UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER: 005-79752
AGU ENTERTAINMENT CORP.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
COLORADO 84-1557072
--------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11077 BISCAYNE BLVD., SUITE 100
MIAMI, FL 33161
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(305) 899-6100
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(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's common stock, no par value, outstanding as
of August 16, 2004 was 21,395,791.
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X]
AGU ENTERTAINMENT CORP.
(FORMERLY LEXINGTON BARRON TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
FORM 10-QSB
INDEX
PAGE
PART I. UNAUDITED FINANCIAL INFORMATION ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of June 30, 2004 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2004
and 2003 and Inception through June 30, 2004 (unaudited) 5
Condensed Consolidated Statement of Changes in Shareholders Deficiency 6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004
and 2003 and Inception through June 30, 2004 (unaudited) 7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
FORWARD LOOKING STATEMENTS
This report includes a number of "forward-looking statements" as that term
is defined in Section 27A of the Securities Act and Section 21E of the Exchange
Act. These statements reflect management's current views with respect to future
events and financial performance and include statements regarding the intent,
belief or current expectations of us and members of our management team, as well
as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance, involve risk and uncertainties, and that actual results may differ
materially from those contemplated by such forward-looking statements. Readers
are urged to carefully review and consider the various disclosures made by us in
this report and in our other reports filed with the Securities and Exchange
Commission. Important factors currently known to management could cause actual
results to differ materially from those in forward-looking statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of such factors. We undertake no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes in the future operating results
over time. We believe that our assumptions are based upon reasonable data
derived from and known about our business and operations. No assurances are made
that actual results of operations or the results of our future activities will
not differ materially from our assumptions.
2
PART 1. UNAUDITED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AGU ENTERTAINMENT CORP. AND SUBSIDIARIES
(FORMERLY LEXINGTON BARRON TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2004
(UNAUDITED)
ASSETS
Current Assets:
Cash $ 600
Note receivable, related party 15,500
Prepaid expenses 101,588
-----------
Total current assets 117,688
Property and Equipment, net of accumulated
depreciation of $54,385 283,252
Intangibles, net 971,935
Other assets 26,604
-----------
Total Assets $ 1,399,479
===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued liabilities $ 663,722
Subordinated convertible notes 50,000
Notes payable, related parties 428,812
Notes payable, other 1,699,000
Capital leases payable, current 12,439
Equipment note, current 11,739
Other current liabilities 724,796
-----------
Total current liabilities 3,590,508
Capital leases payable - non current 18,019
Equipment note - non current 42,841
Notes payable, related parties - non current 245,493
-----------
Total liabilities 3,896,861
-----------
Commitments and Contingencies --
Shareholders' Deficiency:
Preferred stock, no par value; 10,000,000 shares authorized
0 shares issued and outstanding --
Common stock, no par value; 50,000,000 shares
authorized, 21,395,791 shares issued and outstanding 769,779
Deficit accumulated during development stage (3,267,161)
-----------
Total shareholders' deficiency (2,497,382)
-----------
Total liabilities and shareholders' deficiency $ 1,399,479
===========
See accompanying notes to condensed consolidated financial statements
3
AGU ENTERTAINMENT CORP. AND SUBSIDIARIES
(FORMERLY LEXINGTON BARRON TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
------------ ------------
Revenues $ 15,000 $ --
------------ ------------
Operating Expenses
Promotion and advertising 394,263 --
Depreciation and amortization 54,689 --
Other general and administrative costs 1,091,421 26,242
------------ ------------
Total operating expenses 1,540,373 26,242
------------ ------------
Operating loss (1,525,373) (26,242)
Interest expense 32,640 --
------------ ------------
Loss before income taxes (1,558,013) (26,242)
Income tax provision -- --
------------ ------------
Net loss $ (1,558,013) $ (26,242)
============ ============
Basic and diluted loss per share $ (0.07) $ (0.00)
============ ============
Weighted average common shares outstanding -
Basic and diluted 21,318,560 6,664,014
============ ============
See accompanying notes to condensed consolidated financial statements
4
AGU ENTERTAINMENT CORP. AND SUBSIDIARIES
(FORMERLY LEXINGTON BARRON TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003, AND
FOR THE PERIOD MAY 20, 2003 (INCEPTION) THROUGH JUNE 30, 2004
(UNAUDITED)
INCEPTION TO
2004 2003 JUNE 30, 2004
------------ ------------ ------------
Revenues $ 15,000 $ -- $ 108,209
------------ ------------ ------------
Operating Expenses
Promotion and advertising 528,230 -- 558,532
Depreciation and amortization 66,987 -- 83,485
Other general and administrative costs 1,830,523 26,242 2,684,236
------------ ------------ ------------
Total operating expenses 2,425,740 26,242 3,326,253
------------ ------------ ------------
Operating loss (2,410,740) (26,242) (3,218,044)
Interest expense 45,154 -- 49,117
------------ ------------ ------------
Loss before income taxes (2,455,894) (26,242) (3,267,161)
Income tax provision -- -- --
------------ ------------ ------------
Net loss $ (2,455,894) $ (26,242) $ (3,267,161)
============ ============ ============
Basic and diluted loss per share $ (0.14) $ (0.01) $ (0.20)
============ ============ ============
Weighted average common shares outstanding -
Basic and diluted 18,125,528 3,332,007 16,306,945
============ ============ ============
See accompanying notes to condensed consolidated financial statements
5
AGU ENTERTAINMENT CORP. AND SUBSIDIARIES
(FORMERLY LEXINGTON BARRON TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
FOR THE PERIOD MAY 20, 2003 (INCEPTION) THROUGH JUNE 30, 2004
(UNAUDITED)
ACCUMULATED
COMMON STOCK DEFICIT DURING
SHARES AMOUNT DEVELOPMENT STAGE TOTAL
----------- ----------- ----------- -----------
Common stock issued in exchange
for cash on May 20, 2003 (inception) 14,628,324 $ 400 $ -- $ 400
Common stock issued in exchange
for services, March 22, 2004 2,294,140 28,677 -- 28,677
Recapitalization as a result of merger with
Lexington Barron Technologies, Inc.
on April 1, 2004 4,230,614 -- -- --
Convertible subordinate notes and accrued
interest converted into common stock,
April 18, 2004 203,482 610,445 -- 610,445
Notes payable and accrued interest
converted into common stock, June 30, 2004 39,231 130,257 -- 130,257
Net loss -- -- (3,267,161) (3,267,161)
----------- ----------- ----------- -----------
Balance at June 30, 2004 21,395,791 $ 769,779 $(3,267,161) $(2,497,382)
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements
6
AGU ENTERTAINMENT CORP. AND SUBSIDIARIES
(FORMERLY LEXINGTON BARRON TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003, AND
FOR THE PERIOD MAY 20, 2003 (INCEPTION) THROUGH JUNE 30, 2004
INCEPTION TO
2004 2003 JUNE 30, 2004
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(2,455,894) $ (26,242) $(3,267,161)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 66,987 -- 83,485
Common stock issued as payment for services 28,677 -- 28,677
Decrease in accounts receivable 40,671 -- --
Increase in prepaid expenses (101,588) -- (101,588)
Increase in other assets (22,219) -- (26,604)
Increase in accounts payable and accrued liabilities 337,213 -- 674,424
Increase in other liabilities 124,796 -- 124,796
----------- ----------- -----------
Net cash used in operating activities (1,981,357) (26,242) (2,483,971)
----------- ----------- -----------
Cash flows from investing activities:
Disbursements for intangibles (51,035) -- (51,035)
Increase in note receivable, related party -- -- (15,500)
Disbursements for property and equipment (182,159) (350) (236,895)
----------- ----------- -----------
Net cash used in investing activities (233,194) (350) (303,430)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from convertible subordinated notes 50,000 -- 650,000
Proceeds from notes payable to related parties 235,000 -- 349,400
Payment on capital leases (5,224) -- (6,409)
Payment of notes payable (30,673) -- (34,390)
Proceeds from the sale of common stock -- 400 400
Proceeds from other notes payable 1,829,000 38,182 1,829,000
----------- ----------- -----------
Net cash provided by financing activities 2,078,103 38,582 2,788,001
----------- ----------- -----------
Net (decrease) increase in cash (136,448) 11,990 600
Cash, beginning of period 137,048 -- --
----------- ----------- -----------
Cash, end of period $ 600 $ 11,990 $ 600
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ -- $ --
=========== =========== ===========
Cash paid for interest $ 6,515 $ -- $ 6,515
=========== =========== ===========
Non-cash financing activities:
Common stock issued as payment for services $ 28,677 $ -- $ 28,677
=========== =========== ===========
Conversion of liabilities to common stock $ 740,702 $ -- $ 740,702
=========== =========== ===========
Equipment acquired through capital lease obligations $ 12,940 $ -- $ 36,452
=========== =========== ===========
Equipment acquired through notes payable $ -- $ -- $ 63,875
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements
7
AGU ENTERTAINMENT CORP. AND SUBSIDIARIES
(FORMERLY LEXINGTON BARRON TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
AGU Entertainment Corp. (formerly Lexington Barron Technologies, Inc.) was
incorporated on August 23, 2000 to engage in financial, operational and systems
consulting to startup and small businesses. With the exception of the Share
Exchange Agreement described in Note 2, AGU Entertainment Corp. ("AGU") was an
inactive development stage, public reporting company and did not engage in any
significant operations or enter into any material transactions during the first
six months of 2004. Prior services have included market research, business plan
development, strategy development, financial modeling and forecasting, and
pre-IPO and IPO consulting.
Effective April 1, 2004, AGU entered into a Share Exchange Agreement with
Pyramid Music Corp. ("PMC"), a Florida corporation having an inception date of
May 20, 2003, whereby AGU acquired 100% of the outstanding common stock of PMC
in exchange for issuing 16,922,464 shares of its common stock (see Note 2). PMC
is a development stage company and was formed for the purpose of developing
market share in the recording and broadcast media industries through the
establishment of a media distribution channel and archived video and music
collection libraries.
PMC has two wholly-owned operating subsidiaries that are or will become
engaged in the following services: (i) the formation and operation of a
television network, The Tube Music Network, Inc., ("The Tube") that plans to air
traditional music videos and live concerts of contemporary music material that
is derived from archived video and music collection libraries, and (ii) a
production, marketing and distribution record company, Pyramid Records
International, Inc. ("PRI"), that has merged audio, visual and Internet content
into one corporate concept.
On March 26, 2004, in anticipation of the completion of the share
exchange, Lexington Barron Technologies, Inc. changed its name to AGU
Entertainment Corp.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of AGU and its
subsidiaries (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial reporting and the regulations of the Securities and Exchange
Commission ("SEC") for quarterly reporting. The interim unaudited condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in AGU's annual report on Form
10-KSB as filed with the SEC for the year ended December 31, 2003, and with the
audited consolidated financial statements of PMC and its subsidiaries included
in the Company's Form 8-K/A filed with the SEC on June 15, 2004. Management
acknowledges its responsibility for the preparation of the accompanying interim
condensed consolidated financial statements which reflect all adjustments
considered necessary, in the opinion of management, for a fair statement of the
results of interim periods presented. The accompanying financial statements
reflect the results of operations of PMC and its subsidiaries for all periods
presented (see Note 2) and the results of AGU beginning April 1, 2004. Because
PMC was not formed until May 20, 2003, the financial statements for 2004 are not
comparable to those of the prior year. In addition, the results of operations
for the interim periods are not necessarily indicative of the results of
operations for the entire year.
8
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SHARE EXCHANGE AGREEMENT
On April 1, 2004, under the terms of the Share Exchange Agreement, AGU (an
inactive public reporting company) acquired 100% of the stock of PMC in exchange
for 16,922,464 newly issued shares of common stock of AGU. The number of shares
of AGU exchanged in this transaction represented approximately 80% of the issued
and outstanding common stock of AGU. As a result of this transaction, the former
shareholders of PMC own, on a fully diluted basis, approximately 80% of the
outstanding common stock of the Company, resulting in a change in control.
The transaction was accounted for as a reverse merger and recapitalization
whereby PMC is deemed to be the acquirer for accounting purposes. Because PMC is
deemed to be the surviving accounting and reporting entity, only PMC's
historical balances and results of operations are reflected in the accompanying
financial statements for all periods presented. At April 1, 2004, AGU had no
identifiable assets or liabilities, and the transaction did not have a material
effect on PMC's financial condition or results of operations.
3. PREPAID EXPENSES
Prepaid expenses include a deposit to an escrow account in connection with
a joint venture agreement (see Note 8). On March 25, 2004, PRI committed to a
marketing and promotional budget in the amount of $400,000 in connection with a
record and DVD distribution project. Of this amount, $200,000 was deposited into
an escrow account with an independent trustee by one of the Company's promissory
note holders, pursuant to the terms of a trust agreement. As of June 30, 2004
approximately $98,000 had been spent in accordance with the trust agreement and
approximately $102,000 remained in the escrow account, reflected as prepaid
expenses on the Company's balance sheet. The Company expects to incur the
remainder of the expenditure commitment amount prior to December 31, 2004.
4. INTANGIBLES
Intangible assets at June 30, 2004 are as follows:
Value at Accumulated Balance at
acquisition amortization June 30, 2004
---------- ---------- ----------
Distribution agreement
(see Note 5) $ 350,000 $ (29,100) $ 320,900
Other intangibles 651,035 -- 651,035
---------- ---------- ----------
Total intangibles $1,001,035 $ (29,100) $ 971,935
========== ========== ==========
The distribution agreement is being amortized on a straight line basis
over a period of three years. Other intangibles pertain to costs to develop
network logos, graphic templates and on-air intersticials for The Tube (see Note
8), which is expected to commence operations in the fourth quarter of 2004. The
Company will begin amortizing these assets over their estimated useful lives
upon the launch of The Tube. Aggregate amortization expense over the next four
years is expected to be as follows:
9
For the year ending December 31:
Remainder of 2004 $ 58,333
2005 $442,184
2006 $442,184
2007 $ 29,234
5. DEBT
On March 3, 2004, PRI entered into an Assignment and Assumption Agreement
with Pyramid Media Group, Inc. ("PMG") (of which a related party and a
shareholder of the Company own a controlling interest), whereby PRI agreed to
assume all of the covenants and obligations of a Distribution Agreement between
PMG and ARK 21 Records, LP ("ARK21"). The Distribution Agreement provides that
ARK21 be the exclusive manufacturer and distributor of recorded music, in all
contemporary formats, for PRI through normal retail channels throughout the
United States. In exchange for the rights to the Distribution Agreement and
certain assets of PMG, PRI assumed the obligation to repay $350,000 of notes
payable to certain principals of PMG. PMC has guaranteed the payment of these
notes, which have an annual interest rate of 8%. Approximately $25,000 of these
notes were paid in 2004 and the outstanding balance as of June 30, 2004 is
approximately $325,000.
At March 31, 2004, the Company had outstanding $650,000 of 5% Convertible
Subordinated Notes due November 30, 2004. On April 18, 2004 $600,000 of these
notes, plus $10,445 of accrued interest, were converted into 203,482 shares of
the Company's common stock at a price of $3 per share, and $50,000 of
Convertible Subordinated Notes remained outstanding as of June 30, 2004.
In addition to the aforementioned Convertible Subordinated Notes, the
Company has issued, since its inception, 5% Promissory Notes in the aggregate
amount of $2,178,400 to fund its operations. On June 30, 2004 $130,000 of these
notes plus accrued interest were converted into 39,231 shares of the Company's
common stock at an average price of $3.30 per share. The outstanding balance on
these notes, including those payable to related parties, was approximately
$2,048,000 at June 30, 2004, of which $1,150,000 were due at June 30, 2004. On
August 13, 2004, the Noteholders agreed to extend the maturity on these notes
until October 30, 2004.
6. STOCKHOLDERS' EQUITY
On April 18, 2004 $600,000 of the Company's Convertible Subordinated
Notes, plus $10,445 of accrued interest, were converted into 203,482 shares of
the Company's common stock at a price of $3 per share. On June 30, 2004 $130,000
of notes payable plus accrued interest of $257 were converted into 39,231 shares
of the Company's common stock at an average price of $3.30 per share.
On March 22, 2004 the Company recognized expense of $28,677 based on the
estimated fair value of the shares issued in connection with services rendered
to the Company.
7. EARNINGS (LOSS) PER SHARE
Basic income or (loss) per share is computed by dividing net income or
(loss) attributable to common shareholders by the weighted average number of
shares outstanding during the year. Diluted income or loss per share
attributable to common shareholders further considers the impact of dilutive
common stock equivalents. Diluted (loss) per share has not been presented
separately for the three and six months ended June 30, 2004 and 2003 because the
effect of the additional shares which would be issued, assuming conversion of
the convertible debentures, are anti-dilutive for the aforementioned periods.
10
8. COMMITMENTS AND CONTINGENCIES
In June of 2004 the Company entered into an agreement with Radical Media
Inc. ("Radical") whereby Radical will design and develop network logos, graphic
templates, and on-air intersticials for The Tube. In accordance with the terms
of the agreement, the Company paid $50,000 to Radical as of June 30, 2004 and an
additional $100,000 in July of 2004. The Company is required to pay an
additional $50,000 prior to August 31, 2004, and is required to issue 112,500
shares of its common stock, which the contract values at $450,000, to Radical
prior to August 31, 2004. The Company has recorded the entire $650,000
commitment as an intangible asset and the remaining $600,000 of cash and stock
consideration yet to be paid as of June 30, 2004 is reflected in Other Current
Liabilities on the Company's balance sheet.
In accordance with the terms of one of the Company's music projects, the
Company has committed to a marketing and promotion expenditure budget of
$400,000 to support the project. As of June 30, 2004, the Company has spent
approximately $98,000 and expects to spend the remaining $302,000 prior to
December 31, 2004. In connection with this commitment, the Company has
approximately $102,000 remaining in an escrow account from the proceeds of one
of its promissory note issuances.
The Company, as of June 30, 2004, had no legal proceedings. From time to
time, the Company may be involved as plaintiff or defendant in various legal
proceedings arising in the usual course of business.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). This Interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Numbers 46 (R)
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46 (R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46 (R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special purpose entities for periods ending after
December 15, 2004. The adoption of FIN No. 46 (R) is not expected to have an
impact on the Company's consolidated financial position, results of operations
or cash flows.
In March 2004, the U.S. Securities and Exchange Commission's Office of the
Chief Accountant and the Division of Corporate Finance released Staff Accounting
bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments". This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB 105 requires the disclosure of the accounting
policy for loan commitments, including methods and assumptions used to estimate
the fair value of loan commitments, and any associated hedging strategies. SAB
105 is effective for derivative instruments entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate.
The Company has not yet completed its evaluation of SAB 105, but does not
anticipate a material impact on the financial statements.
11
10. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company's
financial condition and operating results, specifically a working capital
deficiency of approximately $3.5 million, a shareholders' deficiency of
approximately $2.5 million, a net loss from operations since inception of
approximately $3.3 million and net cash used in operations since inception of
approximately $2.5 million, raise substantial doubt about its ability to
continue as a going concern. The Company's existence is dependent on
Management's ability to develop profitable operations and resolve the Company's
liquidity problems. Management anticipates that the Company will attain
profitable status and improve its liquidity through the continued development of
market share in the recording and broadcast media industries through the
development of a media distribution channel and archived video and music
collection libraries.
The Company is attempting to complete a substantial equity offering prior
to December 31, 2004 in order to provide for working capital, capital
expenditures and business expansion. There can be no assurances that the Company
will be successful in completing such an offering. If the Company is not
successful in raising additional capital, its financial condition and business
operations will be adversely affected. Moreover, if the Company is successful in
implementing its initial business plan, it will need to raise additional funds
in order to finance more rapid expansion, develop new and enhanced services and
products, and respond to competitive pressures.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
11. RELATED PARTY TRANSACTIONS
On July 25, 2003 the Company executed three promissory notes with three
shareholders, totaling $114,400. The notes are due November 30, 2004 and bear
interest at 5% annually. During June 2004, the Company received loans from two
shareholders totaling $235,000 and executed 5% promissory notes, which are due
June 30, 2005.
On March 3, 2004, in connection with the Distribution Agreement and assignment
of certain assets of PMG (see Note 5), the Company assumed the obligation to
repay $350,000 of notes payable to two shareholders of the Company. The notes
have an annual interest rate of 8%. Payments commenced in March of 2004, and the
balance due as of June 30, 2004 was approximately $325,000.
Accounts payable to related parties at June 30, 2004 totaled approximately
$165,000. Included in this amount was $36,000 in computer and internet services
provided by a shareholder, $59,000 in consulting services and expenses provided
by another shareholder, and $21,000 in consulting services provided by a
director.
An officer, shareholder and director of the Company agreed to defer a portion of
salary, payable under an employment agreement, until such time as adequate funds
become available. The amount deferred at June 30, 2004 was $89,000.
Additionally, there was also a note receivable from this officer at June 30,
2004 of $15,500.
12. SUBSEQUENT EVENTS
In July of 2004, the Company issued additional 8% Promissory Notes in the
aggregate principal amount of $600,000. The notes are due October 31, 2004.
On August 13, 2004, the Noteholders of $1,150,000 of promissory notes due
June 30, 2004, agreed to extend the maturity on these notes until October 30,
2004.
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
AGU Entertainment Corp. (formerly Lexington Barron Technologies, Inc.) was
incorporated on August 23, 2000 to engage in financial, operational and systems
consulting to startup and small businesses. With the exception of the Share
Exchange Agreement described in Note 2, AGU Entertainment Corp. ("AGU") was an
inactive development stage, public reporting company and did not engage in any
significant operations or enter into any material transactions during the first
six months of 2004. Prior services have included market research, business plan
development, strategy development, financial modeling and forecasting, and
pre-IPO and IPO consulting.
Effective April 1, 2004, AGU entered into a Share Exchange Agreement with
Pyramid Music Corp. ("PMC"), a Florida corporation having an inception date of
May 20, 2003, whereby AGU acquired 100% of the outstanding common stock of PMC
in exchange for issuing 16,922,464 shares of its common stock (see Note 2). PMC
is a development stage company and was formed for the purpose of developing
market share in the recording and broadcast media industries through the
establishment of a media distribution channel and archived video and music
collection libraries.
PMC has two wholly-owned operating subsidiaries that are or will become
engaged in the following services: (i) the formation and operation of a
television network, The Tube Music Network, Inc., ("The Tube") that plans to air
traditional music videos and live concerts of contemporary music material that
is derived from archived video and music collection libraries, and (ii) a
production, marketing and distribution record company, Pyramid Records
International, Inc. ("PRI"), that has merged audio, visual and Internet content
into one corporate concept.
On March 26, 2004, in anticipation of the completion of the share
exchange, Lexington Barron Technologies, Inc. changed its name to AGU
Entertainment Corp.
LIQUIDITY AND CAPITAL RESOURCES
As a development stage company with no operating history, we are subject
to all the substantial risks inherent in the development of a new business
enterprise within an extremely competitive industry. We cannot assure you that
the business will continue as a going concern or ever achieve profitability. Due
to the absence of an operating history and the emerging nature of the market in
which we compete, we anticipate operating losses until such time as we can
develop a substantial and stable revenue base. From our inception on May 20,
2003 through June 30, 2004, we had revenues of $108,000 and incurred a net loss
of $3.3 million. Our financial condition and operating results, specifically a
working capital deficiency of approximately $3.5 million, a shareholders'
deficit of approximately $2.5 million, and net cash used in operations of
approximately $2 million in the first six months of 2004, raise substantial
doubt about our ability to continue as a going concern.
Since our inception, we have financed our operations through numerous debt
issuances. We issued $650,000 of 5% Convertible Subordinated Notes, $600,000 of
which were subsequently converted into 203,482 shares of common stock of the
Company at a price of $3 per share. The remaining $50,000 matures on November
30, 2004. We also issued approximately $2,178,000 of 5% Promissory Notes since
our inception, $130,000 of which were converted into 39,231 shares of the
Company's common stock on June 30, 2004. We are currently in negotiations to
extend the maturities of the Promissory Notes, of which $1,150,000 were due at
June 30, 2004, and the remainder of which mature on October 31, 2004. On August
13, 2004, the Noteholders agreed to extend the maturity on these notes until
October 30, 2004. We believe that we will be successful in extending these
maturities and do not expect to receive any demands for repayment prior to the
completion of a substantial equity offering. While there can be no assurances,
it is also possible that some or all of these notes may be converted into
equity.
13
On March 3, 2004 PRI entered into an Assignment and Assumption Agreement
with Pyramid Media Group, Inc. ("PMG") whereby PRI agreed to assume all of the
covenants and obligations of a Distribution Agreement between PMG and ARK 21
Records, LP ("ARK21"). In exchange for the rights to the Distribution Agreement
and certain assets of PMG, PRI assumed the obligation to repay $350,000 of notes
payable to certain principals of PMG. PMC has guaranteed the payment of these
notes, which have an annual interest rate of 8%. Allen Jacobi, President of PRI,
is an owner and controlling shareholder of PMG. Approximately $25,000 of these
notes were paid in 2004 and the outstanding balance as of June 30, 2004 is
approximately $325,000.
In June of 2004 we entered into an agreement with Radical Media Inc.
("Radical") whereby Radical will design and develop network logos, graphic
templates, and on-air intersticials for The Tube. As of July 31, 2004, in
accordance with the terms of the agreement, the Company has paid $150,000 to
Radical and will be required to pay an additional $50,000 prior to August 31,
2004. The Company will also be required to issue 112,500 shares of its common
stock to Radical prior to August 31, 2004.
In accordance with the terms of one of our music projects, we have
committed to a marketing and promotion expenditure budget of $400,000 to support
the project. As of June 30, 2004, we have spent approximately $98,000 and expect
to spend the remaining $302,000 prior to December 31, 2004. In connection with
this commitment, we have approximately $102,000 remaining in an escrow account
from the proceeds of one of our promissory note issuances.
The growth and development of our business will require a significant
amount of additional working capital. We currently have limited financial
resources and based on our current operating plan, we will need to raise
additional capital in order to continue as a going concern. We currently do not
have adequate cash to meet our short or long term objectives. In the event
additional capital is raised, it may have a dilutive effect on the existing
shareholders of the Company.
We are attempting to complete a substantial equity offering prior to
December 31, 2004 in order to provide for working capital, capital expenditures
and business expansion. We cannot assure you that we will be successful in
completing such an offering, in executing the business plan or achieving
profitability. If we are not successful in raising additional capital, our
financial condition and business operations will be adversely affected.
Moreover, if we are successful in implementing our initial business plan, we
will need to raise additional funds in order to finance more rapid expansion,
develop new and enhanced services and products, and respond to competitive
pressures.
Cash used in operations for the six months ended June 30, 2004 was
$1,981,000, as we did not generate any significant revenues to offset our cash
operating expenses, which consisted primarily of payroll, promotion and
advertising expenses and fees for professional services. We expect this trend to
continue until such time as we can complete a substantial equity offering,
launch The Tube and emerge from the development stage.
Cash used in investing activities amounted to $233,000, as we spent
$50,000 in cash under the agreement with Radical and $182,000 on property, plant
and equipment. We received cash from financing activities in the amount of
$2,078,000 as a result of the issuance of notes payable, including $235,000 from
two of our shareholders. We believe we will continue to be successful in raising
additional capital. In July, we received, from an existing Noteholder, an
additional $600,000 in exchange for promissory notes due October 30, 2004.
RESULTS OF OPERATIONS
For the three months ended June 30, 2004 we had revenues of $15,000,
incurred operating expenses of $1,540,000 and a net loss of $1,558,000. Our
business activities to date have been primarily to develop the infrastructure
necessary to market and launch The Tube, and to explore potential musical
projects as we build our recorded music distribution business. We do not expect
to generate significant revenues until we exit our development stage, which we
anticipate will be late in 2004 or early 2005.
For the six months ended June 30, 2004 we had revenues of $15,000,
operating expenses of $2,426,000 and a net loss of $2,456,000.
14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any major market risk exposure to changing interest rates. We
currently do not engage in any hedging activities to manage this risk. At June
30, 2004, we had no outstanding indebtedness that was subject to changes in
interest rates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). This Interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Numbers 46 (R)
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46 (R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46 (R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special purpose entities for periods ending after
December 15, 2004. The adoption of FIN No. 46 (R) is not expected to have an
impact on the Company's consolidated financial position, results of operations
or cash flows.
In March 2004, the U.S. Securities and Exchange Commission's Office of the
Chief Accountant and the Division of Corporate Finance released Staff Accounting
Bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments." This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB105 requires the disclosure of the accounting
policy for loan commitments, including methods and assumptions used to estimate
the fair value of loan commitments, and any associated hedging strategies. SAB
105 is effective for derivative instruments entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate. The
Company has not yet completed its evaluation of SAB 105, but does not anticipate
a material impact on the financial statements.
ITEM 3. CONTROLS AND PROCEDURES
(a) As of June 30, 2004, the Company had performed an evaluation, under the
supervision its chief executive officer and chief financial officer, of
the effectiveness of the design and operation of the company's disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e) or
15d-15(e)). Based upon that evaluation, the chief executive officer and
chief financial officer concluded that the Company's disclosure controls
and procedures are effective in timely alerting them to material
information relating to the Company and its consolidated subsidiaries
required to be included in the Company's reports filed or submitted under
the Exchange Act. Due to the inherent limitations of the effectiveness of
any established disclosure controls and procedures, management cannot
provide absolute assurance that the objectives of its disclosure controls
and procedures will be met.
(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph
(a) above.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company, as of June 30, 2004, had no legal proceedings. From time to
time, the Company may be involved as plaintiff or defendant in various legal
proceedings arising in the usual course of business.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
On April 1, 2004, the Company acquired 100% of the stock of Pyramid Music Corp.,
("PMC") in exchange for 16,922,464 shares of common stock of the Company.
Following the completion of this transaction the former shareholders of PMC
owned, on a fully diluted basis, approximately 80% of the then issued and
outstanding shares of common stock of the Company. As of April 1, 2004 the
Company had issued and outstanding 21,053,076 shares of common stock and the
former principal owners of Lexington Barron Technologies, Inc.'s common stock
owned 4,230,612 shares, or approximately 20% of the outstanding common stock of
the Company.
During the three months ended June 30, 2004 $730,000 of notes payable and
$10,702 of accrued interest were converted into 242,713 shares of common stock.
No cash proceeds were received by the Company from the holders of the notes. The
transactions were exempt from registration under the Securities Act in reliance
upon Section 3(a)(9) of the Securities Act as a security exchanged by the issuer
with its existing security holders exclusively where no commission or
remuneration was paid or given directly or indirectly for soliciting such
exchange.
On June 23, 2004, effective as of April 26, 2004, the Company entered an
agreement with Radical Media Inc., pursuant to which the Company will be
required to issue 112,500 shares of its common stock to Radical prior to August
31, 2004. This issuance will be exempt from registration under the Securities
Act in reliance upon Section 4 (2) of the Securities Act and/or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering. The recipient of the securities will represent their intentions to
acquire the securities for investment only and not with a view to sell in
connection with any distribution thereof, and appropriate legends will be
affixed to the securities issued in such transaction. The recipient will have
adequate access, through its relationships with the Company, to information
about the Company. No underwriters will be employed in the transaction. The
securities will be deemed restricted securities for purposes of the Securities
Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
(a) On July 29, 2004, the Board of Directors of the Company adopted the
2004 Stock Option and Stock Incentive Plan ("Plan"). The shareholders of the
Company will vote on the plan at the next annual meeting of shareholders of the
Company.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Agreement with GSMB regarding marketing and promotional expenditure
commitment.
10.2 Trust Agreement in connection with the marketing and promotional
expenditure commitment.
10.3 Agreement with Radical Media Inc
31 - Section 302 Certification
32 - Section 906 Certification
(b) Reports on Form 8-K
On April 16, 2004, the Company filed a Report on Form 8-K, subsequently
amended on April 21, 2004 to report that the Company had acquired 100% of the
stock of Pyramid Music Corp. in exchange for 16,922,464 shares of common stock
of the Company, and on June 15, 2004 to report a change in the Company's
independent certified public accountants.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATE: AUGUST 20, 2004 /s/ David C. Levy
----------------------------
David C. Levy
Chief Executive Officer and
Chief Financial Officer
17