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 March 31, 2005
|_| 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.
-------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 84-1557072
--------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3200 West Oakland Park Blvd.
Lauderdale Lakes, FL 33311
-------------------------------------------------------------------------
(Address of principal executive offices)
(954) 714-8100
-------------------------------------------------------------------------
(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 May 15, 2005 was 24,597,603.
Transitional Small Business Disclosure Format (check one): Yes |_| ; No |X|
AGU ENTERTAINMENT CORP.
(Formerly Lexington Barron Technologies, Inc.)
FORM 10-QSB
INDEX
Page
----
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of March 31, 2005
(unaudited)....................................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2005 and 2004 (unaudited)............ 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Three Months Ended March 31, 2005 (unaudited)...... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 (unaudited)............ 6
Notes to Condensed Consolidated Financial Statements (unaudited).... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 14
Item 3. Controls and Procedures............................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 20
Item 2. Unregistered Sales of Equity Securities and use of proceeds ........ 20
Item 3. Defaults Upon Senior Securities..................................... 21
Item 4. Submission of Matters to a Vote of Security
Holders.................................................................... 21
Item 5. Other Information................................................... 21
Item 6. Exhibits ........................................................... 21
SIGNATURES................................................................... 23
FORWARD LOOKING STATEMENTS
Cautionary Statement Pursuant to Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
This report may include a number of "forward-looking statements" as that term is
defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These statements reflect
management's current views with respect to future events and financial
performance and include statements regarding management's intent, belief or
current expectations, which are based upon assumptions about future conditions
that may prove to be inaccurate. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance,
involve risk and uncertainties, and that as a result, actual results may differ
materially from those contemplated by such forward-looking statements. Such
risks include, among other things, the volatile and competitive markets in which
we operate, our limited operating history, our limited financial resources, our
ability to manage our growth and the lack of an established trading market for
our securities. When considering forward-looking statements, readers are urged
to carefully review and consider the various disclosures, including risk factors
and their cautionary statements, made by us in this report and in our other
reports filed with the Securities and Exchange Commission.
2
Part 1. Unaudited Financial Information
Item 1. Financial Statements
AGU ENTERTAINMENT CORP.
(Formerly Lexington Barron Technologies, Inc.)
Consolidated Balance Sheets
As of March 31, 2005 and December 31, 2004
2005 2004
Unaudited Audited
Assets
Current Assets:
Cash $ 5,379 $ 771,533
Accounts receivable, net of allowance of $10,000 and $0 475,139 507,482
Prepaid expenses 254,628 225,037
------------ ------------
Total current assets 735,146 1,504,052
Property and equipment, net of accumulated
depreciation of $187,661 and $123,260 9,419,133 9,110,373
Intangibles, net of accumulated amortization 884,635 913,735
Other assets 137,635 164,737
------------ ------------
Total assets $ 11,176,549 $ 11,692,897
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 771,062 $ 501,514
Accounts payable - related parties 109,887 169,258
Notes payable, related parties 636,325 445,642
Convertible notes payable 7,150,000 7,150,000
Equipment note - current portion 12,346 12,140
Capital leases payable - current portion 14,276 13,881
Accrued expenses 789,918 910,418
Other current liabilities 6,872 36,965
------------ ------------
Total current liabilities 9,490,686 9,239,818
Capital leases payable - long term portion 8,209 11,876
Equipment note - long term portion 33,503 36,668
Convertible notes payable - net of unamortized
discounts 944,052 854,178
------------ ------------
Total liabilities 10,476,450 10,142,540
------------ ------------
Stockholders' Equity:
Preferred stock, no par value; 10,000,000 shares authorized,
-0- shares issued and outstanding -- --
Common stock, no par value; 100,000,000 shares authorized,
24,220,361 and 23,392,576 shares issued and outstanding 5,646,246 4,658,380
Additional paid-in capital 4,952,422 3,593,634
Accumulated deficit (9,898,569) (6,701,657)
------------ ------------
Total stockholders' equity 700,099 1,550,357
------------ ------------
Total liabilities and stockholders' equity $ 11,176,549 $ 11,692,897
============ ============
See accompanying notes to condensed consolidated financial statements
3
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Revenues $ 150,503 $ --
Cost of sales and services performed 36,745
------------ ------------
Gross profit 113,758 --
Operating Expenses
Promotion and advertising 71,530 133,968
Depreciation and amortization 93,501 12,299
Other general and administrative costs 1,695,872 739,100
------------ ------------
Total operating expenses 1,860,903 885,367
------------ ------------
Operating loss (1,747,145) (885,367)
Interest expense 1,449,767 12,514
------------ ------------
Loss before income taxes (3,196,912) (897,881)
Income tax provision -- --
------------ ------------
Net loss $ (3,196,912) $ (897,881)
============ ============
Basic and diluted loss per share $ (0.15) $ (0.06)
============ ============
Weighted average common shares outstanding -
Basic and diluted 23,720,678 14,880,427
============ ============
See accompanying notes to condensed consolidated financial statements
4
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
Condensed Consolidated Statements of
Changes in Stockholders' Equity
For the Three Months Ended March 31, 2005
(Unaudited)
Retained
Additional Earnings
Paid-In (Accumulated
Shares Amount Capital Deficit) Total
--------------------------------------------------------------------
Balance at December 31, 2004 23,392,576 $ 4,658,380 $ 3,593,634 $(6,701,657) $ 1,550,357
Issuance of shares of common stock for services 108,570 286,592 -- -- 286,592
Issuance of shares of common stock to employees for
compensation 45,540 107,474 -- -- 107,474
Issuance of common stock as a price adjustment for
cetain investors 5,000 -- -- -- --
Common stock issued in connection with the acquisition
of property plant and equipment 97,800 244,500 -- -- 244,500
Issuance of warrants in connection with the issuance of
convertible debt -- -- 1,358,788 -- 1,358,788
Issuance of shares in settlement of liabilities 121,875 337,500 -- -- 337,500
Issuance of shares of common stock to directors for
services 5,000 11,800 -- -- 11,800
Issuance of common stock to a director as an adjustment
to shares awarded pursuant to an employment agreement 444,000 -- -- -- --
Net loss -- -- -- (3,196,912) (3,196,912)
--------------------------------------------------------------------
Balance at March 31, 2005 24,220,361 $ 5,646,246 $ 4,952,422 $(9,898,569) $ 700,099
====================================================================
See accompanying notes to condensed consolidated financial statements
5
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
Condensed Consolidated Statements of Cash Flows
For the Three Months Ending March 31, 2005 and 2004
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $(3,196,912) $ (897,881)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 93,501 12,299
Common stock issued as payment for services 405,866 28,677
Amortization of discount on convertible notes payable 1,178,662 --
Amortization of deferred financing fees 18,253
Decrease in accounts receivable 32,343 40,671
Increase in prepaid expenses (29,591) (200,200)
Increase (decrease) in other assets 8,849 (369,804)
Increase in accounts payable and accrued liabilities 427,177 88,891
(Decrease) increase in other liabilities (30,093) 24,462
----------- -----------
Net cash used in operating activities (1,091,945) (1,272,885)
----------- -----------
Cash flows from investing activities:
Disbursements for property and equipment (128,661) (22,334)
----------- -----------
Net cash used in investing activities (128,661) (22,334)
----------- -----------
Cash flows from financing activities:
Payment of notes payable (2,959) (9,972)
Proceeds from notes payable to related parties 190,683 --
Payment on capital leases (3,272) (3,417)
Proceeds from other notes payable 270,000 1,220,000
----------- -----------
Net cash provided by financing activities 454,452 1,206,611
----------- -----------
Net decrease in cash (766,154) (88,608)
Cash, beginning of period 771,533 137,048
----------- -----------
Cash, end of period $ 5,379 $ 48,440
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ --
=========== ===========
Cash paid for interest $ 50,512 $ 4,862
=========== ===========
Non-cash financing activities:
Common stock issued as payment for services $ 405,866 $ 28,677
=========== ===========
Conversion of liabilities to common stock $ 337,500 $ --
=========== ===========
Equipment acquired through issuance of common stock $ 244,500 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements
6
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 (unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
AGU Entertainment Corp. (formerly Lexington Barron Technologies, Inc.) was
incorporated in the state of Colorado on August 23, 2000 to engage in financial,
operational and systems consulting to startup and small businesses. Prior to
April 1, 2004, AGU Entertainment Corp. ("AGU") was a development stage, public
reporting company and did not engage in any significant operations or enter into
any material transactions.
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 to the
stockholders of PMC (see note 2). PMC was 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 music oriented television
network and archived video and music collection libraries.
On October 20, 2004, AGU was reincorporated in the state of Delaware
through a merger of AGU into a wholly owned subsidiary corporation incorporated
in the State of Delaware. The reincorporation resulted in AGU becoming a
Delaware corporation effective as of October 21, 2004 and did not result in any
change in the company's name, business, assets, liabilities or net worth.
At March 31, 2005, AGU had two wholly-owned operating subsidiaries that
were engaged in the following services:(i) the formation and operation of a
television network, The Tube Music Network, Inc., ("The Tube") that airs
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, AGU Music, Inc. ("AGU
Music"), formerly Pyramid Records International, Inc. In February of 2005, the
Company formed two new subsidiaries, AGU Studios, Inc., ("AGU Studios") a
Florida corporation, and 3200 Oakland Park Boulevard, Inc., a Florida
corporation for the purpose of developing a media center for the film and
entertainment business.
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 the Company's annual report
on Form 10-KSB as filed with the SEC for the year ended December 31, 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 AGU and its
subsidiaries for the three months ended March 31, 2005 and the results of the
Company for the three months ended March 31, 2004. Because the Company was a
development stage enterprise for most of 2004, the financial statements for 2005
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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
AGU Entertainment Corp. and its subsidiaries. All significant intercompany
transactions have been eliminated.
7
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. INTANGIBLES
Intangible assets at March 31, 2005 are as follows:
Value at acquisition Accumulated amortization Balance at March 31, 2005
-------------------- ------------------------ -------------------------
Distribution agreement $ 350,000 $ (116,400) $ 233,600
Other intangibles 651,035 -- 651,035
-------------------- ------------------------- -------------------------
Total intangibles $ 1,001,035 $ (116,400) $ 884,635
==================== ========================= =========================
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, whose
national launch commenced in the second quarter of 2005. The Company will begin
amortizing these assets over their estimated useful lives beginning in May of
2005. Aggregate amortization expense over the next three years, assuming an
estimated useful life of two years for the other intangibles, is expected to be
as follows:
For the year ending December 31:
--------------------------------
Remainder of 2005 $ 277,185
2006 441,918
2007 165,532
8
3. NOTES PAYABLE
Convertible Notes
Convertible Notes Payable consists of the following at March 31, 2005 and
December 31, 2004:
2004 2004
------------- -------------
First mortgage note secured by Lauderdale Property $ 7,000,000 $ 7,000,000
Second mortgage note secured by Lauderdale Property 3,000,000 3,000,000
Other convertible notes and subordinated debentures 1,745,000 1,475,000
------------- -------------
11,745,000 11,475,000
Less: current portion (7,150,000) (7,150,000)
Less: Discount on convertible mortgage and notes payable (3,650,948) (3,470,822)
------------- -------------
Notes payable, long term portion, net of discounts $ 944,052 $ 854,178
============= =============
In connection with the purchase of the Lauderdale Property, the Company
issued to the seller on December 22, 2004 a convertible mortgage promissory note
in the principal amount of $7,000,000. The note pays interest at an annual rate
of 6.5% and is convertible at any time at the seller's option into shares of the
Company's common stock at a conversion price of $2.50 per share. A principal
payment of $250,000 is due on June 25, 2005 and the remaining balance of the
note matures on December 22, 2005. At the closing of the purchase of the
Lauderdale Property, the Company made a prepayment into an escrow account of
$150,000 for interest on the note and real estate taxes on the Lauderdale
Property covering the quarterly period ending March 31, 2005. Additional
quarterly prepayments of interest and real estate taxes in the amount of
$145,000 were required to be put into escrow beginning March 22, 2005. The
Company did not make the required prepayment on March 22, 2005. This amount was
paid on behalf of the Company by the holder of the Mitchell Note (which is
evidenced by the second mortgage on the Lauderdale Property) on April 22, 2005,
at which time the Company received a letter from the holder of the first
mortgage note acknowledging the cure of the payment default. All of the
Company's obligations to the holder of this convertible promissory note and
related agreements are secured by a first mortgage on the Lauderdale Property,
including all of the Company's rights, title and interest as lessor in and to
all leases or rental arrangements of the Lauderdale Property.
On May 13, 2005 the Company executed a letter agreement with the holder of
the Mitchell Note whereby the Company agreed that the $145,000 interest and real
estate tax payment made on behalf of the Company, the $100,000 that was advanced
to the Company on April 29, 2005 by the holder of the Mitchell Note, the unpaid
interest on the Mitchell Note for March and April 2005 and the legal fees
incurred by the holder in connection with the letter agreement, would accrue
interest at the default rate of 18% and would be due and payable by the Company
on August 1, 2005. The letter agreement also extends the deadline for which the
Company was to have filed a registration statement to register the Company's
common stock pertaining to the Mitchell Note and related warrants from April 30,
2005 to June 30, 2005, and extends the date for which the registration statement
is required to be declared effective to November 30, 2005. The Company also
agreed to grant the holder of the Mitchell Note an additional 150,000 warrants
to purchase the Company's common stock at an exercise price of $1.50 per share,
with the same registration and anti-dilution protections contained in the
warrants originally granted to the holder of the Mitchell Note (See Note 10).
The Mitchell Note is evidenced by a second mortgage on the Lauderdale Property
and by substantially all of the Company's other assets, including the capital
stock of its subsidiaries. Because the Company did not pay the required monthly
interest payments for March and April 2005, which resulted in the Company
receiving a default letter from the holder of the Mitchell Note on April 8,
2005, the interest rate on the note was increased to the default rate of 18%. If
in the future the Company is unable to comply with the terms of the Mitchell
Note, the May 13 letter agreement or the terms of the first mortgage note, the
holders of either note may seek to foreclose on the Lauderdale Property.
During January and March of 2005 the Company issued convertible promissory
notes to various accredited investors in the aggregate principal amount of
$270,000. The $270,000 of convertible promissory notes are due on the second
anniversary of their issuance date and are convertible into shares of the
Company's common stock at the option of each holder at a conversion price of
$3.00 per share. In connection with the issuance of the convertible notes, the
Company issued to the holders an aggregate of 89,999 common stock purchase
warrants to purchase the Company's common stock (See Note 4). The common stock
purchase warrants have a two year term and the exercise price is $3.00 per
share. The common stock purchase warrants were valued at $46,217, and this
amount was recorded as a discount to the convertible promissory notes. The
unamortized balance of the discount for these notes as of March 31, 2005 was
$42,982.
9
Related Party Notes
On March 3, 2004, AGU Music entered into an Assignment and Assumption
Agreement with Pyramid Media Group, Inc. ("PMG") (of which a related party and a
stockholder of the Company own a controlling interest), whereby AGU Music 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 manufacturer and distributor of certain recorded
music projects for AGU Music through normal retail channels throughout the
United States. In exchange for the rights to the Distribution Agreement and
certain assets of PMG, AGU Music assumed the obligation to repay $350,000 of
notes payable ("the ARK 21 Notes") to certain principals of PMG. The Company has
guaranteed the payment of the ARK 21 Notes, which have an annual interest rate
of 8%, and were to have matured on May 1, 2007. Approximately $19,000 of these
notes was paid in 2004 and the outstanding balance as of March 31, 2005 is
approximately $331,000. The terms of the ARK 21 Notes require monthly payments
of principal and interest. The Company has not made the required monthly
principal and interest payments since June of 2004. On May 5, 2005, the Company
entered into a settlement agreement with the holders of the ARK 21 Notes, who
are significant stockholders of the Company. Under the terms of the settlement
agreement, the ARK 21 Notes were cancelled and were replaced with new notes
containing the same terms and conditions as the old notes, except that the new
notes have a beginning principal balance of $331,240 and require, in addition to
the monthly payment of approximately $8,500, the repayment of principal in the
amount of $50,000 for every $1,000,000 in equity capital raised by the Company.
In addition, upon the Company's closing of a capital raising of at least
$250,000, the Company must pay all the principal and interest due under the
original notes for the period January through April, 2005 in the amount of
approximately $36,000. The Company also agreed to issue 500,000 restricted
shares of the Company's common stock to the holders of the ARK 21 Notes.
On March 31, 2005 the Company received a loan in the amount of $190,683
from a stockholder of the Company who is a related party. This loan pays
interest at 10% and is due June 30, 2005. As of March 31, 2005 the Company had
outstanding loans payable to related parties in the aggregate amount of
$636,325. The Company currently does not have the resources to repay these loans
upon their maturity.
4. STOCKHOLDERS' EQUITY
During the first three months of 2005, the Company issued 108,570 shares
of common stock to third parties in exchange for services performed. These
services were valued at $286,592 and this amount was charged to earnings during
the period. The Company also issued 45,540 shares of common stock to employees
and 5,000 shares to directors during the first three months of 2005 and recorded
compensation expense of $119,274. In addition, the Company issued 444,000 shares
of common stock to its chairman as an adjustment to the shares allocated to the
original investors of the Company, 5,000 shares of common stock as a share price
adjustment for certain investors, 97,800 shares of common stock in connection
with the acquisition of property and equipment valued at $244,500 and 121,875
shares of common stock in settlement of a liability of $337,500.
During the first three months of 2005, the Company issued 89,999 detached
common stock purchase warrants to acquire the Company's common stock in
connection with the issuance of convertible promissory notes (see note 3). The
warrants have an exercise price of $3.00 per share and expire on the maturity
dates of the respective convertible promissory notes with which they were
issued. In addition, the Company issued 2,550,000 common stock purchase warrants
at an exercise price of $3.00 per share and 3,575 common stock purchase warrants
at an exercise price of $2.00 per share to a significant stockholder in
consideration for converting a substantial portion of his holdings of Company
promissory notes to common stock and for extending the maturity dates of some of
the other promissory notes of the Company held by him. The aggregate value of
the warrants issued during the period was $1,358,788, and this amount was
recorded as a discount on the Company's convertible debt with an offset to Paid
in Capital. The discount is being amortized on a pro rata basis over the life of
the respective convertible debt instruments. No warrants were exercised during
the first three months of 2005 and 5,325,910 warrants were outstanding at March
31, 2005.
10
5. EARNINGS PER SHARE
Basic income or loss per share is computed by dividing net income or loss
attributable to common stockholders by the weighted average number of shares
outstanding during the year. Diluted income or loss per share attributable to
common stockholders further considers the impact of dilutive common stock
equivalents. Diluted loss per share has not been presented separately for the
three ending March 31, 2005 and 2004 because the effect of the additional shares
which would be issued, assuming conversion of the convertible notes and common
stock purchase warrants, are anti-dilutive for the aforementioned periods.
6. COMMITMENTS AND CONTINGENCIES
On January 27, 2005, the Company was served with a summons with notice by
Jarred Weisfeld and Cherry Jones, individually and doing business as
JarredCherry Productions LLC, referred to herein as the plaintiffs, which
indicates that the plaintiffs commenced an action against the Company. The
plaintiffs allege, among other things, breach of contract, breach of implied
covenant of good faith and fair dealing, unfair competition, tortuous
misappropriation of goodwill, and deceptive acts and practices pursuant to
Section 349 of the New York General Business Law. This dispute stems from an
alleged agreement between the plaintiffs and the Company related to the works of
the late Mr. Russell Jones, who was the son of Ms. Jones and the management
client of Mr. Weisfeld. The Company served on plaintiffs and filed a demand for
complaint in the jurisdiction in which the summons with notice was filed by the
plaintiffs. The plaintiffs were required to respond within 20 calendar days as
measured from February 23, 2005, to avoid having the action dismissed. The
plaintiffs did not respond within the required 20 calendar days but did file a
complaint on March 15, 2005. The complaint indicates that the plaintiffs are
seeking compensatory and punitive damages of no less than $1,812,500 for each of
the six causes of action alleged. On May 6, 2005 the Company forwarded a
proposed definitive settlement agreement to the Plaintiffs Attorney and is
currently waiting for their response. To date, the Company has not heard from
the Plaintiffs or their Counsel. The Company believes that this dispute will be
resolved, however the Company is unable to predict the outcome of this action
and the effect that it may have on the Company's liquidity and results of
operations.
October 13, 2004, The Tube received notification from a television channel
featuring music related programming that the circle logo used by The Tube is
"confusingly similar" to the circle logo used by that television channel,
supporting claims of trademark infringement and unfair competition. On November
3, 2004, the Company responded to the October 13, letter stating it does not
believe the logos are confusingly similar or that any trademark infringement has
occurred. The Company has not received a response to its November 3, 2004
letter. The Company intends to vigorously defend any challenge to its use of its
logo.
The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions, will not have
a material effect on the financial position or results of operations of the
Company.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, Share-Based Payments (revised 2004), ("SFAS No. 123R"). This
statement eliminates the option to apply the intrinsic value measurement
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, to stock based compensation issued to employees. The
Statement requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based on the fair value of the
award at the date of grant, and recognize that cost over the period during which
an employee is required to provide services in exchange for the award. The
adoption of SFAS No. 123R could have a material effect on the Company's results
of operations.
11
8. SEGMENT REPORTING
The Company has three reportable operating segments: The Tube, AGU Music
and AGU Studios. The Tube airs traditional music videos and live concerts of
contemporary music material that is derived from archived video and music
collection libraries. When fully operational, the Company expects that The Tube
will generate revenues by selling advertising time and through direct sales of
music related to the content broadcasted on the network. AGU Music is a record
company engaged in the release of recorded music materials acquired through
artist signings and acquisitions. AGU Studios, when fully operational, will
become a comprehensive media entertainment Center, which will offer film,
television and music production facilities, sound stages for recording and
executive offices for AGU's operations and other entertainment industry
organizations. The Company expects to generate revenue by offering technical and
production services in the areas of film, television and music production, and
through the rental of office and studio space. Each segment is separately
managed and is evaluated by the Company's chief operating decision makers for
the purpose of allocating the Company's resources. The Company also has a
corporate headquarters function which does not meet the criteria of a reportable
operating segment.
The table below presents information about reportable segments for the
three months ending March 31, 2005 and 2004.
2005 2004
----------- -----------
Revenues
AGU Music $ 105,927 $ --
AGU Studios 44,576 --
The Tube -- --
----------- -----------
Consolidated revenues $ 150,503 $ --
=========== ===========
Operating loss
AGU Music 18,760 (315,340)
AGU Studios (21,555) --
The Tube (811,242) (293,262)
----------- -----------
Segment loss (814,037) (608,602)
Corporate (933,108) (276,765)
----------- -----------
Consolidated operating loss (1,747,145) (885,367)
=========== ===========
The table below reconciles the measurement of segment profit shown in the
previous table to the Company's consolidated income before taxes:
2005 2004
----------- -----------
Total segment loss $ (814,037) $ (608,602)
Operating loss - corporate (933,108) (276,765)
Interest expense (1,449,767) (12,514)
----------- -----------
Loss before income tax $(3,196,912) $ (897,881)
=========== ===========
9. RELATED PARTY TRANSACTIONS
On March 31, 2005 the Company received a loan in the aggregate amount of
$190,683 from a related party and stockholder of the Company. This loan pays
interest at 10% and is due June 30, 2005. As of March 31, 2005 the Company had
outstanding loans payable to related parties in the aggregate amount of
$636,325. The Company currently does not have the resources to pay these loans
upon their maturity.
On May 5, 2005, the Company entered into a settlement agreement with the
holders of the ARK 21 Notes (See Note 3), who are significant stockholders of
the Company. Under the terms of the settlement agreement, the ARK 21 notes were
cancelled and were replaced with new notes containing the same terms and
conditions as the old notes, except that the new notes have a beginning
principal balance of $331,240 and require, in addition to the monthly payment of
approximately $8,500, the repayment of principal in the amount of $50,000 for
every $1,000,000 in equity capital raised by the Company. In addition, upon the
Company's closing of a capital raising of at least $250,000, the Company must
pay all the principal and interest due under the original notes for the period
January through April, 2005 in the amount of approximately $36,000. The Company
also agreed to issue 500,000 restricted shares of the Company's common stock to
the holders of the ARK 21 Notes.
12
For the period from January 1, 2005 through March 31, 2005, the Company
received various consulting services totaling approximately $63,600 from two
stockholders. At March 31, 2005 approximately $58,600 was unpaid.
Additionally, two officers of the Company agreed to defer a portion of
their salary, payable under their employment agreements until such time as
adequate capital has been raised by the Company. The amount deferred as of March
31, 2005 was approximately $151,000.
Accounts payable to related parties at March 31, 2005 totaled
approximately $110,000. Included in this amount was $5,400 in consulting
services and expenses provided by a director.
For the period from April 1, 2005 through May 17, 2005, the Company
received various loans from three stockholders totaling $98,500 as follows;
$75,000 from DML Marketing Corp, $7,500 from John P. Grandinetti , and $5,000
from David Levy. The loans will accrue interest at an annual rate of 10% and
mature on June 30, 2005.
10. SUBSEQUENT EVENTS
On May 5, 2005, the Company entered into a settlement agreement with the
holders of the ARK 21 Notes, who are significant stockholders of the Company.
Under the terms of the settlement agreement, the ARK 21 notes were cancelled and
were replaced with new notes, terms of which are more fully described in Notes 3
and 9.
On May 13, 2005, the Company executed a letter agreement with the holder
of the Mitchell Note whereby the Company agreed that the $145,000 interest and
real estate tax payment made on behalf of the Company, the $100,000 that was
advanced to the Company on April 29, 2005 by the holder of the Mitchell Note,
the unpaid interest on the Mitchell Note for March and April 2005 and the legal
fees incurred by the holder in connection with the letter agreement, would
accrue interest at the default rate of 18% and would be due and payable by the
Company on August 1, 2005. The letter agreement also extends the deadline for
which the Company was to have filed a registration statement to register the
Company's common stock pertaining to the Mitchell Note and related warrants from
April 30, 2005 to June 30, 2005, and extends the date for which the registration
statement is required to be declared effective to November 30, 2005. The Company
also agreed to grant the holder of the Mitchell Note an additional 150,000
warrants to purchase the Company's common stock at an exercise price of $1.50
per share, with the same registration and anti-dilution protections contained in
the warrants originally granted to the holder of the Mitchell Note.
On April 19, 2005, the Company was advanced $100,000 from a stockholder
and issued a promissory note that matures on June 30, 2005 and has an annual
interest rate of 10%.
On April 20, 2005, the Company issued 277,242 shares of its common stock
as follow;
o 200,000 shares in connection with a services agreement
o 13,667 shares in exchange for professional services received by the
Company
o 60,000 shares as consideration for defaults on promissory notes
o 3,575 shares as payment of interest
13
11. 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 $8.8 million and accumulated deficit of
approximately $9.9 million at March 31, 2005, as well as a net loss of
approximately $3.2 million and net cash used in operations of approximately $1.1
million for the quarter ended March 31, 2005 and de minimus cash on hand, 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 the Company's television network, recorded music
business and the Lauderdale Property.
These financial statements do not include any adjustments that might
result from the outcome of this uncertainty. If the Company is unsuccessful in
obtaining the additional capital necessary to fund its operations, it may be
forced to downsize certain operations, restructure its current debt obligations
on terms less favorable to the Company than the existing obligations or sell
some of its assets. It may also need to seek protection under the federal
bankruptcy laws or be forced into bankruptcy by its creditors. There can be no
assurance the Company will be successful in its efforts to raise additional
financing.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
We were formerly known as Lexington Barron Technologies, Inc. and were
incorporated in the State of Colorado on August 23, 2000 for the purpose of
addressing the specific needs of small businesses and startup organizations by
providing a broad range of consulting and advisory services, ranging from market
research and analysis to business plan and systems development to financial
consulting. In early 2004, our former management determined that their business
model was not progressing and that we should either merge with or acquire an
operating company with an operating history and assets.
Effective April 1, 2004, we completed a Share Exchange Agreement with
Pyramid Music Corp., a Florida corporation ("PMC"). Under the terms of the Share
Exchange Agreement, we acquired 100% of the outstanding common stock of PMC in
exchange for 16,922,464 shares of our common stock. On March 26, 2004, in
anticipation of the completion of the share exchange, we changed our name to AGU
Entertainment Corp. Upon completion of this transaction, the former stockholders
of PMC owned, on a fully diluted basis, approximately eighty percent of the
outstanding common stock of AGU Entertainment Corp. as of April 1, 2004,
resulting in a change in control. The transaction was accounted for as a reverse
merger and recapitalization whereby PMC, which became a wholly owned subsidiary
of AGU Entertainment Corp., is deemed to be the acquirer for accounting
purposes. In addition, we had no identifiable assets and liabilities as of April
1, 2004. As a result, PMC is deemed to be the surviving accounting and reporting
entity, and all of the historical financial information presented in this Form
10-KSB, including the consolidated financial statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
reflect the assets, liabilities, results of operations and cash flows of PMC and
its subsidiaries, The Tube Music Network, Inc., a Florida corporation ("The
Tube") and Pyramid Records International, inc., a Florida corporation ("PRI").
As a result of the share exchange, AGU became the parent company of PMC,
which was a development stage company with an inception date of May 20, 2003
with two wholly-owned operating subsidiaries that are engaged in the following
services: (i) the formation and operation of a television network, The Tube
Music Network, Inc., ("The Tube") that airs 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"). PMC was dissolved
in July of 2004 and at that time The Tube and PRI became wholly-owned
subsidiaries of AGU Entertainment Corp. In February 2005, PRI officially changed
its name to AGU Music, Inc. ("AGU Music").
14
The Tube is a 24-hour per day broadcast digital television network that
delivers high quality music video, audio, pay-per-view options and commerce to
digital viewers nationally. Its national launch is expected to take place in the
second quarter of 2005. The Tube can currently be seen in a limited number of
households in various parts of the United States.
In the late 1990's, broadcasters throughout the country were granted
portions of the airwaves at no cost with the understanding that they would
provide free digital signals as part of the U.S. government's desire for high
definition television. However, due to improvements in digital signal
compression, the bandwidth required to broadcast digital television was
substantially reduced, leaving broadcasters with excess bandwidth to use at
their discretion. As a result, there are currently a number of media companies
that have the ability to offer a digital quality picture over the air directly
to consumers and indirectly through the cable and satellite operators' digital
box using surplus bandwidth from local broadcasters. These media outlets can
offer additional channels to broadcast local news, sports, weather or other
specialty services like The Tube. We expect to gain additional distribution for
The Tube by reaching agreements with these service providers to air The Tube's
digital signal. We are currently in negotiations with several of these service
providers, and expect to eventually leverage this market penetration into
households served by larger cable and satellite systems. There can be no
assurance as to whether or when these negotiations will result in definitive
agreements. We expect that The Tube will earn revenues through advertising sales
and through e-commerce with respect to music and related products that will be
seen by consumers on The Tube.
AGU Music produces both studio albums and DVD concerts. It entered into
several agreements for distribution and released three albums to the public in
2004. Our ability to produce new albums and DVD concerts in 2005 will be
dependent on the amount of working capital available to us (see Liquidity and
Capital Resources) for the required marketing, promotional and other operating
expenses necessary to produce recorded music projects. We have already cancelled
plans for one significant music project due to a lack of available working
capital, and do not expect to release any new projects until our liquidity
situation improves substantially.
In the third quarter of 2004, our board of directors decided to purchase
and develop a facility that would serve as a comprehensive media entertainment
recording and production facility that would encompass film, television and
musical projects. On December 22, 2004, we closed on the purchase of a 162,000
square foot facility situated on 23 acres of land in Lauderdale Lakes, Florida
(the "Lauderdale Property"). Our business plan envisions a facility that will
consist of approximately 75,000 square feet of office space available for lease,
six sound stages ranging in size from 1,800 square feet to 28,000 square feet, a
12,000 square foot audio production studio, a 7,000 square foot commissary and a
two and a half acre back lot for film projects. We believe that this will be one
of the largest studio production facilities on the east coast and that there is
substantial demand within the entertainment industry for a facility of this type
in South Florida.
It was originally anticipated that within three years the rental income
from the office space and production facilities would be sufficient to cover
substantially all of the operating expenses of the studio, which would allow us
to use the soundstages and production studio to develop new music and film
projects without requiring significant cash outlays. To date, we have not
entered into any leases or any other material contractual commitments with
respect to the usage of this facility. The Company expects to generate revenue
by offering technical and production services in the areas of film, television
and music production, and through the rental of office and studio space. There
can be no assurances that we will be able to reach our projected rental income
levels. A limited amount of production activity did take place on the Lauderdale
Property in 2004 and in the first quarter of 2005, and in February 2005 we
formed a separate subsidiary, AGU Studios, Inc., a Florida Corporation, under
which our studio development and production activities will take place.
Because of the start up nature of our business throughout most of 2004,
our results of operations and cash flows in the first quarter of 2005 are not
comparable to the same period of a year ago.
15
Liquidity and Capital Resources
We do not have adequate cash to meet our current obligations as well as
our short and long term objectives. The growth and development of our business
will require a significant amount of additional working capital. Our sources of
cash are not adequate to fund the next 12 months of operations. We currently
have very limited financial resources and will need to raise additional capital
in order to continue as a going concern. If we are unsuccessful in obtaining the
additional capital necessary to fund our operations, we may be forced to
downsize certain operations, restructure our current debt obligations on terms
less favorable to us than the existing obligations or sell some of our assets.
We may also need to seek protection under the federal bankruptcy laws or be
forced into bankruptcy by our creditors.
Our financial condition and operating results, specifically a working
capital deficit of approximately $8.8 million, an accumulated deficit of
approximately $9.9 million, de minimus cash on hand as of March 31, 2005 and a
net loss of $3.2 million and net cash used in operations of approximately $1.1
million for the three months ending March 31, 2005 raise substantial doubt about
our ability to continue to operate as a going concern.
As a company that has recently emerged from the start-up phase with a
limited 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 and lack of
sufficient capital to fund our operations and implement our business plan, we
anticipate operating losses until such time as we can successfully implement our
business strategy, which includes the national launch of The Tube and the
development of the Lauderdale Property. Because of losses incurred by us through
our most recent fiscal year end and our general financial condition, our
independent registered public accounting firm inserted a going concern
qualification in their audit report for the most recent fiscal year that raises
substantial doubt about our ability to continue as a going concern.
Since May 20, 2003, we have financed our operations through numerous debt
and equity issuances. In addition to the convertible notes discussed below, we
issued approximately $4,699,000 of convertible notes or debentures,
approximately $3,379,000 of which plus accrued interest, were subsequently
converted into 1,173,540 shares of common stock of the Company and $75,000 of
which was repaid in 2004. Approximately $1,095,000 of the remaining convertible
promissory notes mature between the fourth quarter of 2006 and the first quarter
of 2007 and a $150,000 promissory note matures on June 30, 2005. While these
convertible notes are convertible into shares of our common stock at a
conversion price of $3.00 per share, there can be no assurances that these notes
will be converted prior to their becoming due. We currently do not have the
financial resources to repay these promissory notes without completing an
additional financing, reducing expenses, selling assets or extending the
maturities of this debt. If we are unsuccessful in obtaining the additional
capital necessary to fund our operations, it may be forced to downsize certain
operations, restructure our current debt obligations, find a strategic partner,
and or sell some certain assets. We may also have to seek protection under the
federal bankruptcy laws or be forced into bankruptcy by its creditors.
As part of the purchase price of the Lauderdale Property, we issued to the
seller on December 22, 2004 a convertible promissory note in the principal
amount of $7,000,000. The note pays interest at an annual rate of 6.5% and is
convertible at any time at the seller's option into shares of our common stock
at a conversion price of $2.50 per share. A principal payment of $250,000 is due
on June 25, 2005 and the remaining balance of the note matures on December 22,
2005. All of our obligations to the seller under this convertible promissory
note and related agreements are secured by a first mortgage on the Lauderdale
Property, including all of our rights, title and interest as lessor in and to
all leases or rental arrangements of the Lauderdale Property. At the closing of
the purchase of the Lauderdale Property, we made a prepayment into an escrow
account of $150,000 for interest on the note and real estate taxes on the
Lauderdale Property covering the quarterly period ending March 31, 2005.
Additional quarterly prepayments of $145,000 are required to be put into escrow
beginning March 22, 2005. We did not make the required prepayment on March 22,
2005. This amount was paid on behalf of the Company by one of our other
creditors (see below) on April 22, 2005, at which time we received a letter from
the holder of the first mortgage note acknowledging the cure of the payment
default.
Also on December 22, 2004, we issued a secured convertible term note in
the principal amount of $3,000,000 to Mitchell Entertainment Company (the
"Mitchell Note"). The note pays interest monthly at an annual rate of 10% and
has a maturity date of December 19, 2006. The note can be converted at any time
by the lender into shares of our common stock at an initial conversion price of
$1.50 per share, subject to anti-dilution protections and certain other
adjustments. The Mitchell note is secured by a second mortgage on the Lauderdale
Property and by substantially all of our other assets, including the capital
stock of our subsidiaries.
16
On May 13, 2005 we executed a letter agreement with the holder of the
Mitchell Note whereby we agreed that the $145,000 interest and real estate tax
payment made on behalf of the Company, the $100,000 that was advanced to us on
April 29, 2005 by the holder of the Mitchell Note, the interest installments on
the Mitchell Note for April 1,2005 and May 1, 2005 and the legal fees incurred
by the holder in connection with the letter agreement, together with the
interest due on the foregoing amount would accrue interest at the default rate
of 18% and would be due and payable by us on August 1, 2005. The letter
agreement also extends the deadline for which we were to have filed a
registration statement to register the Company's common stock pertaining to the
Mitchell Note and related warrants from April 30, 2005 to June 30, 2005, and
extends the date for which the registration statement is required to be declared
effective to November 30, 2005. We also agreed to grant the holder of the
Mitchell Note additional warrants of 100,000 and 50,000 respectively, to
purchase our common stock at an exercise price of $1.50 per share, with the same
registration and anti-dilution protections contained in the warrants originally
granted to the holder of the Mitchell Note. Because we did not pay the required
monthly interest payments for March and April 2005, which resulted in our
receiving a default letter from the holder of the Mitchell Note on April 8,
2005, the interest rate on the note was increased to the default rate of 18%. If
in the future we are unable to comply with the terms of the Mitchell Note, the
May 13, letter agreement or the terms of the first mortgage note, the holders of
either note may seek to foreclose on the Lauderdale Property.
On March 3, 2004 our AGU Music subsidiary entered into an Assignment and
Assumption Agreement with Pyramid Media Group, Inc. ("PMG") whereby AGU Music
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, AGU Music
assumed the obligation to repay $350,000 of notes payable to certain principals
of PMG (the "ARK 21 Notes"). The Company has guaranteed the payment of the ARK
21 notes, which have an annual interest rate of 8% and mature on May 1, 2007.
Allen Jacobi, the former President of AGU Music, is an owner and controlling
stockholder of PMG. Approximately $19,000 of these notes was paid in 2004 and
the outstanding balance as of March 31, 2005 is approximately $331,000. The
terms of these notes require monthly payments of principal and interest. We have
not made the required monthly principal and interest payments since June of
2004. On May 5, 2005, we entered into a settlement agreement with the holders of
the ARK 21 Notes, who are significant stockholders of the Company. Under the
terms of the settlement agreement, the ARK 21 Notes were cancelled and were
replaced with new notes containing the same terms and conditions as the old
notes, except that the new notes have a beginning principal balance of $331,240
and require, in addition to the monthly payment of approximately $8,500, the
repayment of principal in the amount of $50,000 for every $1,000,000 in equity
capital raised by us. In addition, upon the our closing of a capital raising of
at least $250,000, we must pay all the principal and interest due under the
original notes for the period January through April, 2005 in the amount of
approximately $36,000. We also agreed to issue 500,000 restricted shares of the
Company's common stock to the holders of the ARK 21 Notes.
We currently have a monthly cash requirement of approximately $550,000 and
we will need to raise additional capital in the second quarter and the balance
of 2005, for working capital, capital expenditures, business expansion,
repayment of maturing debt and to continue as a going concern. We anticipate
that we will need to raise up to approximately $6 million over the balance of
2005 to provide for these requirements. Management is evaluating several
alternatives, including the sale of assets, sale of equity securities or
issuance of additional debt, or finding a strategic partner. 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 and refinancing the $7,000,000 convertible promissory note
due in December 2005, our financial condition, business operations and ability
to continue as a going concern will be adversely affected, and we may need to
seek protection under the federal bankruptcy laws.
Cash used in operations for the first three months of 2005 was $1,092,000,
which was primarily the result of our operating loss of $1,747,000, partially
offset by increases to accounts payable and accrued expenses and the issuance of
common stock in exchange for services. Cash used in operations in 2004 was
$1,273,000. We expect to continue to generate negative cash flows from
operations until such time as we can complete a substantial debt or equity
offering and more fully develop our three lines of business. No assurances can
be given as to when or if we will be able to develop profitable operations.
17
Cash used in investing activities in the first quarter of 2005 amounted to
$129,000, as compared to $22,000 in 2004. The increase was due to higher capital
expenditures in 2005. Capital expenditures for the remainder of 2005 will depend
largely upon our ability to raise additional capital; however, our business plan
currently assumes approximately $1 million of capital expenditures over the next
twelve months.
We received cash from financing in the first quarter of 2005 in the amount
of $454,000, as compared to $1,207,000 in the same period of a year ago. The
decrease was due to fewer issuances of convertible notes in 2005.
We have experienced liquidity issues since our inception due primarily to
our limited ability, to date, to raise adequate capital on acceptable terms. We
have historically relied upon the issuance of promissory notes that are
convertible into shares of our common stock to fund our operations and currently
anticipate that we will need to continue to issue promissory notes and common
stock to fund our operations and repay our outstanding debt for the foreseeable
future. At March 31, 2005, we had approximately $12.5 million of debt
outstanding, approximately $7.3 million of which is due at various dates in
2005. We currently do not have the financial resources to repay any of these or
any of the aforementioned obligations without completing an additional
financing. We also currently do not have funds available for basic working
capital requirements beyond May 31, 2005. There can be no assurance that we will
be successful in obtaining additional funds necessary to finance our operation
or repay debt.
If we are unable to raise the necessary capital to meet our current and
future obligations, we will need to consider other alternatives, which could
include curtailing our business plan, selling some of our assets or finding a
strategic partner.
Moreover, as a result of our liquidity issues, we have experienced delays
in the repayment of certain promissory notes upon maturity. However, certain
holders of our promissory notes have agreed in 2004 and 2005 to extend the due
dates on their promissory notes. If in the future, the holders of our promissory
notes demand repayment of principal and accrued interest instead of electing to
extend the maturity dates on their notes and if we are unable to repay our debt
when due because of our continued liquidity issues, we may be forced into an
involuntary bankruptcy filing.
We do not have adequate cash to meet our current obligations as well as
its short and long term objectives. The growth and development of the Company's
business will require a significant amount of additional working capital. We
currently have very limited financial resources and will need to raise
additional capital in order to continue as a going concern. Our financial
condition and operating results, specifically a working capital deficit of
approximately $8.8 million, an accumulated deficit of approximately $9.9
million, de minimus cash on hand as of March 31, 2005 and a net loss of $3.2
million for the three months ending March 31, 2005 raise substantial doubt about
our ability to continue to operate as a going concern. If we are unsuccessful in
obtaining the additional capital necessary to fund our operations, we may be
forced to downsize certain operations, restructure our current debt obligations
on terms less favorable to the existing obligations or sell some of our assets.
We may also need to seek protection under the federal bankruptcy laws or be
forced into bankruptcy by our creditors.
Critical Accounting Policies and Estimates
The accounting policies that we have identified as critical to our
business operations and to an understanding of our results of operations are
described in detail in our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States of America, with no need for management's judgment in their
application. In other cases, preparation of our unaudited condensed consolidated
financial statements for interim periods requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. There can be no assurance that the actual results will not
differ from those estimates.
18
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, Share-Based Payments (revised 2004), ("SFAS No. 123R"). This
statement eliminates the option to apply the intrinsic value measurement
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, to stock based compensation issued to employees. The
Statement requires companies to measure the cost of employee services received
in exchange for an award of equity instruments based on the fair value of the
award at the date of grant, and recognize that cost over the period during which
an employee is required to provide services in exchange for the award. Adoption
of SFAS No. 123R could have a material effect on the Company's results of
operations.
Results of Operations for the Three Months ending March 31, 2005 and 2004
Revenues were $151,000 in 2005 and $0 in 2004. Approximately $106,000 of
this amount was related to recorded music shipments by AGU Music and the
remainder was generated by AGU Studios. AGU Music had gross profit of $83,000
and AGU Studios had gross profit of $31,000 during the period.
Operating expenses were $1,861,000 and $885,000 in 2005 and 2004
respectively, the majority of which was general and administrative expenses.
Thus far in 2005 our liquidity constraints have severely limited our ability to
engage in marketing, promotion, advertising and similar expenses necessary to
develop our business. We expect this trend to continue until such time as we can
complete a substantial debt or equity offering.
Interest expense in 2005 was $1,450,000, as compared to $12,500 in 2004,
and includes $1,197,000 for the amortization of debt discounts and the
amortization of deferred financing fees. The remainder of the increase in
interest expense is the result of increased indebtedness in 2005.
We did not record a tax benefit during this period as we determined that
it was more likely than not that we would not be able to generate sufficient
taxable income to use any net deferred tax assets. As such, we increased our
valuation allowance for the net deferred tax asset that existed at December 31,
2004 so that no net tax benefit was recorded in 2005.
Our net loss for the period was $3,196,000, as compared to $898,000 in the
prior year.
We anticipate entering into several affiliate agreements with digital
broadcasters, which will allow The Tube to be seen in approximately 20 million
homes by the end of 2005. While we expect this market penetration to generate a
substantial increase in marketing, promotion and other expenses both at The Tube
and at AGU Studios, we also expect that our revenues will ultimately increase
sufficiently enough to cover these increases. Thus, our results of operations in
fiscal 2004 are not indicative of our projected results of operations in fiscal
2005 and beyond.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, Share-Based Payments
(revised 2004), ("SFAS No. 123R"). This statement eliminates the option to apply
the intrinsic value measurement provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, to stock based
compensation issued to employees. The Statement requires companies to measure
the cost of employee services received in exchange for an award of equity
instruments based on the fair value of the award at the date of grant, and
recognize that cost over the period during which an employee is required to
provide services in exchange for the award. Adoption of SFAS No. 123R could have
a material effect on the Company's results of operations.
19
Item 3. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its
management, including its principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, the principal executive officer and principal
financial officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective in
reaching a reasonable level of assurance that management is timely alerted to
material information related to and during the period when our periodic reports
are being prepared.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
On January 27, 2005, the Company was served with a summons with notice by
Jarred Weisfeld and Cherry Jones, individually and doing business as
JarredCherry Productions LLC, referred to herein as the plaintiffs, which
indicates that the plaintiffs commenced an action against the Company. The
plaintiffs allege, among other things, breach of contract, breach of implied
covenant of good faith and fair dealing, unfair competition, tortuous
misappropriation of goodwill, and deceptive acts and practices pursuant to
Section 349 of the New York General Business Law. This dispute stems from an
alleged agreement between the plaintiffs and the Company related to the works of
the late Mr. Russell Jones, who was the son of Ms. Jones and the management
client of Mr. Weisfeld. The Company served on plaintiffs and filed a demand for
complaint in the jurisdiction in which the summons with notice was filed by the
plaintiffs. The plaintiffs were required to respond within 20 calendar days as
measured from February 23, 2005, to avoid having the action dismissed. The
plaintiffs did not respond within the required 20 calendar days but did file a
complaint on March 15, 2005. The complaint indicates that the plaintiffs are
seeking compensatory and punitive damages of no less than $1,812,500 for each of
the six causes of action alleged. On May 6, 2005 the Company forwarded a
proposed definitive settlement agreement to the Plaintiffs Attorney and is
currently waiting for their response. To date, the Company has not heard from
the Plaintiffs or their counsel. The Company believes that this dispute will be
resolved, however the Company is unable to predict the outcome of this action
and the effect that it may have on the Company's liquidity and results of
operations.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
See the Company's Current Reports on Form 8-K filed with the Securities
and Exchange Commission on April 28, 2005, May 11, 2005 and May 20, 2005.
20
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS
The following exhibits are incorporated by reference herein or filed herewith.
The warranties, representations and covenants contained in the agreements listed
below as exhibits should not be relied upon by buyers, sellers or holders of the
Company's securities and are not intended as warranties, representations or
covenants to any individual or entity except as specifically set forth in the
agreements.
Number Title
- ------ -----
2.1 Share Exchange Agreement, dated March 15, 2004, between the
shareholders of Pyramid Music Corp., Pyramid Music Corp. and
Lexington Barron Technologies, Inc. (Incorporated by reference to
the Registrants Form 8-K filed April 21, 2004, as amended)
2.2 Agreement and Plan of Merger, dated as of September 30, 2004, by and
between AGU Entertainment Corp., a Colorado corporation, and AGU
Entertainment Corp., a Delaware corporation (incorporated herein by
reference to the Registrant's Form 10-QSB filed November 12, 2004)
3.1 Certificate of Incorporation of AGU Entertainment Corp., a Delaware
corporation (incorporated herein by reference to the Registrant's
Form 10-QSB filed November 12, 2004)
3.2 Bylaws of AGU Entertainment Corp., a Delaware corporation
(incorporated herein by reference to the Registrant's Form 10-QSB
filed November 12, 2004)
3.4 Specimen certificate of the common stock of AGU Entertainment Corp.,
a Delaware company (incorporated herein by reference to the
Registrant's Registration Statement on Form SB-2 (File No.
333-86244)).
4.1 Convertible Promissory Note dated September 13, 2004, made by AGU
Entertainment Corp. in favor of Galt Financial Corp. (incorporated
herein by reference to the Registrant's Form 8-K filed September 20,
2004)
4.2 Warrant to subscribe for 500,000 shares of common stock of AGU
Entertainment Corp. issued to Galt Financial Corporation
(incorporated herein by reference to the Registrant's Form 8-K filed
September 20, 2004)
4.3 Secured Convertible Term Note issued by AGU Entertainment Corp., The
Tube Music Network, Inc., and Pyramid Records International, Inc. to
Mitchell Entertainment Company (incorporated herein by reference to
the Registrant's Form 8-K filed December 29, 2004)
21
4.4 Common Stock Purchase Warrant of AGU Entertainment Corp. issued to
Mitchell Entertainment Company (incorporated herein by reference to
the Registrant's Form 8-K filed December 29, 2004)
4.5 Promissory Note issued by AGU Entertainment Corp. to Charley Zeches,
in her capacity as trustee of Lakes Holding Trust U/A (incorporated
herein by reference to the Registrant's Form 8-K filed December 29,
2004)
10.1 Letter Agreement regarding $145,000 Protective Advance, dated April
14, 2005 (incorporated herein by reference to the Registrant's Form
8-K filed April 20, 2005)
10.2 Letter, dated April 22, 2005 from Elizabeth Buntrock (incorporated
herein by reference to the Registrant's Form 8-K/A filed April 28,
2005)
10.3 Settlement and Mutual Release Agreement, effective April 15, 2005,
by and among AgU Entertainment Corp. and each of its subsidiaries,
and Ned Siegel, Neil Strum and Strum Brothers Investment, LLC.
(incorporated herein by reference to the Registrant's Form 8-K filed
May 11, 2005)
10.4 Charter Affiliate Affiliation Agreement dated as of April 15, 2005,
by and between The Tube Music Network, Inc. and Raycom Media, Inc.
(incorporated herein by reference to the Registrant's Form 8-K/A
filed May 23, 2005) (This agreement has been redacted pursuant to a
confidential treatment request filed with the SEC)
10.5 Technical Services Agreement, dated as of December 1, 2004, by and
between The Tube Music Network, Inc. and Skyport Services, Inc.
(incorporated herein by reference to the Registrant's Form 8-K/A
filed May 23, 2005) (This agreement has been redacted pursuant to a
confidential treatment request filed with the SEC)
31.1 Certification of David C. Levy, Chief Executive Officer of the
Company, dated May 23, 2005, pursuant to Rule 13a - 14(a)/15d -
14(a) of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of John W. Poling, Chief Financial Officer of the
Company, dated May 23, 2005, pursuant to Rule 13a - 14(a)/15d -
14(a) of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of David C. Levy, Chief Executive Officer of the
Company, and John W. Poling, Chief Financial Officer of the Company,
dated May 23, 2005 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
22
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: May 26, 2005 /s/ John W. Poling
---------------------------------
Name: John W. Poling
Title: Chief Financial Officer
23