QUARTELY REPORT SEPTEMBER 30, 2010

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 ended September 30, 2010March 31, 2011
 
 
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 22, 2010,May 26, 2011, there were 63,525,66261,977,266 common stock of the registrant issued and 63,468,488 shares outstanding.                  

 
 
1
 

 
CMG HOLDINGS, INC.
 FORM 10-Q

TABLE OF CONTENTS

Item # DescriptionPage Numbers
    
  PART I3
    
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)F-13
    
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS39
    
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK510
    
ITEM 4 CONTROLS AND PROCEDURES11
    
  PART II 
    
ITEM 1 LEGAL PROCEEDINGS1112
    
ITEM 1A RISK FACTORS1112
    
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1112
    
ITEM 3 DEFAULTS UPON SENIOR SECURITIES1412
    
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS1412
    
ITEM 5 OTHER INFORMATION1412
    
ITEM 6 EXHIBITS1413
    
  SIGNATURES14
    
    
EXHIBIT31.1 SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER 
    
EXHIBIT 31.2 SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER 
    
EXHIBIT 32.1 SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER 
    
EXHIBIT 32.2 SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER 


 
2
 
 
 
PART I

ITEM 1:                       CONSOLIDATED FINANCIAL STATEMENTS


CMG HOLDINGS, INC.
 UNAUDITED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
 
 
 CONTENTS
 ______________________________________________________________________________________
 
Consolidated Balance Sheets as of September 30, 2010March 31, 2011 and December 31, 20092010 (Unaudited)F-24
 
Consolidated Statements of Operations for the three months ended March 31, 2011 and nine months ended September 30, 2010 and 2009 (Unaudited) F-35
 
Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2011 and 2010 and 2009 (Unaudited)F-46
 
Notes to Consolidated Financial Statements (Unaudited)F-57
 
F-1
3
 

CMG HOLDINGS, INC
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
  March  31, 2011  December 31, 2010 
ASSETS      
       
CURRENT ASSETS:      
Cash $790,517  $13,695 
Investments  72,002   49,006 
Accounts receivable  372,921   204,147 
Inventory  3,240,502   -- 
Prepaid and other current assets  314,933   71,497 
Total current assets  4,790,875   338,345 
Property and equipment, net of accumulated depreciation of $76,677 and $56,357  131,200   151,520 
         
Intangible assets, net accumulated amortization of $596,665 and $522,082, respectively  320,173   394,756 
TOTAL ASSETS $5,242,248  $884,621 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
CURRENT LIABILITIES:        
Client payable $11,317  $11,317 
Accounts payable  1,882,825   1,713,300 
Accrued liabilities  1,070,381   868,454 
Deferred income  1,183,111   39,319 
Derivative liabilities  2,146,247   -- 
Short term debt, net of unamortized discount of $107,055 and $67,063, respectively  1,042,945   1,007,937 
Line of credit  76,487   183,478 
Advances from related parties – current portion  656,748   127,438 
TOTAL CURRENT LIABILITIES  8,070,061    3,951,243 
         
Advance from related parties – long term  --   204,878 
         
TOTAL LIABILITIES  8,070,061    4,156,121 
         
STOCKHOLDERS’ DEFICIT        
Preferred stock:        
Series A Convertible Preferred Stock; 5,000,000 shares authorized;  par value $0.001 per share; none issued and outstanding   $--   -- 
Series B Convertible Preferred Stock; 5,000,000 shares authorized;  par value $0.001 per share; 50,000 and 0 shares issued and outstanding  50   -- 
Common stock:        
150,000,000 shares authorized,  par value $0.001 per share; 61,284,355 and 58,165,988 shares issued and outstanding  61,284   58,166 
Additional paid in capital  7,911,561   7,272,662 
Treasury stock, 37,174 and 37,174 shares held, respectively.  37   37 
Accumulated deficit  (10,800,745)  (10,602,365)
         
TOTAL STOCKHOLDERS’ DEFICIT  (2,827,813 )  (3,271,500)
         
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $5,242,248  $884,621 
 
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 unaudited consolidated financial statements
F-2
 
 
4
 
 

CMG HOLDINGS, INC 
CONSOLIDATED STATEMENTS OF OPERATIONS 
(unaudited) 
  
  
  Three months ended Nine months ended 
  September 30, September 30, 
  2010  2009 2010 2009 
     (Restated)   (Restated) 
                 
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  1,650,557   757,584   3,773,338   2,349,875 
                 
 Operating income (loss)  (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  --   --   405,759   81,616 
Gain on Extinguishment of Debt  --   --   --   19,565 
Interest expense  (144,708)   (485,528)  (224,908)  (615,857) 
Interest income  --   9,255   49   61,562 
                 
 Net income (loss) $(1,097,665)  $(455,275)  $(1,488,886)  $(420,656) 
                 
Basic and diluted loss per common share $(0.03)  $(0.01)  $(0.04)  $(0.01) 
                 
                 
Basic and diluted weighted average common shares outstanding  42,355,761   32,638,474   40,775,906   32,033,844 
                 
CMG HOLDINGS, INC 
CONSOLIDATED STATEMENTS OF OPERATIONS 
(unaudited) 
  
  
    
  
Three Months Ended March 31,
 
  2011  2010 
       
Gross revenues $787,483  $1,286,599 
Cost of revenue  332,331   709,006 
Gross margin  455,152   577,593 
         
Amortization expense  259,077   74,583 
Operating expenses  957,208   832,744 
         
Operating gain/(loss)  (761,133)  (329,734)
         
Other income (expense)        
Bargain purchase gain  --   405,759 
Loss on settlement of debt  (148,022)  -- 
Gain on derivative liability  907,210   -- 
Other income  22,996   -- 
Interest expense  (219,431)  (7,584)
         
 Net income (loss) $(198,380) $68,441 
         
Basic income (loss) per common share $(0.00) $0.00 
Diluted income (loss) per common share  (0.00)  0.00 
         
         
Basic weighted average common shares outstanding  59,530,993   38,460,404 
 
Diluted weighted average common shares outstanding
  59,530,993   40,591,654 



See accompanying notes to unaudited consolidated financial statements

F-3

 
5
 

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   -- 
   Three Months Ended 
  March 31, 
  2011  2010 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income/ (loss) $(198,380)   $68,441 
Adjustments to reconcile net income        
      to net cash used in operating activities:        
           Bargain purchase gain  --   (405,759) 
           Amortization of deferred financing costs  31,803   -- 
           Shares issued for services  --   31,500 
           Amortization of intangible assets  74,583   74,583 
           Depreciation expense  20,320   -- 
           Loss on settlement of debt  148,022   -- 
           Realized gain on trading securities  (22,996)   -- 
           Gain on derivative  (907,210)   -- 
           Amortization of debt discount  152,691   5,400 
Changes in:        
 Accounts receivable  (168,774)   (37,375) 
            Prepaid expense and other current assets  (275,239)   3,000 
            Deferred income  1,137,548   (19,600) 
            Accrued liabilities  208,171   225,135 
 Accounts payable   169,525   295,356 
         
 Net cash provided by operating activities  370,064   240,681 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
        Cash received from acquisition of Audio Eye, Inc.  --   3,217 
Net cash provided by investing activities  --   3,217 
         
CASH FLOWS FROM FINANCING ACTIVITIES        
        Payments on related parties debt  (50,000)   -- 
        Advances from related parties  306,749   -- 
        Proceeds from issuance of debt  75,000   -- 
        Stock issued for cash  82,000   -- 
        Net borrowings on line of credit  (6,991)   2,184 
Cash provided by financing activities  406,758   2,184 
         
Net increase in cash  776,822   246,082 
Cash, beginning of period  13,695   32,968 
Cash, end of period $790,517  $279,050 
Supplemental cash flow information:        
         Interest paid $    34,943  $     -- 
         Income taxes paid $--  $-- 
Non-cash investing activity:        
         Acquisition of Audio Eye, Inc. $ --  $502,542 
         Preferred stock issued for inventory  3,240,502   -- 
         Discount on notes payable from derivative liability  75,000   -- 
         Common stock issued for settlement of notes payable  100,000   -- 
         Reclassification of derivative liabilities from additional paid-in-capital  10,822,677   -- 
         Reclassification of derivative liabilities to additional paid-in-capital  7,894,220   -- 
         Reclassification of long term related parties debt to short term  204,878   -- 
         


See accompanying notes to unaudited consolidated financial statements
F-4
 
 
6
 

CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 – BASIS–BASIS OF PRESENTATION

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 contained in its 20092010 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 re sultsresults 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 footnotes 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, 20092010 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 2009,2010, as reported in the Form 10-K, have been omitted.

FormationPrinciples of Empire Technologies, LLC

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.Consolidation

The consolidated financial statements include the accounts of CMG Holdings, Inc., CMG Acquisition, Inc., CMGO Capital, Inc., The Experiential Agency, Inc, Audio Eye, Inc., CMGO Logistics, Inc., Empire Technologies, LLC and Creative Management Group, Inc. after elimination of all significant inter-company accounts and transactions. 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 to date.
Earning per share


PrinciplesBasic earnings per share (“EPS”) is calculated by dividing net income available to common stockholders by the weighted average number of consolidationshares of the Company’s common stock outstanding during the period. Diluted EPS reflect the potential dilution that could occur if the Company’s share-based awards were exercised into common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. The following represents a reconciliation of the numerators and denominators of the basic and diluted EPS computations:

The consolidated financial statements include the accounts of CMG Holdings, Inc., CMG Acquisition, Inc., CMGO Capital, Inc., The Experiential Agency, Inc, Audio Eye, Inc., CMGO Logistics, Inc. and Creative Management Group, Inc. after elimination of all significant inter-company accounts and transactions.
  Three Months Ended March 31, 2011  Three Months Ended March 31, 2010 
                   
  Net Income/ (Loss)  Shares  Per Shares  Net Income  Shares  Per Shares 
  Numerator  Denominator  Amount  Numerator  Denominator  Amount 
Basic EPS  (198,380)  59,530,993   0.00   68,441   38,460,404   0.00 
Effect of dilutive securities  -   -       -   -     
Warrants  -   -       -   2,131,250     
Diluted EPS  (198,380)  59,530,993   0.00   68,441   40,591,654   0.00 

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 during the six months ended June 30, 2009. The note matured on June 15, 2009 and additional $50,000 in fees and 400,000 warrants were issued to the note 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 fees, $57,500 in additional paid-in-capital to record the fair value of the 1.4 million warrants and $107,500 in interest expense.

In the fourth quarter of fiscal 2009, the Company’s management determined that there were errors in the accounting for the acquisition of XA The Experiential Agency, Inc, which resulted in the overstatement of intangibles, leasehold improvements, amortization related to the intangibles and leaseholder improvements and the bargain purchase gain.

 
7
 
 
Therefore,
CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Measurements

As defined in ASC 820 “Fair Value Measurements”, 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 is adjusting its previouslyutilizes 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 measurement) 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 September 30, 2009 consolidated statementsdate. 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 operations and cash flowsthese 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 September, 2010 quarterly filing. category 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 tables reflecttable sets forth by level within the impactfair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2011. 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 above errorssignificance of a particular input to the consolidated statementsfair value measurement requires judgment, and may affect the valuation of operations forfair value assets and liabilities and their placement within the three and nine months ended September 30, 2009:fair value hierarchy levels.

  March 31, 2011 
  Level 1  Level 2  Level 3  Total 
Derivative Liabilities  -   -   2,146,247   2,146,247 


NOTE 2: EQUITY
 
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:   ACQUISITIONSPreferred Stock

Series B Preferred Stock and Inventory Purchase

On March 31, 2010,2011 the Company acquired all outstanding20,000 cartoon animated cels (the “Cel Art”) from Continental Investments Group, Inc. (the “Agreement”).  The Company issued 50,000 shares of Audio Eye,its Series B Convertible Preferred Stock to Continental Investments Group, Inc. in exchangeas consideration for $30,000 cash, 1.5 millionthe Cel Art, such shares warrantsof Series B Convertible Preferred Stock having a stated value per share of $100.   The Cel Art consists of collectible, hand-painted cartoon animation cels.  The shares of Series B Preferred Stock are convertible into common shares of the Company at the stated value of $100 per share divided by the volume weighted average trading price for the 30 days prior to purchase 250,000conversion.  The preferred shares at an exerciseare non-voting and do not receive dividends.  The Company determined the fair value of the preferred stock to be $3,240,502 on the acquisition date based on the number of shares of common stock the preferred shares could be converted into and the market 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 usersthe common stock on any internet connected device.  With this acquisition, the Company expects to be a leading provideragreement date.  This amount was  recorded as inventory in the Internet content publication and distribution software enabling the conversionconsolidated balance sheet as of any media into accessible formats and allows for real time distribution to end users on any network conne cted device.March 31, 2011.

 
8
 
 CMG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The cartoon animated cels are valued at the lower of cost or market. Management will writes down the inventories to market value if it is below cost. The Company also analyzed the embedded conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the conversion option should be classified as equity.

Series A Preferred Stock Issuance and Rescission

On March 31, 2011 the Company approved the issuance of 51 shares of preferred stock designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”) to three officers of the Company in consideration for the officers forgiving $300,000 of accrued salaries.  Each share of Series A Preferred Stock is convertible into 1% of the Company’s common stock.  The number of votes for the Series A Preferred Stock shall be the same number as the amount of shares of Common Stock that would be issued upon conversion.  The Series A Preferred Stock is not entitled to dividends or preference upon liquidation.

On May 16, 2011 the Company rescinded the above agreement with an effective date of March 31, 2011.  There are no shares of Series A Preferred Stock issued or outstanding as March 31, 2011.  There was no impact to the consolidated financial statements as a result of the above issuance and rescission.

Common Stock:

Garlette LLC

On January 6, 2011 the Company assigned $50,000 of debt owed to Morgan Stanley Smith Barney to Garlette, LLC.  On the same date, the Company amended the assigned debt to add a conversion feature.  The new note was convertible at 25% of the average of the five lowest closing prices for the company's stock during the previous 30 trading days.  The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion feature should be classified as a liability due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The embedded conversion feature was measured at fair value at inception and on the date of conversion (see below) with the change in fair value recorded to earnings.  The addition of the embedded conversion option resulted in a full discount to the note of $50,000 on January 6, 2011.  See Note 4 for additional information on the derivative liability.

$25,000 of the note was converted on January 7, 2011 into 357,143 shares of common stock. The remaining $25,000 was converted on January 18, 2011 into 357,143 shares of common stock.  As a result of the conversion, the entire discount of $50,000 was amortized to interest expense during the three months ended March 31, 2011.

American Settlement LLC

On February 17, 2011 the company assigned $25,000 of debt owed to Morgan Stanley Smith Barney to American Settlements, LLC.  On the same date, the Company issued 548,246 shares of common stock with a fair value of consideration transferred in$98,684 to settle the acquisition,note.  The difference between the assets acquiredfair value of the common stock and the liabilities assumed are set forth indebt was recorded as a loss on settlement of debt during the following table:three months ended March 31, 2011.
On March 21, 2011 the company assigned 25,000 of debt owed to Morgan Stanley Smith Barney to American Settlements, LLC.  On the same date, the Company issued 735,835 shares of common stock with a fair value of $99,338 to settle the note.  The difference between the fair value of the common stock and the debt was recorded as a loss on settlement of debt during the three months ended March 31, 2011.

Shares and Warrants Issued for Cash

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 receivable196,119
Property and equipment294,387
Other assets32,500
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,During the three months ended March 31, 2011, four individuals purchased purchased 1,120,000 shares of common stock, 224,000 A Warrants and 224,000 B Warrants for $82,000.  The A Warrants are exercisable at a strike price of $0.25 for three years, and the B Warrants are exercisable at a strike price of $0.50 for three years.  The Company can call each of the Warrants after twelve months if 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 also loaned The Experiential Agency, Inc. $100,000 in March 2009 which has been accounted for as partCommon Shares of the purchase price. On April 1, 2009, CMG Holdings, Inc. foreclosed onCompany in the note and completed the acquisitionMarket is 150% of the assets of The Experiential Agency, Inc.Warrant strike price for 10 consecutive days.

 
9
 
 
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.

 
10
 
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.

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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.

 
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 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.
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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 10:8:  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.

 
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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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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.

 
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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 is mainly due to the increase in the legal expenses pertaining to the 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 interactive marketing.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

Gross revenues increased from $933,742 for the three months ended September 30, 2009 to $1,005,237 for the three months ended September 30, 2010. The decrease in revenues is mainly due to the delay in the generation of new business related to Creative Management Group and the implementation activity of new business associated with the purchase of Audio Eye, Inc. The new business for Audio Eye is forecasted to be reflective into the remainder of the calendar year. The decrease in revenues generated is offset 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.

Cost of revenues increased from $155,160 for the three months ended September 30, 2009 to $297,663 for the three months ended September 30, 2010. The increase 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 purchase 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 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, 2010,March 31, 2011, the Company’s cash balanceon hand was $151,755.$790,517.
 
Cash provided by operations for the ninethree months ended September 30, 2009March 31, 2010 was $100,462,$240,681, as compared to cash used inprovided by operations of  $809,675$370,064 for the ninethree months ended September 30, 2010.March 31, 2011. This change is primarily due to amortization of intangible assets, shares issuedstock expenses for services, deferred revenue and accrued expenses related to the increase in accruedoperating expenses due to increased operating expenses resulting from increased personnel and operations from the event marketing, public relations, and consulting business of XA and the purchase of the business operations of Audio Eye, Inc.XA.

Cash used in investing activities for the ninethree months ended September 30, 2009March 31, 2010 was $250,000,$3,217 as compared to cash used inprovided by investing activities of $5,294$0 for the ninethree months ended September 30, 2010.March 31, 2011. For the nine months ended September 30, 2009, the Company incurred $250,000 for the acquisition of assets of XA to obtain a note receivable from a financial institution and for the ninethree month ended September 30,March 31, 2010, the incurred $30,000 for to acquisition of Audio Eye, Inc. and purchase of fixed assets of $11,287 and cash received of $3,217 resulted from the acquisition of Audio Eye, Inc.

Cash provided by financing activities for the ninethree months ended September 30, 2009March 31, 2010 was $260,763,$2,184, as compared to $933,756$406,758 provided for the ninethree months ended September 30, 2010. In 2009,March 31, 2011. The increase during the Company borrowed $20,750three months ended March 31, 2011, was primarily due to the company increased its debt from related parties by $256,749 and increased 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 Notesdebt from third parties totaling $1,075,000, for the purchaseby $75,000 and increased cash from sale of Audio Eye, Inc. and for working capital purposes.restricted common stock to third parties by $82,000.


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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of November 22,May 20, 2010, information with respect to the beneficial ownership of the Company’s Common Stock by (i) each person known by the Company to own beneficially 5% or more of such stock, (ii) each Director of the Company who owns any Common Stock, and (iii) all Directors and Officers as a group, together with their percentage of beneficial holdings of the outstanding shares. The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a "beneficial owner" of a security if that person has or shares the power to vo tevote 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 listed below have sole voting and investment power with respect to the shares shown.
 

 SECURITY OWNERSHIP OF MANAGEMENT:
 Title of Class Name Shares  Percent 
        
Common StockAlan Morell  10,107,000   15.91% 
Common StockJames J. Ennis  3,500,000   5.51% 
Common StockMichael Vandetty  1,000,000   1.57% 
 All Directors and Executive Officers   14,607,700   22.99% 

Title of ClassName Shares  Percent 
        
Common StockAlan Morell  10,107,000   14.3%
          
 Common StockJames J. Ennis  3,500,000   4.9%
          
 Common StockMichael Vandetty  1,000,000   1.5%
          
All Directors and Executive Officers  14,607,000   20.6%

These tables are based upon 63,525,66270,810,592 shares outstanding as of November 22, 2010May 23, 2011 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.
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(1)Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned, subject to community property laws where applicable. The number and percentage of shares beneficially owned are based on 63,525,66270,810,592 shares of common stock outstanding. The address for those individuals for which an address is not otherwise indicated is: c/o CMG Holdings, Inc., 5601 Biscayne Boulevard, Miami, Florida 33137, USA.
 
 (2)Mr. Morell owns 3,500,000 shares of The Company directly, and is the beneficial owner of additional 6,607,000 shares owned by Commercial Rights Intl Corp. for a total of 10,107,000 shares.
  
(3)Mr. Ennis owns 1,500,000 shares of The Company directly, and is the beneficial owner of an additional 2,000,000 shares owned by Hastings Creek Group, Inc. for a total of 3,500,000 shares.


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ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS

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 mitlimit 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 creasedincreased 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.

THE RESULTS OF OPERATIONS ARE SUBJECT TO CURRENCY FLUCTUATION RISKS

Although the Company’s financial results are reported in U.S. dollars, a portion of its revenues and operating costs may be denominated in currencies other than the US dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and other currencies, may affect the Company’s financial results and competitive position.
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%22% 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’smanagement’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.

 
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OUTSTANDING INDEBTEDNESS; SECURITY INTEREST AND UNREGISTERED SALES OF EQUITY SECURITIES

On April 1, 2010, the Company entered into a Note Purchase Agreement with CMGO Investors, LLC, a Delaware limited liability company, providing for the sale and issuance of (i) $725,000 of its 13% Senior Secured Convertible Extendible Notes due 2011 and (ii) warrants to purchase 3,625,000 shares of the Company’s Common Stock.    The Note bears interest at a rate of 13% per annum payable quarterly.  The entire amount of the Note, together with all accrued but unpaid interest thereon, is due and payable in full on July 1, 2011; provided that, so long as there is no continuing Event of Default, the Company may in its sole discretion e xtendextend 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 hwith 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.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.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 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 eefee 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.

 
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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
 
22
PUBLIC COMPANY COMPLIANCE MAY MAKE IT MORE DIFFICULT TO ATTRACT AND RETAIN OFFICERS AND DIRECTORS
 
The Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public entity, the Company expects these new rules and regulations to increase compliance costs in 20092010 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.

18
 
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 chaserspurchasers 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’sCompany’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.
  
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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 cideddecided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.
 
 
THE ELIMINATION OF MONETARY LIABILITY AGAINST THE COMPANY’S DIRECTORS, OFFICERS AND EMPLOYEES UNDER NEVADA LAW AND THE EXISTENCE OF INDEMNIFICATION RIGHTS TO THE COMPANY’S DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL EXPENDITURES BY THE COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST THE COMPANY’S DIRECTORS, OFFICERS AND EMPLOYEES

 
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The Company’s certificate of incorporation does not contain any specific provisions that eliminate the liability of directors for monetary damages to the Company and the Company’s stockholders; however, the Company is prepared to give such indemnification to its directors and officers to the extent provided by Nevada law. The Company may also have contractual indemnification obligations under its employment agreements with its executive officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which the Company may be unable to recoup.
These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors and officers for breaches of their 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.stockholders


ITEM 4:    CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of the end of the period covered by this report and concluded that our disclosure controls and procedures were not effective to ensure that all material information required to be disclosed in this Quarterly Report on Form 10-Q has been made known to them in a timely fashion. We are in the process of improving our internal control over financial reporting in an effort to remediate these deficiencies through improved supervision and training of our accounting staff. These deficiencies have been disclosed to our Board of Directors. We believe that this effort is sufficient to fully remedy these deficiencies and we are continuing our efforts to improve and strengthen our control processes and procedures. Our Chief Executive Officer, Chief Financial Officer and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in the Company’s internal control over financial reporting occurred during the ninethree months ended September 30,March 31, 2010, that materially affected, or is reasonably likely to materially affect, the Company s internal control over financial reporting.
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PART II
 
ITEM 1 – 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. On September 2, 2010,In February, 2011, the Company became aware that it had been named as a Defendant inwas 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. Although the Company has not been served with the lawsuit, theThe Company has retained counsel and is prep aredprepared to defend this lawsuit inlawsuit. A motion to dismiss the event that itcomplaint has been filed and said motion is eventually served with process.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. If served, theThe Company willintends 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 are 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. 


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ITEM 1A – RISK FACTORS

Registrant is a smaller reporting company and is therefore not required to provide this information.

ITEM 2 –2:  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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 tandingoutstanding 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 arketmarket 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.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 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 eefee 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.

On February 1, 2011, an individual purchased 250,000 units at $0.10 each for a total sum of $25,000. Each Unit consists one Common Share and with a detachable A and B Warrant.  The A Warrant is for 20% of the Shares represented herein at a strike price of $0.25 for three years, and the B Warrant is for 20% of the Shares represented herein at a strike price of $0.50 for three years.  The Company can call each of the Warrants after twelve months if the price of the Common Shares of the Company in the Market is 150% of the Warrant strike price for 10 consecutive days.

On March 11, 2011, an individual purchased 333,333 units at $0.06 each for a total sum of $20,000. Each Unit consists one Common Share and with a detachable A and B Warrant.  The A Warrant is for 20% of the Shares represented herein at a strike price of $0.25 for three years, and the B Warrant is for 20% of the Shares represented herein at a strike price of $0.50 for three years.  The Company can call each of the Warrants after twelve months if the price of the Common Shares of the Company in the Market is 150% of the Warrant strike price for 10 consecutive days.
 
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On March 11, 2011, an individual purchased 416,667 units at $0.06 each for a total sum of $25,000. Each Unit consists one Common Share and with a detachable A and B Warrant.  The A Warrant is for 20% of the Shares represented herein at a strike price of $0.25 for three years, and the B Warrant is for 20% of the Shares represented herein at a strike price of $0.50 for three years.  The Company can call each of the Warrants after twelve months if the price of the Common Shares of the Company in the Market is 150% of the Warrant strike price for 10 consecutive days.
On March 14, 2011 the company signed a convertible promissory note agreement with Asher Enterprises, Inc. for the sum of $75,000, together with any interest as set forth herein due on December 16, 2011 and to pay interest on the unpaid principal balance hereof at an interest rate of eight percent (8%) per annum from the date hereof until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The convertible promissory note calls 4,510,826 shares to be reserved for issuance upon conversion of this Note and any amount not paid by December 16, 2011 will incur a 22% interest rate. The conversion price will be 58% multiplied by market price which is the average of the lowest three trading prices for the Common Stock during the ten trading day period ending on the latest complete Trading Day prior to the Conversion Date.

ITEM 3 – DEFAULT UPON SENIOR SECURITIES
 
None
 
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5 – OTHER INFORMATION
 
None

 
ITEM 6 – EXHIBITS 
 
Exhibit No.Document Description
 

31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange              Act, as amended.

31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

32.1Certification 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.

32.2Certification 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:
The Company filed a Form 8-K on April 6, 2011   - Item 3.02.   Unregistered Sales of Equity Securities
The Company filed a Form 8-K on April 12, 2011 - Item 2.01.  Completion of Acquisition or Disposition of Assets
The Company filed a Form 8-K on May 16, 2011  - Item 1.02.  Termination of a Material Definitive Agreement
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SIGNATURES

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 May26, 2011
 By:  /s/ ALAN MORELL
 Alan Morell
 Chief Executive Officer and Chairman of the BoardChief Executive Officer and Chairman of the Board
  
 Date: November 22, 2010May 26, 2011
By:  /s/ JAMES J. ENNIS
 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, 2010May 26, 2011 
       
/s/James I. Ennis James I. Ennis CFO & Director November 22, 2010MAy 26, 2011
       


 
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