes revenues from new business generated from licensing of the patented technology from the Audio Eye, Inc. a wholly-owned subsidiary acquired in 2010.
Cost of revenues 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 eventour events marketing, public relations and consulting business of XA, The Experiential Agency, Inc. (“XA”), a wholly-owned subsidiary acquired(XA).
Cost of revenue decreased from $709,006 for the three months ended March 31, 2010 to $332,331 for the three months ended March 31, 2011. The decrease in cost of goods sold was due to the cost of sales associated with the new revenues being allocated to the second quarter of 2009 that has build up2011 inside our our events marketing, public relations and consulting business of XA, The Experiential Agency, Inc. (XA) regarding new client business pipeline of new clients.secured during the first quarter.
Operating expenses increased from $2,349,875$832,744 for the ninethree months ended September 30, 2009March 31, 2010 to $3,773,338$957,207 for the ninethree months ended September 30, 2010.March 31, 2011. The increase in operating expenses is mainly due to the increase in personnel, rent and operating expenses from three months of operations related to AudioEye, Inc that was not included in 2010. Also included was increase operating expenses related to the new business and increased personnel, marketing, professional fees and operations fromrevenues generated for XA for the eventthree months ended March 31. 2011.
The net income of $68,441 for the three months ended March 31, 2010 decreased to a net loss of $198,380 for the three months ended March 31, 2011. The decrease in net income was mainly due to additional operating expenses associated with Audioeye Inc as part of the company for a full three months during 2011 as the acquisition of Audioeye was finalized during the end of the first quarter for 2010. There are additional operating expenses associated with the events marketing, public relations and consulting business of XA, bad debtThe Experiential Agency, Inc. (XA) to service new clients during the first quarter of 2011 that was not reflective in first quarter of 2010. There were also additional overhead accounting and legal expenses and includes additional operating expenses from months of activity from the inclusion of the purchase of Audio Eye, Inc. a wholly-owned subsidiary acquiredassociated with corporate overhead that was in first quarter 2011 that was not reflective in 2010 first quarter.