The accompanying notes are an integral part of these financial statements.
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Primco Management Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Primco Management Inc. (the “Company”) was incorporated under the laws of the state of Delaware on October 14, 2010.
On October 10, 2012, the Company’s board of directors adopted a resolution approving an amendment to our Articles of Incorporation to effectuate an increase of the authorized common shares from 25,000,000 par value $0.001 to 500,000,000 par value $0.001 and additionally authorized a 20 for 1 forward split increasing the number of issued and outstanding common shares from 9,245,600 common shares to 184,912,000 common shares. The forward split did not affect the number of authorized common shares or their par value.
On June 10, 2013, the Company’s board of directors adopted a further resolution approving an amendment to the Articles of Incorporation increasing the authorized common shares from 500,000,000 par value $0.001 to 2,000,000,000 par value $0.00001 and to designate 10,000,000 preferred shares, par value $.00001, to be issued from time to time in one or more series as determined by the board of directors, with the balance being designated as 1,990,000,000 common shares. The amendment to the Articles of Incorporation was effective as of July 8, 2013 and will be reflected therefore in the third quarter, 2013.
On August 6, 2013, the Company filed a Certificate of Designation with the State of Delaware to create and issue a series of 10,000,000 preferred stock to be designated the “Series A Preferred Stock” .These shares rank senior to the common stock with respect to distributions or payments in the event of any liquidation, dissolution, or winding up of the Company.
Effective as of January 31, 2013, the Company executed a reverse merger by entering into a stock purchase agreement whereby the Company acquired all of the assets, contracts and obligations of ESMG Inc. existing as of that date through a cashless exchange of stock. ESMG Inc., which was formed in the state of Nevada on October 9, 2012, is a formative multi-media entertainment enterprise with an active music production and distribution division, as well as having a business plan to launch a motion picture and TV production and distribution division; a radio content syndication division and an on-line interactive sports division. Accordingly, as of January 31, 2013, through the acquisition of ESMG Inc., the Company expanded its operations to include
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entertainment in addition to continuing to offer real estate management and development services.
On May 30, 2013, the Company completed and funded the acquisition of Top Sail Productions, “Top Sail” a music production company and record label with a multi-year US distribution agreement through WEA, a Warner Music Group Company. The Company purchased Top Sail from Chuck Gullo, the principal of Top Sail, who will continue as Senior Executive Consultant to assist in the operation of Top Sail and other entertainment entities owned by the Company.
The Company purchased the membership interests in Top Sail for a total of $440,000. The initial payment was $75,000 and $15,000 worth of the Company’s 5,000,000 restricted common shares. The remaining $350,000 is being paid in installments until June 30, 2016.
On June 30, 2013 the Company purchased D & B Music, Inc. from David Michery our President and CEO, consisting of a music catalog of 41 titles. The consideration paid by the company was the assumption by the Company of a promissory note for $ 242,000 due Pegasus Group, Inc. together with accrued and unpaid interest thereon of $ 114, 841 and the issuance of 7,000,000 of the Company’s Series A preferred stock.
Basis of presentation
The accompanying unaudited interim financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. For the 6 months ending June 30,2013 they include the consolidation of the results if the Company’s operation and those of its wholly-owned subsidiaries, ESMG Inc; Top Sail Productions LLC and D & M Music, Inc. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. The results for the six month periods ended June 30, 2013 and 2012 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2012 filed on Form 10-K.
Development stage enterprise
The Company is a development stage company as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 915 "Development Stage Entities". Since October 14, 2010, the Company has been devoting substantially all of its efforts to establishing new customized real estate management programs for their clients and well as expanding its operations post February 1, 2013 to include entertainment related activities. As such, the Company has not generated significant
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revenues from its operations and has no assurance of future revenues. All losses accumulated since October 14, 2010 have been considered as part of the Company's development stage activities. However, with the various assets that have been acquired, mainly by debt, since February 1, 2013 the Company expects to transition from development stage to full operations by or before fourth quarter 2013 which the corresponding refection of more significant revenue from its music releases first scheduled for digital distribution and sale beginning September, 2013.
Use of estimates
The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates.
Revenue recognition
Operating revenue consists of management income for services provided by the Company to a related party pursuant to a management agreement. Management income is recognized during the period in which the Company provides services in connection with this agreement.
Cash
The Company places its cash and cash equivalents with high quality financial institutions. At times, cash balances may be in excess of the FDIC insurance limits. Management considers the risk to be minimal.
Fair value of financial instruments
All financial instruments are carried at amounts that approximate estimated fair value.
The Company accounts for financial instruments under the guidance of ASC 820-10 – “Fair Value Measurements.” ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
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As of June 30, 2013, the Company’s derivatives, which include the embedded conversion feature on the convertible note payable, were considered level 2 financial instruments. See Note 10 for valuation technique and assumptions used. The respective carrying value of certain on-balance sheet financial instruments approximated their fair values. These financial instruments include cash, prepaids, inventory, intellectual property rights, other assets, accounts payable, accrued liabilities, short-term notes payable and short-term convertible notes payable. Fair values for these items were assumed to approximate carrying values because of their short term nature or they are payable on demand. The Company did not have any level 3 instruments at June 30, 2013
Accounts Receivable
Accounts receivable represent the amount management expects to collect from outstanding balances.
Loss per Share
Net loss per common share is computed by dividing net loss by the weighted average common shares outstanding during the period as defined by ASC Topic 260, "Earnings per Share". Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted
New Accounting Pronouncements
The FASB issues ASUs to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC to (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
Income taxes
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Financial Accounting Standards Board Accounting Standards Codification ASC 740, “Income Tax,” requires the recognition of the impact of a tax position in the financial statements only if that position is more likely than not of being sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of June 30, 2013 and December 31, 2012, the Company had no accrued interest or penalties related to uncertain tax positions.
Research and development
The Company records research and development expense as incurred.
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NOTE 2 – GOING CONCERN
The Company is a development stage company and management of the Company is devoting substantially all of its present efforts to establish new customized real estate management and development programs for its clients and to expand into aspects of the entertainment industry. In the near term, the Company expects operating costs to continue to exceed funds generated from operations.
The Company has not yet generated substantial revenues from its operations and has no assurance of future revenues. As a result, the Company expects to continue to incur operating losses, and the operations in the near future are expected to continue to use working capital. The ability of the Company to continue as a going concern is dependent on its ability to raise capital, through equity and/or convertible debt instruments, to meet its operating requirements.
Our independent auditors, in their report on our financial statements for the year ended December 31, 2012, expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
NOTE 3 – ACCOUNTS RECEIVABLE AND INVENTORY
Accounts receivable represents the net amount due from WEA/Warner Music Group from the sale of Top Sale music CD’s during June, 2013. Inventory represents the finished cost of Top Sail’s music CD’s (including prepaid royalties to music artists) available for resale to consumers, less a reserve of $ 3,729.
NOTE 4 – INTELLECTUAL PROPERTY RIGHTS
Our wholly-owned subsidiary, ESMG Inc, acquired the following intellectual property rights, which are reflected at their original cost as of June 30, 2013:
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4A. Music related rights:
Cost to acquire the exclusive right to produce and/or co-produce original recorded music, and subsequent production and marketing costs, for the worldwide distribution by ESMG Inc. of the following artists:
| |
| Cost to acquire at June 30, 2013 |
Jesse Scott | $300,000 |
V.I.C. | 150,000 |
Hurricane Chris | 150,000 |
Rion Phipps | 150,000 |
Bruce-E-Bee | 25,750 |
Downtown Attraction | 60,000 |
Choo Biggz | 255,600 |
Total cost | $1,091,350 |
Except for Downtown Attraction, Bruce-E-Bee and $5,600 of the Choo Biggz investment, all other acquisitions were financed, or are being financed, through short-term convertible debt instruments. $250,000 of the Company’s financing obligation for the artist Choo Biggz is evidenced by a promissory note due GGAG, Inc. dated May 21,2013, which bears interest at the rate of 8% per annum from December 1,2013.
4B. Motion picture related rights:
Cost to acquire the co-produce and for ESMG Inc. to distribute worldwide the animated motion picture rights to “Bigfoot’s Big Halloween Adventures” (the sequel to “The Legend of Sasquatch’); $275,000. The Company’s financing commitment is evidenced by a promissory note dated November 6, 2012 with Gorilla Pictures, which bears interest at the rate of 8% per annum from June 1, 2013.
NOTE 5 – PREPAYMENTS policy
As explained in Note 14, on June 26, 2013 the Company established the 2013 Stock Awards Plan to attract, retain and motivate employees, directors and person affiliated with the Company, including but not limited to, non-employee consultants. The Plan enabled the Company to set aside a total of 50 million common shares for this purpose. On June 27, 2013 the company issued a total of 40,000,000 shares to four independent financial consultants to providing financial guidance over a 12 month period. The market value of these common shares at that date of issuance was $60,000. Since services commenced July 1, 2013, this cost will be expensed over the period ending June 30, 2014.
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NOTE 6- MUSIC CATALOG
The music catalog represents the cost at June 30, 2013 to acquire D & B Music, Inc. by the Company, on June 30, 2013, which has the worldwide right to reproduce and distribute 41 fully produced titles. The cost of $356,841 represents the assumption of a promissory note, originally dated February 1, 2009, payable in the amount of $242,000 to Pegasus Group, Inc., together with the assumption of accrued and unpaid interest thereon through June 30, 2013 of $114,841.
NOTE 7 – EQUITY INVESTMENT policy
The equity investment at June 30, 2013 represents the acquisition on May 23, 2013 of a 20% equity investment in The Basketball Channel (“TBC”) for the sum of $500,000. The acquisition was evidenced through a promissory note in favor of TBC, which bears interest at the rate of 8% per annum from December 1, 2013. The acquisition also anticipates the formation of a separate joint venture, 51% owned by the Company/49% owned by TBC (with net profits shared 50/50), for the joint marketing and sale of both TBC digital content and content produced by EatSleepSports.tv. TBC is a formative digital producer and distributor of basketball content, with plans to broadcast, initially via online streaming, topical basketball “news” programming commencing in September, 2013. TBC also owns an archive of approximately 5,000 hours of original basketball related programming.
NOTE 8- ACCRUED LIABILITIES
Accrued liabilities at June 30, 2013 represent:
| |
| June 30, 2013 |
Accrued interest: D & B Music, Inc. (See Note 5) | $114,841 |
Other accrued interest on short-term debt | 9,944 |
Accrued management compensation due CEO and CFO | 110,712 |
Total accrued liabilities | $235,497 |
Accrued liabilities at December 31, 2013 represent professional fees of $10,000.
NOTE 9 – DUE TO AFFILIATED COMPANY policy
The amount due to affiliated company of $25,750 at June 30, 2013 represents actual costs incurred by Michery, Inc. to acquire and initial test market music recorded by the music artist Bruce-E-Bee. Michery Inc. assigned all right and interest to this artist to ESMG Inc. on October 22, 2013, with the understanding that ESMG Inc., reimburse Michery, Inc those costs. Michery Inc. is owned by our CEO.
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NOTE 10 – SHORT TERM DEBT
Short-term debt at June 30, 2013 represents the following:
| |
| June 30, 2013 |
Promissory Note due The Basketball Channel (See Note 7) | $500,000 |
Promissory Note due GGAG, Inc. (See Note 4A) | 250,000 |
Promissory Note due Pegasus Group, Inc. (see Note 6) | 242,000 |
Promissory Note due Gorilla Pictures (see Note 4B) | 275,000 |
Total Notes Due | $1,267,000 |
NOTE 11 - SHORT-TERM CONVERTIBLE DEBT AND DERIVATIVE LIABILITIES POLICY
Short –term convertible debt at June 30, 2013 represents the following:
| | | | |
Convertible Debt Due: | Original Principal | Reduction through conversion to stock | Balance at June 30, 2013 | Unamortized Discount |
Asher Enterprises, Inc. | $95,500 | $0 | $95,500 | $0 |
Magna Group, Inc. | 150,000 | (83,560) | 66,440 | (60,240) |
Redwood Management, LLC | 200,000 | (124,485) | 75,515 | (61,250) |
Redwood Fund II, LLC | 100,000 | 0 | 100,000 | 0 |
WHC Capital, LLC (i) | 400,000 | 0 | 400,000 | (99,026) |
WHC Capital, LLC (ii) | 50,000 | 0 | 50,000 | (49,513) |
| $995,500 | ($208,045) | $787,455 | $270,029 |
Derivative liabilities at June 30, 2013 represent the fair market value at June 30, 2013 of the following short-term convertible entitlements of debt holders:
| |
| June 30, 2013 |
Magna Group, Inc. note | $161,390 |
Redwood Management, LLC note | 169,292 |
WHC Capital, LLC note (i) | 230,960 |
WHC Capital, LLC note (ii) | 115,480 |
Total Derivative Liabilities | $677,122 |
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The derivative liability was calculated by an independent accounting firm and verified by management.
The following is the range of variables used in revaluing the derivative liabilities at June 30, 2013 and during the three months then ended for derivatives that were revalued upon conversion of principle balances as noted above during the quarter.
| | |
| June 30, 2013 | Three Months ended June 30, 2013 |
Annual dividend yield | 0 | 0 |
Expected life (years) of | 0.83 - 1.50 | 0.84 - 1.55 |
Risk-free interest rate | 0.12 - 0.15% | 0.11 - 0.17% |
Expected volatility | 262.80% | 226.7 - 235.7% |
Summary explanation of each component of short-term convertible debt:
a)
On April 4, 2013, the Company issued a convertible note of $32,500 to Asher Enterprises, Inc. Under the terms of the notes, the Company is to repay any principal balance and interest, at 8% per annum at the maturity date of December 11, 2013. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock after six months. The conversion price is calculated by multiplying 58% (42% discount) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. Since the conversion feature is only convertible after six months, there is no derivative liability upon issuance. However, the Company will account for the derivative liability upon the passage of time or in the event of default whereby the note becomes convertible if not extinguished, as defined above. Derivative accounting applies upon the conversion feature being available to the holder, as it is variable and does not have a floor as to the number of common shares in which could be converted.
b)
On May 14, 2013, the Company issued a convertible note of $63,000 to Asher Enterprises, Inc. Under the terms of the notes, the Company is to repay any principal balance and interest, at 8% per annum at the maturity date of February 17, 2014. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock after six months. The conversion price is calculated by multiplying 58% (42% discount) by the average of the lowest three closing bid prices during the 10 days prior to the conversion date. Since the conversion feature is only convertible after six months, there is no derivative liability upon issuance. However, the Company will account for the derivative liability upon the passage of time or in the event of default whereby the note becomes convertible if not extinguished, as defined above. Derivative accounting applies upon the conversion
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feature being available to the holder, as it is variable and does not have a floor as to the number of common shares in which could be converted.
c)
On April, 29, 2013, the Company issued a convertible note of $150,000 to Magna Group, LLC. Under the terms of the notes, the Company is to repay any principal balance and interest, at 12% per annum at the maturity date of December 29, 2014. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock any time after the issuance of the convertible note. The conversion price is calculated by multiplying 55% (45% discount) by the lowest trading price in the three (3) trading days prior to the conversion date. The conversion feature is considered a derivative liability as the conversion feature is variable with no floor as to the number of common shares which could be converted. Accordingly, the Company calculated the derivative liability to be $246,329 using the Black-Scholes option pricing model with the following assumptions: volatility of 190.7%, expected life of 1.67 years, risk free interest rate of 0.12% and no dividends. This derivative liability exceeded the principal amount resulting in a full discount of the note and an additional day one charge for the excess value of the derivative liability of $114,329 which is included in the accompanying statement of operations. The discount is being amortized over the life of the note.
Upon conversion of all or a portion of the convertible note, the derivative liability associated with the principal and interest converted is valued immediately before conversion using the Black-Scholes model. The change in fair value of the derivative liability associated with the principal and interest converted is recorded as a gain/loss on fair value of derivative liability in the accompanying statement of operation, with the remaining value of that portion of the derivative liability written off with a corresponding credit to additional paid-in capital. During the three and six-months ended June 30, 2013, the holder of the convertible note converted $83,560 of principal and accrued interest thereon into 42,829,005 shares of common stock. The derivative liability of $179,550 associated with the converted principal and interest was credited to additional paid-in capital at the time of conversion. As of June, 2013, the derivative liability associated with this note was valued at $161,390. The company recorded a loss on the change in fair value of the derivative liability of $79,611 during the three and six months ended June 30, 2013. As of June 30, 2013 accretion of discount was $89,760 based on the original convertible note. Unamortized discount of $60,240 remains on the outstanding portion of the convertible note. The Company used the range of inputs on page 21 to the Black-Scholes pricing model for each valuation and the quarter end valuation related to the derivative liability.
(d)
On April, 29, 2013, the Company issued a convertible note of $200,000 to Redwood Management LLC. Under the terms of the notes, the Company is to repay any principal balance and interest, at 8% per annum at the maturity date of April 29, 2014. The Company may prepay the convertible promissory note prior to maturity at varying
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prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock any time after the issuance of the convertible note. The conversion price is calculated by multiplying 55% (45% discount) by the lowest closing day trading price during the eight (8) trading days prior to the conversion date. The conversion feature is considered a derivative liability as the conversion feature is variable with no floor as to the number of common shares which could be converted. Accordingly, the Company calculated the derivative liability to be $1,417,303 using the Black-Scholes option pricing model with the following assumptions: volatility of 208.6%, expected life of 1.0 year, risk free interest rate of 0.12% and no dividends. This derivative liability exceeded the principal amount resulting in a full discount of the note and an additional day one charge for the excess value of the derivative liability of $1,217,303 which is included in the accompanying statement of operations. The discount is being amortized over the life of the note. Upon conversion of all or a portion of the convertible note, the derivative liability associated with the principal and interest converted is valued immediately before conversion using the Black-Scholes model. The change in fair value of the derivative liability associated with the principal and interest converted is recorded as a gain/loss on fair value of derivative liability in the accompanying statement of operation, with the remaining value of that portion of the derivative liability written off with a corresponding credit to additional paid-in capital. During the three and six-months ended June 30, 2013, the holder of the convertible note converted $124,485 of principal and accrued interest thereon into 52,805,870 shares of common stock. The derivative liability of $204,386 associated with the converted principal and interest was credited to additional paid-in capital at the time of conversion. As of June, 2013, the derivative liability associated with this note was valued at $169,292. The company recorded a gain on the change in fair value of the derivative liability of $1,043,625 during the three and six months ended June 30, 2013. As of June 30, 2013 accretion of discount was $138,750 based on the original convertible note. Unamortized discount of $61,250 remains on the outstanding portion of the convertible note.
(e)
On April 29, 2013, the Company issued a convertible note of $500,000 to Redwood Fund II, LLC. Of which $ 100,000 had been funded by the note holder through June 30, 2013. Under the terms of the notes, the Company is to repay any principal balance and interest, at 8% per annum at maturity date of January 29, 2014. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock after six months. The conversion price is calculated by multiplying 55% (45% discount) by the lowest traded price during the eight (8) days prior to the conversion date. Since the conversion feature is only convertible after six months, there is no derivative liability upon issuance.
However, the Company will account for the derivative liability upon the passage of time or in the event of default whereby the note becomes convertible if not extinguished, as defined above. Derivative accounting applies upon the conversion feature being available
17
to the holder, as it is variable and does not have a floor as to the number of common shares in which could be converted.
(f)
On June 27, 2013, the Company issued a convertible note of $50,000 to WHC Capital, LLC. under an overall obligation of note holder to fund a total of $400,000 to the Company through October 8, 2013. Under the terms of the notes, the Company is to repay any principal balance and interest, at 10% per annum at the maturity date of May 1, 2014. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock any time after the issuance of the convertible note. The conversion price is calculated by multiplying 45% (55% discount) by the average of the three (3) lowest intra-day trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date. The conversion feature is considered a derivative liability as the conversion feature is variable with no floor as to the number of common shares which could be converted. Accordingly, the Company calculated the derivative liability to be $65,581 using the Black-Scholes option pricing model with the following assumptions: volatility of 259.6%, expected life of 0.84 years, risk free interest rate of 0.15% and no dividends. This derivative liability exceeded the principal amount resulting in a full discount of the note and an additional day one charge for the excess value of the derivative liability of $15,581 which is included in the accompanying statement of operations. The discount is being amortized over the life of the note. As of June 30, 2013 accretion of discount was $487 based on the original convertible note. Unamortized discount of $49,513 remains on the outstanding portion of the convertible note. The Company revalued the derivative liability as of June 30, 2013 using the Black-Scholes option pricing model with variables included in the range of the table below. The company recorded a loss on the change in fair value of the derivative liability of $49,629 during the three and six months ended June 30, 2013.
(g)
On June 27, 2013, the Company issued a convertible note of $400,000 to WHC Capital, LLC, of which $ 100,000 had been funded by the note holder at June 30,2013, with funding on the balance of $ 300,000 committed through October 9,2013. Under the terms of the notes, the Company is to repay any principal balance and interest, at 10% per annum at the maturity date of May 1, 2014. The Company may prepay the convertible promissory note prior to maturity at varying prepayment penalty rates specified under the agreement. The convertible promissory note is convertible into shares of the Company’s common stock any time after the issuance of the convertible note. The conversion price is calculated by multiplying 45% (55% discount) by the average of the three (3) lowest intra-day trading prices for the Company’s common stock during the ten (10) trading days prior to the conversion date.
The conversion feature is considered a derivative liability as the conversion feature is variable with no floor as to the number of common shares which could be converted. Accordingly, the Company calculated the derivative liability to be $131,703 using the
18
Black-Scholes option pricing model with the following assumptions: volatility of 259.6%, expected life of 0.84 years, risk free interest rate of 0.15% and no dividends. This derivative liability exceeded the principal amount resulting in a full discount of the note and an additional day one charge for the excess value of the derivative liability of $31,703 which is included in the accompanying statement of operations. The discount is being amortized over the life of the note. As of June 30, 2013 accretion of discount was $974 based on the original convertible note. Unamortized discount of $99,026 remains on the outstanding portion of the convertible note. The Company revalued the derivative liability as of June 30, 2013 using the Black-Scholes option pricing model with variables included in the range of the table below. The Company recorded a loss on the change in fair value of the derivative liability of $99,927 during the three and six months ended June 30, 2013.
NOTE 12 – ISSUANCE OF STOCK
Over the 6 month period ending June 30, 2013 the following common stock was issued:
| | | |
| Number of Shares | Pay Value | Additional Paid-In Capital |
Balance at January 1, 2013 | 184,912,000 | $184,912 | $3,462 |
Issuance of stock against conversions of debt | 95,634,875 | 95,635 | 112,410 |
Used towards the purchase of Top Sail Productions, LLC (see Note 1) | 5,000,000 | 5,000 | 10,000 |
Used to compensate financial consultants (see Note 5) | 40,000,000 | 40,000 | 20,000 |
Total issued and outstanding June 30, 2013 | 325,546,875 | 325,547 | 145,872 |
Gain on change in fair market value of derivative liabilities on debt conversions during the period ending June 30, 2013 | 0 | 0 | 383,936 |
Balance at June 30, 2013 | 325,546,875 | $325,547 | $529,808 |
Subsequent to June 30, 2013, the Company issued additional common shares totaling 352,338,538 through August 19, 2013 for a total of 677,885,413 issued and outstanding at August 19, 2013. 342,338,538 of these issuances related to debt conversions and interest thereon, and 10,000,000 related to additional compensation to a financial consultant.
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NOTE 13 – RELATED PARTY TRANSACTIONS
Lease
The Company leases its office premise at 1875 Century Park East, Century City, CA 90067 from our CFO on a month-to-month basis at no cost to the Company.
Acquisition of Bruce-E-Bee artist recording contract
As explained in Note 9, the Company assumed the obligation to reimburse Michery, Inc ( a company owned by our CEO) the sum of $ 25,750 in reimbursement of the actual costs incurred by Michery, Inc. to acquire and initial test market music recorded by the music artist Bruce-E-Bee.
Acquisition of D & B Music, Inc.
As explained in Note 6, the Company acquired D & B Music, Inc on June 30, 2013 which has the worldwide right to reproduce and distribute 41 fully produced titles at a cost of $356,841, being the assumption of a promissory note, originally dated February 1, 2009, payable in the amount of $242,000 to Pegasus Group, Inc., together with the assumption of accrued and unpaid interest thereon through June 30, 2013 of $114,841. D & B Music, Inc was acquired from its sole owner, David Michery, our CEO.
NOTE 14 – FINANCING POLICY
Effective May 24, 2013 the Company terminated, for non-performance, its March 5, 2013 Investment and Registration Rights Agreements with Deer Valley Management, LLC (“Deer Valley”) originally intended to assist the Company to issue an S-1 with Deer Valley purchasing up to $ 5 million of the Company’s common stock in tranches over a 36 month period. Following this termination, the Company has entered into discussions with alternative finance providers. In the interim, the Company currently utilizes independent financial consultants and advisors (see Note 5).
NOTE 15 – STOCK AWARDS PLAN POLICY
On June 26, 2013 the Company’s Board of Directors approved the creation of the Company’s 2013 stock Awards Plan and set aside up to 50,000,000 of the Company’s common stock for this purpose. The purpose of the Primco Management, Inc. 2013 Stock Awards Plan is to provide a means through which the Company and its subsidiaries may attract, retain and motivate employees, directors and persons affiliated with the Company, including, but not limited to, non-employee Consultants, and to provide a means whereby such persons can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company. A further purpose of the Plan is to provide such participants with additional incentive and reward opportunities designed to enhance the profitable growth and increase stockholder value of the Company. To further align the interests of employees, directors and non-employee Consultants with those of the stockholders by providing incentive compensation opportunities tied to the performance
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of the Common Stock and by promoting increased ownership of the Common Stock by such individuals. The Plan is also intended to advance the interests of the Company and its stockholders by attracting, retaining and motivating key personnel upon whose judgment, initiative and effort the successfully conduct of the Company’s business is largely dependent.
Accordingly, the Plan also provides for granting Incentive Stock Options, options that do not constitute Incentive Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Awards, or any combination of the foregoing, as is best suited to the particular circumstances as provided herein.
As explained in Note 5, the Company issued 40,000,000 common shares available under this Plan on June 27,2013, with an additional 10,000,000 common shares issued on August 14,2013 to certain independent financial consultants.
NOTE 16 – SUBSEQUENT EVENTS
Subsequent to June 30, 2013 the following events have occurred:
(a)
On July 1, 2013 the Company entered into a 66 month lease with a third-party landlord for the lease of 2,592 square feet of offices located in Hollywood , California to house its ESMG Inc,. and Top Sail Productions LLC staff, commencing August 1,2013 The first year’s rent was rebated to $ 45,101, with subsequent full base rent totaling $ 440,978 over the remaining 54 months of the lease.
(b)
Between July 1, 2013 and August 19,2013 the following short-term convertible debt conversions and related interest payments occurred, with issuance of the Company’s common stock in exchange for the reduction in principal:
| | |
Full conversions/ retirement of: | Principal/ Interest | Stock issued on conversions |
Magna Group, Inc. convertible note | $66,440 | 73,396,971 |
Interest thereon | 1,464 | 1,109,091 |
Redwood Management, LLC conv. Note | 75,515 | 98,995,730 |
WHC Capital, LLC convertible note | 100,000 | 133,290,807 |
Interest thereon | 622 | 545,939 |
Partial retirement: | |
WHC Capital, LLC convertible note | 39,900 | 35,000,000 |
| $283,941 | 342,338,538 |
(See Note 11)
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(c)
Since July 1, 2013, the following additional short-term convertible note transactions occurred:
-
Asher Enterprises,Inc. was issued an additional convertible note on July 10, 2013 for $55,000 ,which was funded July 15, 2013;
-
Redwood Fund II, LLC funded $25,000 on July 19 and 26, 2013 under its overall $ 400,000 convertible note;
-
WHC Capital, LLC funded $100,000 on August 5,2013 of the balance due of
$ 300,000 under its overall $ 400,000 convertible note; and
-
WHC Capital, LLC also funded $100,000 on August 8, 2013 of the balance due of $350,000 under its overall $400,000 convertible note.
(d)
On August 6, 2013, the Company filed a Certificate of Designation with the State of Delaware to create and issue a series of preferred stock to be designated the “Series A Preferred Stock” by adding the following subsections to Article IV:
There are Ten Million (10,000,000) Series A Preferred Shares with a par value of $0.00001. These shares rank senior to the common stock with respect to distributions or payments in the event of any liquidation, dissolution, or winding up of the registrant. These shares are not entitled to receive any cash dividends.
After twelve months, each Series A Preferred Share will be convertible at the option of the holder into one hundred (100) common shares. This conversion ratio will be adjusted to account for stock splits and other, similar changes in the capital structure of the registrant. These shares are not entitled to any preemptive rights to purchase stock in any future stock offerings.
Each Series A Preferred Share shall be entitled to one thousand (1,000) votes per share at any meeting of the stockholders or to participate in any action taken by the registrant or the stockholders thereof, or to receive any notice of any meeting of stockholders. These shares do not have the right of co-sale. Holders of Series A Preferred Shares are not required to sell all of their Series A Preferred Shares on the same terms or conditions of a co-sale by a majority shareholder.
If any of the Series A Preferred Shareholder wishes to sell, transfer or otherwise dispose of any or all of their Series A Preferred Shares, the other Series A Preferred Shareholders shall not have a prior right to buy such Series A Preferred Shares.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The registrant offers real estate management services. Our performance will be significantly affected by changes in general economic conditions and, specifically, shifts in consumer confidence and spending. Additionally, our performance will be affected by competition. Management believes that as the industry continues to consolidate, competition with respect to price will intensify. Such a heightened competitive pricing environment will make it increasingly important for us to successfully distinguish ourselves from competitors based on quality and superior service and operating efficiency.
We have not generated any significant revenues to date, although we have entered into significant transactions during the quarter ending June 30, 2013 the results of which we expect will be reflected later in 2013.
We are currently not aware of any other known material trends, demands, commitments, events or uncertainties that will have, or are reasonable likely to have, a material impact on our financial condition, operating performance, revenues and/or income, or results in our liquidity decreasing or increasing in any material way.
Results of Operations
For the three months ended June 30, 2013, we earned revenues from music product sales of $13,915. We had a cost of sales of $10,343, resulting in total revenue of $3,572. We had general and administrative expenses of $145,875. We paid an interest expense of $239,915 and a loss on change in net fair value of derivative liability. As a result, we had a net loss of $943,276 for the three months ended June 30, 2013.
Comparatively, for the three months ended June 30, 2012, we did not earn any revenues from music product sales. We earned $1,600 from property management fees, resulting in total revenue of $1,600. We had general and administrative expenses of $14,140. As a result, we had a net loss of $12,540 for the three months ended June 30, 2012.
The $930,736 increase in net loss during the three months ended June 30, 2013 compared to the three months ended June 30, 2012 is due primarily to increased operations during 2013. The company came under new management on January 31, 2013 and expanded operations to include entertainment as well as continuing to offer real estate management services. These expanded operations greatly increased our expenses and will continue to do so for the foreseeable future.
For the six months ended June 30, 2013, we earned revenues from music product sales of $13,915. We had a cost of sales of $10,343, resulting in total revenue of $3,572. We had general and administrative expenses of $145,875. We paid an interest expense of
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$239,915 and a loss on change in net fair value of derivative liability. As a result, we had a net loss of $943,276 for the three months ended June 30, 2013.
Comparatively, for the six months ended June 30, 2012, we did not earn any revenues from music product sales. We earned $1,600 from property management fees, resulting in total revenue of $1,600. We had general and administrative expenses of $14,140. As a result, we had a net loss of $12,540 for the three months ended June 30, 2012.
The $874,741 increase in net loss during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 is due primarily to increased operations during 2013. The company came under new management on January 31, 2013 and expanded operations to include entertainment as well as continuing to offer real estate management services. These expanded operations greatly increased our expenses and will continue to do so for the foreseeable future.
Liquidity and Capital Resources
For the six months ended June 30, 2013, we paid $75,000 for the acquisition of Top Sail Productions, LLC and $841,350 for the acquisition of music rights and related music costs. As a result, we had net cash used in investing activities of $916,350 for the six months ended June 30, 2013.
For the six months ended June 30, 2012, we did not pursue any investing activities.
For the six months ended June 30, 2013, we received proceeds from short-term convertible debt of $995,500. As a result, we had net cash provided by financing activities of $995,500 for the six months ended June 30, 2013.
For the six months ended June 30, 2012, we received proceeds from officer advances of $16,850. As a result, we had net cash provided by financing activities of $16,850 for the six months ended June 30, 2012.
Plan of Operations
The registrant has developed and continues to develop its business plans in both real estate management and in aspects of the entertainment industry. However, if we are unable to raise sufficient funds or obtain additional alternate financing, we may never complete development and become profitable.
Our current cash balance is estimated not to be sufficient to fund our current operations. However, as explained in Notes 7 and 8 we have entered into financing arrangement which we expect will generate direct working capital and/or we still settle a substantial portion of our accounts payable. We also need to raise additional sufficient funds to complete the implementation of our business plan.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for a smaller reporting company
ITEM 4: CONTROLS AND PROCEDURES
During the three months ended June 30, 2013, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2013. Based on this evaluation, our chief executive officer and principal financial officers were not able to conclude that the Company’s disclosure controls and procedures are effective to ensure that information required to be included in the Company’s periodic Securities and Exchange Commission filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Therefore, under Section 404 of the Sarbannes-Oxley Act of 2002, the Company must conclude that these controls and procedures are not effective.
Off-Balance Sheet Arrangements; Commitments and Contractual Obligations
As of June 30, 2013, we did not have any off-balance sheet arrangements and did not have any commitments or contractual obligations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
Not applicable for smaller reporting companies
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits
Exhibit 31* - Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32* - Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**. XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith
**XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Dated: August 19, 2013
Primco Management Inc.
/s/ David Michery
David Michery
Chief Executive Officer
/s/ Alan Bailey
Alan Bailey
Chief Financial Officer
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