TriMedia Entertainment Group, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(2) QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter ended April 30, 2008
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------------- --------------------
Commission File No. 000-49865
TriMedia Entertainment Group, Inc.
(Name of Small Business Issuer)
Delaware 14-1854107
- --------------------------------- --------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
115 East 57th Street, 11th Floor 10022
New York, NY
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(Address of principal executive offices) (Zip Code)
Tel 917.546.6640
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filings requirements for the past 90 days.
YES (X) NO o
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES o NO (X)
There were 94,710,012 issued and outstanding shares of the registrant's common
stock, par value $.0001 per share, at June 12,2008.
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TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
INDEX
PAGE NUMBER
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 30, 2008 and
October 31, 2007 1
Consolidated Statements of Operations for the three month and six
month periods ended April 30, 2008 and April 30, 2007 2
Consolidated Statements of Cash Flows for the six month periods ended
April 30, 2008 and April 30, 2008 3
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 6. Exhibits 18
SIGNATURES
PART I - FINANCIAL INFORMATION
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2008 AND OCTOBER 31, 2007
April 30, October 31,
2008 2007
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 175,396 $ 233
Prepaid expenses 5,500 --
Other current assets - discontinued operations -- 22,087
------------ ------------
TOTAL ASSETS $ 180,896 $ 22,320
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Convertible notes payable, net of discount of $193,030 $ 206,970 $ --
Warrant liability 149,000 --
Embedded derivative liability 149,000 --
Term loans -- 3,740,888
Accounts payable and accrued expenses 962,074 1,614,757
Taxes payable -- 16,000
Due to stockholder -- 147,119
Other current liabilities of discontinued operations -- 2,800,819
------------ ------------
TOTAL LIABILITIES 1,467,044 8,319,583
------------ ------------
STOCKHOLDERS' DEFICIT
Preferred stock, $0.0001 par value; 20,000,000 shares authorized;
no shares issued and outstanding in 2008 and 2007 10 --
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 93,710,011 and 47,710,011 shares issued and
outstanding in 2008 and 2007 9,370 4,769
Additional paid-in capital 14,556,328 13,285,312
Accumulated deficit (15,851,856) (21,587,344)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (1,286,148) (8,297,263)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 180,896 $ 22,320
============ ============
See accompanying notes to consolidated financial statements.
-1-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED APRIL 30, 2008 AND 2007
(UNAUDITED)
Three Months Ended Six Months Ended
April 30, April 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
NET REVENUE $ -- $ -- $ -- $ --
DIRECT COSTS -- -- -- --
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) -- -- -- --
OPERATING EXPENSES 114,314 235,370 209,587 630,475
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (114,314) (235,370) (209,587) (630,475)
OTHER INCOME (EXPENSE)
Accretion of discount on
convertible notes (58,470) -- (62,970) --
Change in fair value of
warrant liability (21,000) -- (21,000) --
Change in fair value of
embedded derivative liability (21,000) -- (21,000) --
Other income 97 -- 5,097 4,150
Impairment loss -- -- (641,800) --
------------ ------------ ------------ ------------
(100,373) -- (741,673) 4,150
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING
OPERATIONS (214,687) (235,370) (951,260) (626,325)
NET LOSS FROM
DISCONTINUED OPERATIONS -- (40,351) -- 3,000,402
------------ ------------ ------------ ------------
NET LOSS $ (214,687) $ (275,721) $ (951,260) $ 2,374,077
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF SHARES 93,710,012 47,710,012 89,876,679 47,710,012
PER SHARE BASIS
Basic and diluted
Continuing operations $ -- $ (0.01) $ (0.01) $ (0.01)
Discontinued operations -- -- -- 0.06
------------ ------------ ------------ ------------
INCOME (LOSS) PER SHARE $ -- $ (0.01) $ (0.01) $ 0.05
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
-2-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2008 AND 2007
(UNAUDITED)
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (951,260) $ 2,374,077
Adjustment to reconcile net income (loss) to net cash
used in operating activities
Impairment loss 641,790 --
Depreciation in discontinued operations -- 2,369
Accretion of discount of convertible notes 62,970 --
Change in fair value of warrant liability 21,000 --
Change in fair value of embedded derivative liability 21,000 --
(Increase) decrease in assets
Prepaid expenses (5,500) --
Increase (decrease) in liabilities
Accounts payable and accrued expenses 1,163 (295,897)
Decrease in assets and liabilities relating to
discontinued operations -- (3,130,841)
Deferred revenue -- 67,725
Taxes payable (16,000) --
----------- -----------
Net cash used in operating activities (224,837) (982,567)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Due to (from) stockholder -- 90,990
----------- -----------
Net cash provided by investing activities -- 90,990
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on convertible term loans 400,000 890,982
----------- -----------
Net cash provided by financing activities 400,000 890,982
----------- -----------
NET INCREASE (DECREASE) IN CASH 175,163 (595)
CASH - BEGINNING OF PERIOD 233 3,586
----------- -----------
CASH - END OF PERIOD $ 175,396 $ 2,991
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
SIX MONTHS ENDED APRIL 30, 2008 AND 2007
(UNAUDITED)
2008 2007
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SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest - continued operations $ -- $ --
========== =======
Interest - discontinued operations $ -- $50,376
========== =======
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of warrants as discount on convertible
notes payable $ 128,000 $ --
========== =======
Embedded derivative as discount on convertible
notes payable $ 128,000 $ --
========== =======
Issuance of preferred stock for acquisition $ 641,800 $ --
========== =======
Issuance of common stock for settlement of debt $ 460,000 $ --
========== =======
Transfer investment for settlement of debt $ 250,000 $ --
========== =======
Spin-off of subsidiaries
Accumulated deficit $6,686,748 $ --
Additional paid-in capital (76,173) --
---------- -------
$6,610,575 $ --
========== =======
See accompanying notes to consolidated financial statements.
-4-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared by Trimedia Entertainment Group, Inc. ("Trimedia") and Subsidiary
(collectively, "the Company"). These statements include all adjustments
(consisting only of normal recurring adjustments) which management believes
necessary for a fair presentation of the statements and have been prepared on a
consistent basis using the accounting policies described in the Summary of
Accounting Policies included in the Annual Report on Form 10-KSB for the fiscal
year ended October 31, 2007 which the Company filed with the Securities and
Exchange Commission on February 13, 2008 (the "Annual Report"). Certain
financial information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading. The Notes to
Financial Statements included in the Annual Report should be read in conjunction
with the accompanying interim financial statements. The interim operating
results for the six months ended April 30, 2008 may not necessarily be
indicative of the operating results expected for the full year.
MERGER AND REORGANIZATION
On October 1, 2007, Trimedia entered into an Agreement and Plan of Merger (the
"Merger Agreement") by and among the Company, TriMedia Acquisition Corp., a
wholly owned subsidiary of the Company ("Merger Subsidiary") and VGB Media, Inc.
("VGB"). On that date the Company also entered into a Restructuring Agreement,
by and among the Company, 1025 Investments, Inc., IL Resources, Inc.,
Christopher Schwartz, SPH Investments, Capital Growth Investments and Rufftown
Entertainment, Inc. ("Newco") (the "Restructuring Agreement"). The other parties
to this Agreement include the Company's former chief executive officer and other
of the Company's affiliates.
As of November 16, 2007, all the transactions under the Merger Agreement closed
(the "Closing"). As provided for in the Merger Agreement, the merger ("Merger")
of Merger Subsidiary into VGB with VGB as the surviving corporation has been
completed. In connection with the Merger, the shareholder of VGB received 10,000
shares of the Company's newly authorized Series A Convertible Preferred Stock
("Preferred Shares"), valued at $641,800 (Note 6). Each share is convertible
into 6,418 shares of the Company's Common Stock or a total of 64,180,000 shares
of the Company's Common Stock. This represents 40% of the Company's shares on
the Closing on a fully diluted basis as defined in the Merger Agreement
(assuming conversion of the Preferred Shares on such date). The Preferred Shares
will have voting rights equivalent to the Common Stock into which these shares
are convertible. VGB is a newly formed company with substantially no assets or
liabilities. It has entered into a distribution agreement and intends to engage
in the production, distribution and marketing of entertainment related content
after the Merger.
As a further condition of the Closing, the Company completed a restructuring
pursuant to the terms of the Restructuring Agreement. As a result: (i) certain
creditors of the Company converted a portion of their indebtedness ($460,000)
into 46,000,000 shares of Common Stock of the Company; (ii) all the assets of
the Company, including ownership of all our operating subsidiaries, were
contributed to a newly formed Delaware corporation, Newco, in which (A) the
Company has a 19% economic interest owned through a class of non-voting common
stock with an option to acquire additional interests and (B) the aforesaid
creditors (I) initially have an 81% economic interest and the full voting
interest represented by a class of voting common stock and (II) a $4,800,000
liquidation preference represented by a newly designated series of preferred
stock of Newco and (iii) significantly mostly all liabilities of Parent prior to
the closing date or arising from the continuing business were assumed by Newco.
In addition, the Company transferred its 10% interest in Battle Rap, LLC as
settlement of $250,000 of debt. The Company's investment in Battle Rap, LLC was
written off in prior years.
-5-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENTS (Continued)
The settlement of the debt aggregating $792,584 with creditors was deemed to be
a related party and in essence a capital transaction and credited to APIC.
Aside from the Company's interest in Newco, after the Merger and closing of the
restructuring the Company's business will consist of the entertainment related
business VGB intends to conduct. It has entered into one distribution agreement.
The following amounts related to the transfer of net assets of the Company's
operating subsidiaries under the Restructuring Agreement have been segregated
from continuing operations and included in discontinued operations in the
consolidated statement of operations:
Three Months Six Months
Ended Ended
April 30, 2007 April 30, 2007
----------- -----------
Net revenue $ 31,715 $ 167,284
Direct costs 23,966 121,653
----------- -----------
Gross profit 7,749 45,631
Operating expenses 48,108 153,482
----------- -----------
Loss from operations (40,359) (107,851)
----------- -----------
Other income (expense)
Other income 8 1,273
Foreign currency exchange -- (79,794)
Forgiveness of indebtedness -- 3,186,774
----------- -----------
8 3,108,253
----------- -----------
Net income from discontinued operations $ (40,351) $ 3,000,402
=========== ===========
The following assets and liabilities have been segregated and included in assets
of discontinued operations and liabilities of discontinued operations, as
appropriate, in the consolidated balance sheet as of October 31, 2007 and relate
to our operating subsidiaries:
October 31, 2007
----------------
Current assets $ 10,942
Property, plant and equipment less
accumulated depreciation 11,145
----------
Assets of discontinued operations $ 22,087
==========
Current liabilities $1,700,819
Loan payable - stockholder 1,100,000
----------
Liabilities of discontinued operations $2,800,819
==========
-6-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENTS (Continued)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Trimedia and its
wholly-owned subsidiary. All material inter-company transactions have been
eliminated in consolidation.
EARNINGS (LOSS) PER SHARE
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE, resulting in the presentation of basic and diluted
earnings (loss) per share. For the six and three months ended April 30, 2008 and
2007, the basic and diluted earnings (loss) per share are the same, since the
exercise price exceeded the market price and the assumed conversion of stock
options and warrants would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 ("FIN 48"), ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES.
FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise's financial statements in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES ("SFAS No. 109"). Tax positions must meet a
more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 has
been adopted by the Company as of November 1, 2007, and the provisions of FIN 48
will be applied to all tax positions under SFAS No. 109 after initial adoption.
The cumulative effect of applying the provisions of this interpretation will be
reported as an adjustment to the opening balance of retained earnings for that
fiscal year. The adoption of FIN 48 did not require an adjustment to the
Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS
No. 157"). SFAS No. 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of SFAS No. 157 relate to the definition
of fair value, the methods used to measure fair value and the expanded
disclosures about fair value measurement. SFAS No. 157 will be effective for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The Company does not believe that the adoption of the provisions
of SFAS No. 157 will materially impact its financial statements or footnote
disclosures.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and will become effective for the
Company beginning with the first quarter of fiscal 2009. The Company is
currently evaluating the impact of SFAS No.159 on its consolidated financial
statements and footnote disclosures.
-7-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENTS (Continued)
On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 160, NONCONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS (SFAS No.
160). SFAS No. 160 requires all entities to report noncontrolling (minority)
interests in subsidiaries as equity in the consolidated financial statements.
The statement establishes a single method of accounting for changes in a
parent's ownership interest in a subsidiary that do not result in
deconsolidation and expands disclosures in the consolidated financial
statements. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008 and interim periods within those fiscal years. This statement is
currently not applicable since the Company's subsidiary is wholly-owned.
On December 4, 2007, the FASB issued SFAS No.141R, BUSINESS COMBINATIONS (SFAS
No. 141R). SFAS No. 141R requires the acquiring entity in a business combination
to recognize all the assets acquired and liabilities assumed, establishes the
acquisition date fair value as the measurement objective for all assets acquired
and liabilities assumed, and requires the acquirer to expand disclosures about
the nature and financial effect of the business combination. SFAS No. 141R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This statement will be effective for the Company beginning
November 1, 2009 and will change the accounting for business combinations on a
prospective basis.
In March 2008, the FASB issued Statement No. 161, DISCLOSURES ABOUT DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 161), which is effective November 1,
2009. SFAS 161 requires enhanced disclosures about derivative instruments and
hedging activities to allow for a better understanding of their effects on an
entity's financial position, financial performance, and cash flows. Among other
things, SFAS 161 requires disclosures of the fair values of derivative
instruments and associated gains and losses in a tabular format. The Company has
not yet determined the impact of the adoption of SFAS 161 on its financial
statements and footnote disclosures.
NOTE 2 - MANAGEMENT PLANS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
Since its inception, the Company has incurred significant losses and, as of
April 30, 2008 had accumulated losses of $15,851,856. For the six months ended
April 30, 2008, the Company's net loss was $951,260 which included $641,800
representing goodwill impairment in connection with the Company's recent merger.
In addition, the Company had negative working capital of $1,286,148 at April 30,
2008. The Company, after the merger and restructuring, raised $400,000 in a
convertible note offering (and in May 2008 received a subscription of an
additional $50,000 investment). As a result of the restructuring:
o The Company is not engaged in any business activity other than
exploring new businesses and is incurring minimal overhead;
o While legally obligated for payment of most of its payables, under the
terms of the Restructuring Agreement a third party is obligated to the
Company for payment of these obligations and, therefore, the Company
does not anticipate having to fund these obligations.
While the Company will incur further operating losses and experience negative
cash flow in the near future, the Company believes it has sufficient cash, with
the expected payment of the additional $50,000 subscription to conduct limited
operations until at least November 30, 2008. In addition, if the notes are not
converted or extended by November 30, 2008, the Company will need in excess of
$450,000 of funds for the repayment of the Notes.
-8-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 2 - MANAGEMENT PLANS (Continued)
Ultimately the Company's ability to achieve profitability and positive cash flow
depends on the Company's ability to generate sufficient revenues from a business
it may enter into. While the Company is exploring several possibilities any
business will require a additional capital. There can be no assurances that the
Company will be able to enter a business to generate sufficient revenues or
raise additional capital to achieve and sustain profitability and positive cash
flow in the future. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
The Company has no firm commitments for funding its operations, although it
intends to increase its efforts to sell its convertible note. The Company may
raise additional capital from the sale of its equity securities. However, there
can be no assurances that the Company will be successful in raising sufficient
capital to have a material positive effect of the Company's operations and cash
flow.
There can be no assurance that such funding will be generated or available on
terms acceptable to the Company, or at all, or that the commercial exploitation
of the Company's products will be economically profitable for the Company. These
uncertainties raise substantial doubt about the ability of the Company to
continue as a going concern.
NOTE 3 - CONVERTIBLE NOTES PAYABLE
During the six month period ended April 30, 2008, the Company executed and
delivered, separately to four accredited investors (the "Convertible
Investors"), (i) convertible promissory notes in the aggregate face amount of
$400,000 (the "Convertible Notes"), and (ii) warrants to purchase up to an
aggregate of 20,000,000 shares of the Company's common stock. The proceeds of
the sale of the Convertible Notes were used for general corporate purposes. The
Convertible Notes mature November 30, 2008. The Convertible Notes bear interest
at 8% per annum and are due and payable at the maturity date. The Convertible
Investors may convert the principal balance of the Convertible Notes plus
accrued interest (if any), in whole or in part, into common shares, at their
election at any time after the amendment of the Certificate of Incorporation of
the Company to increase the authorized shares of common stock and until the
maturity date or prior to payment at a conversion price equal to $0.01 per
share. The warrants have an exercise price of $0.01 per share for the five year
life of the warrants. In accordance with EITF-00-19, ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN
Stock, the warrants are classified as a liability since the Company does not
have sufficient authorized and unissued shares available to settle the warrant
contract. The warrant liability will be reclassified to equity when the Company
amends the Certificate of Incorporation to increase the authorized shares so
that it has sufficient authorized and unissued shares to settle the warrant
liability or when the warrants expire. The Company has initially valued the
warrants at $128,000, representing the fair value using the Black-Sholes model
at the time the loans were made and reflected as a discount on the Convertible
Notes to be accreted over the term of the Convertible Notes. Additionally, in
accordance with SFAS 133, the Convertible Notes are deemed derivative
instruments requiring bifurcation of the conversion feature. Under EITF-00-27,
APPLICATION OF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE Instruments, the Company
has calculated an initial intrinsic conversion value of the Convertible Notes at
$128,000 and will treat this amount as an embedded derivative liability since
the counterparty has a choice of settlement in cash or in shares. The aggregate
embedded derivative liability will be reclassified to equity upon expiry or
conversion of the conversion feature. Additionally, and in accordance with
EITF-98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION
FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, the value of the warrants
-9-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 3 - CONVERTIBLE NOTES PAYABLE (Continued)
and the beneficial conversion feature, totaling $256,000 is reflected as a
discount assigned to the Convertible Notes. The discount associated with the
beneficial conversion feature is to be accreted over the period of the earliest
conversion date. Since the Convertible Notes cannot be converted until after the
amendment of the Certificate of Incorporation, of which the completion date is
unknown at this time, the Company will accrete the discount associated with the
embedded derivative over the term of the convertible notes. The discount
associated with the issuance of the warrants is accreted over the term of the
Convertible Notes. During the six months ended April 30, 2008, the Company
accreted $62,970 associated with these discounts as expense.
The carrying amounts of the warrant liability and embedded derivative liability
were adjusted to their fair market value as of April 30, 2008. The $21,000
increase in the fair value of both liabilities is reflected as an expense in the
statement of operations for the three and six months ended April 30, 2008.
NOTE 4 - INCOME TAXES
There is no deferred income tax benefit for the losses for the three and six
months ended April 30, 2008 and the three months ended April 30, 2007 since
management has determined that the realization of the net deferred tax asset is
not assured and has created a valuation allowance for the entire amount of such
benefits. There is no current income tax for the six months ended April 30, 2007
due to the utilization of net operating loss carryforwards.
At October 31, 2007, the Company had net operating loss carryforward for federal
and state income tax purposes of approximately $19,588,000 (the "NOL
carryforwards"), which were available to offset future taxable income, if any,
through 2027. However, due to a substantial change in ownership in current and
prior years, the use of any NOL carryforward may be limited. Based upon the
limited operating history of the Company and losses incurred to date, management
has fully reserved the deferred tax asset.
As discussed in Note 1, the Company adopted FIN 48 effective November 1, 2007
which did not require an accrual for uncertain tax positions as of November 1,
2007.
There was no change in unrecognized tax benefits during the period ended April
30, 2008 and there was no accrual for uncertain tax positions as of April 30,
2008.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. In general, the Company's filed income tax returns
are no longer subject to examination by the respective taxing authorities for
years ended before October 31, 2004.
NOTE 5 - STOCK BASED COMPENSATION
In December 2004, the FASB issued SFAS 123 (revised 2004), SHARE-BASED PAYMENT
("SFAS 123(R)"). SFAS 123(R) supersedes Accounting Principles Board ("APB")
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and amends SFAS No.
95, STATEMENT OF CASH FLOWS. Generally, the approach in SFAS 123(R) is similar
to the approach described in SFAS 123. However, SFAS 123(R) requires share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values at the date of
grant. Pro forma disclosure is no longer an alternative.
-10-
TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 5 - STOCK BASED COMPENSATION (Continued)
On November 1, 2006, the Company adopted SFAS 123(R) using the modified
prospective method as permitted under SFAS 123(R). Under this transition method,
compensation cost recognized in the first quarter of 2007 includes compensation
cost for all share-based payments granted prior to but not yet vested as of
October 31, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123. In accordance with the modified prospective
method of adoption, the Company's results of operations and financial position
for prior periods have not been restated. There was no unrecognized compensation
cost as of October 31, 2006.
The Company uses the Black-Scholes option pricing model to calculate the
grant-date fair value of an award.
There were no stock options granted during the six months ended April 30, 2008
and 2007.
A summary of options is as follows:
Shares Option Price Per Weighted Average
Outstanding Share Expense Exercise Price
------------- ----------------- ------------------
Options outstanding,
October 31, 2007
and April 30, 2008 8,036,707 $0.01 to $1.50 $0.62
============ ================= =====================
The options that are exercisable at April 30, 2008 are summarized as follows:
Weighted
Average Number of Options
Remaining Currently Weighted Average
Option Price Contractual Life Exercisable Exercise Price
------------ ---------------- ----------- --------------
$0.01 to $1.50 6.96 years 8,036,707 $0.61
A summary of the warrants issued by the Company is as follows:
Number of Option Price Per Weighted Average
Shares Share Range Exercise Price
------ ----------- --------------
Warrants outstanding at
October 31, 2007 4,941,667 $0.45 to $1.06 $0.61
Warrants granted 20,000,000 $0.01 0.01
Warrants expired (666,667) $1.25 (0.06)
---------- -------------- ------
Warrants outstanding at
April 30, 2008 24,275,000 $0.01 to $1.06 $0.16
========== ============== ======
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TRIMEDIA ENTERTAINMENT GROUP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2008
(UNAUDITED)
NOTE 5 - STOCK BASED COMPENSATION (Continued)
Warrants that are exercisable at April 30, 2008 are summarized as follows:
Weighted
Average Number of Warrants
Remaining Currently Weighted Average
Warrant Price Contractual Life Exercisable Exercise Price
------------- ---------------- ----------- --------------
$0.01 to $1.50 4.29 years 24,275,000 $0.10
NOTE 6 - IMPAIRMENT LOSS
During the six months ended April 30, 2008, the Company recorded an impairment
loss of $641,800 on its investment in VGB.
NOTE 7 - SUBSEQUENT EVENT
On May 11, 2008, the Company received an additional $50,000 representing a 1/2
subscription to the convertible notes referred to in Note 3.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties, and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to the risks discussed in this report.
OVERVIEW
Through the end of fiscal 2007 we were a multimedia entertainment company that
had film and music operations. As of October 2007 and during most all of fiscal
2007 we did not have sufficient cash to implement our business plan. For the
year ended October 31, 2007 the Company's net income was $1,907,933 (primarily
due forgiveness of debt). In addition, the Company had negative working capital
of $7,208,408 at October 31, 2007 and experienced negative cash flow from
operations of $ 315,370 and $1,981,277 for the years ended October 31, 2007 and
2006. The Company had total liabilities of approximately $8,300,000 of which the
outstanding debt was in the aggregate principal amount of approximately
$5,400,000 as of October 31, 2007. Accordingly, the Company had only minimal
operations in fiscal 2007 and would have required a significant amount of cash
to fund its then operations and to continue its business.
On November 16, 2007 the Company pursuant to an Agreement and Plan of Merger
(the " Merger Agreement") by and among the Company, TriMedia Acquisition Corp.,
a wholly owned subsidiary of the Company ("Merger Subsidiary") and VGB Media,
Inc. ("VGB") completed the merger of VGB with Merger Subsidiary. On that date
the Company also completed a restructuring pursuant to a Restructuring
Agreement, by and among the Company, certain creditors and its chief executive.
As a result of these transactions (i) certain creditors of the Company converted
a portion of their indebtedness into 46,000,000 shares of Common Stock of the
Company; (ii) all the assets of Company, including ownership of all our
operating subsidiaries, were contributed to a newly formed Delaware corporation
("Newco") in which the Company will have an economic interest and (iii)
significantly all liabilities of the Company prior to the closing date or
arising from the continuing business were assumed by Newco.
As a result of that transaction substantially all liabilities were satisfied or
assumed and we will not have to fund the operations of the prior business. For
accounting purposes the prior business has been treated as a discontinued
business.
New Management desires to pursue various aspects of the entertainment business
and is considering several avenues. At the present time we have no operations.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes thereto included in this
Form 10-Q
CRITICAL ACCOUNTING POLICIES
In presenting our financial statements in conformity with accounting principles
generally accepted in the United States, we are required to make estimates and
assumptions that affect the amounts reported therein. Several of the estimates
and assumptions we are required to make relate to matters that are inherently
uncertain as they pertain to future events. However, events that are outside of
our control cannot be predicted and, as such, they cannot be contemplated in
evaluating such estimates and assumptions. If there is a significant unfavorable
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change to current conditions, it will likely result in a material adverse impact
to our consolidated results of operations, financial position and in liquidity.
We believe that the estimates and assumptions we used when preparing our
financial statements were the most appropriate at that time. Presented below are
those accounting policies that we believe require subjective and complex
judgments that could potentially affect reported results.
The discussion in the following two sections were appliciable to our
discontinued business and may not be relevant on a going forward basis.
REVENUE RECOGNITION
We recognize revenue from the sale or licensing of films and nonrefundable
minimum guarantees from customers upon meeting all recognition requirements of
Statement of Position ("SOP") 00-2, "Accounting by Producers or Distributors of
Films". According to SOP 00-2, an entity should recognize revenue from a sale or
licensing arrangement of a film when all of the following conditions are met:
O persuasive evidence of a sale or licensing arrangement with a customer
exists;
O the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate and
unconditional delivery;
O the license period of the arrangement has begun and the customer can
begin its exploitation, exhibition, or sale;
O the arrangement fee is fixed or determinable; and
O collection of the arrangement fee is reasonably assured.
If we do not meet any one of the preceding conditions, then we will defer
recognizing revenue until all of the conditions are met.
CAPITALIZED FILM COSTS
Costs of making motion picture films that are produced for sale to third parties
are stated at the lower of cost, less accumulated amortization, or fair value.
In accordance with SOP 00-2, we expense film costs based on the ratio of the
current period gross revenues to estimated total gross revenues from all sources
on an individual production basis. This ratio requires the use of estimates
based on management's knowledge and experience. Due to the uncertainty of future
estimated revenues from films in production, we normally write off film costs as
they occur.
ARTIST COMPENSATION COSTS
The amount of royalties earned by artists, as adjusted for anticipated returns,
is charged to expense in the period in which the sale of the record takes place.
Advance royalty paid to an artist is reported as an asset only if the past
performance and current popularity of the artist to whom the advance is made
provide a sound basis for estimating that the amount of the advance will be
recoverable from future royalties earned by the artist. Capitalized advances are
charged to expense as subsequent royalties are earned by the artist. Any portion
of capitalized advances that appear not to be fully recoverable from future
royalties to be earned from the artist are charged to expense during the period
in which the loss becomes evident.
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STATEMENTS OF OPERATIONS
COMPARISON
Three Months Three Months Change $ Change % Six Months Six Months Change $ Change %
Ended Ended Ended Ended
April 30, April 30, April 30, April 30,
2008 2007 2008 2007
- ------------------------------------------------------------------------------------------------------------------------------
Net Revenues -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Direct Costs -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES 114,314 235,370 (121,056) (51.4) 209,587 630,475 (420,888) (66.8)
- ------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense) (100,373) -- (100,373) (100.0) (741,673) 4,150 (745, 823) (179.7)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) From
Continued Operations (214,687) (235,370) (20,683) (8.8) (951,260) (626,325) 324,935 51.8
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
From
Discontinued
Operations -- (40,351) (40,351) (100.0) -- 3,000,402 (3,000,402) (100.0)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (214,687) (275, 721) (61,034) (22.1) (951,260) 2,374,077 (3,325,337) (140.1)
- ------------------------------------------------------------------------------------------------------------------------------
DISCUSSION
The Company had no net revenue or direct costs through April 30, 2008 as the
Company had completed it restructuring and discontinued its prior business. New
management was exploring possible business directions and had not commenced
additional operations. Because any net revenue or direct costs occurring in the
three and six months ended April 30, 2007 related to our discontinued
business it is reflected in calculating our Net Income (Loss) From Discontinued
Operations for such periods.
The $121,056 and $420,888 decrease in Operating Expenses for the three and six
months ended April 30, 2008 respectively was primarily due to a decrease
in activity of the Company after the restructuring. Operating Expenses are
generally the costs of operating our business and include salaries, advertising,
professional and consulting fees, rent and utilities, travel and costs related
to financing activities.
The $745,823 increase in Other Expenses for the six month ended April
30, 2008 was due to primarily to an impairment expense of $641,800. This expense
arose in connection with the acquisition of VGB. The Company valued the
consideration of the shares issued for the acquisition at $641,800 the aggregate
market value of the Company's common stock at the time. Because the value of the
VGB stock was negligible at the time of the acquisition, the Company considered
the entire resulting goodwill without value and wrote this amount off
-15-
immediately as an impairment. Included in such other expense for the six month
period ended April 30, 2008 was approximately $100,000 of expenses and charges
relating to our convertible notes and warrants incurred for the three month
period ended April 30, 2008. There were no similar charges or expenses for the
for the three month period ended April 30, 2007. Because it is reflected in Net
Income From Discontinued Operations for for the six month period ended April 30,
2007 Other Income for such period does not include forgiveness of indebtedness
income of $3,186,774 due to repayment of a line of credit at maturity with
collateral of a third party held on deposit by our lender, offset by a foreign
currency exchange loss of $79,794.
Our Net Loss was 951,260 during the six months ended April 30, 2008
compared to Net Income of $2,374,077 during the six months ended April 30, 2007.
This was because we had Net Income From Discontinued Operations of $3,000,402 in
the prior period primarily resulting from forgiveness of debt discussed above.We
incurred losses of $214,687 and $275,721 respectively during the three month
periods ended April 30, 2008 and April 30 2007. In each period the Company had
no revenue and incurred expenses.
CHANGES IN FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Six Months Six Months Change
2008 2007 percentage
---------------------------------------------
Cash Flows From Operating Activities (224,837) (982,567) (757,730) (77.1)
Cash Flows From Investing Activities -0- 90,990 (90,990) (100.0)
Cash Flows From Financing Activities 400,000 890,982 (490,982) (55.1)
- --------------------------------------------------------------------------------------
The use of cash from operations for the six months ended April 30, 2008 was due
primarily to our Net Loss of, $951,260 principally offset by non-cash charges
for Impairment of approximately $641,800 and certain other costs relating to the
convertible bond warrants.
During the six months ended April 30, 2008, no cash was derived or expended as
result of investing activities.
During the six months ended April 30, 2008, $ 400,000 cash provided by financing
activities represented monies derived from our convertible note and warrant
private offering. This is compared to $890,982 advanced in the prior period.
As a result of the foregoing the Company had a net increase of $175,163 of cash
and had $175,396 remaining as of April 30, 2008. As of June 12,2008 we had
approximately $153,000 in cash after the receipt of $50,000 for the additional
one half subscription referred to in the following paragraph.
Since its inception, the Company has incurred significant losses and, as of
April 30, 2008 had accumulated losses of $15,851,856.For the six months ended
April 30, 2008, the Company's net loss was $951,260 which included $641,800
representing good will impairment in connection with the Company's recent
merger. In addition, the Company had negative working capital of $1,286,148, at
April 30, 2008. The Company, after the merger and restructuring, raised $400,000
in a convertible note offering (and subsequent to April 30, 2008 has recently
obtained a subscription for an additional $50,000 from its convertible note and
warrant offering). As a result of the restructuring:
o The Company is not engaged in any business activity other than
exploring new businesses and is incurring minimal overhead;
o While legally obligated for payment of most of its payables, under the
terms of the Restructuring Agreement a third party is obligated to the
Company for payment of these obligations and the Company does not
anticipate these obligations will result in cash outlays.
While the Company will incur further operating losses and experience negative
cash flow in the near future, the Company believe it has sufficient cash to
conduct limited operations until at least November 30, 2008. If addition, if the
Notes are not converted or extended by November 30, 2008 the Company will need
in excess of $450,000 of funds for the repayment of the Notes.
New Management desires to pursue various aspects of the entertainment business
and is considering several avenues. At the present time we have no operations.
No matter what business we pursue we shall need additional capital, the amount
of which will depend upon on our business operations. In the event that we are
unable to raise these funds, we will then be required to delay our plans to
implement any new business.
-16-
The nature of our business is such that significant cash outlays are required to
produce and acquire entertainment content including films, television programs,
music soundtracks and albums. However, net revenues from these projects are
earned over an extended period of time after their completion or acquisition.
Accordingly, we will require a significant amount of cash to fund our present
operations and to continue to grow our business. Any business entered into will
require financing s for the foreseeable future. Therefore we will be dependent
on continued access to external sources of financing. Our current financing
strategy is to sell our securities to raise a substantial amount of our working
capital.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the six months ended April
30, 2008 that have or are reasonably likely to have, a current or future effect
on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to our interests.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
ITEM 4. CONTROLS AND PROCEDURES.
As of April 30, 2008 we carried out an evaluation of the effectiveness of
the design and operation of our "disclosure controls and procedures" (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under the supervision and
with the participation of our management, including Jason Meyers our Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, Mr.
Meyers concluded that our disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management to allow timely decisions regarding
required disclosure.
-17-
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended April 30, 2008 we sold two units of our securities
in a private placement. Each unit consisted of $100,000 note and warrants to
purchase 5,000,000 of our shares at an exercise price of one cent ($.01), The
notes are convertible at a conversion price is one cent ($.01). Both conversion
aof the note and exercise of the warrant are contingent on increasing the
authorized number of shares. Of common stock of the Company and are exempt from
the registration requirements under that act.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER
DESCRIPTION OF EXHIBIT
31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRIMEDIA ENTERTAINMENT GROUP, INC.
Date: June 16, 2008 /s/ Jason Meyers
----------------
Jason Meyers
Chief Executive Officer and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
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