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 September 30, 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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1451 West Cypress Creek Road.
Ft. Lauderdale, FL 33309
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(Address of principal executive offices)
(954) 714-8100
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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 [_] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The number of shares of the issuer's common stock, par value $0.0001 per share,
outstanding as of November 30, 2005 was 25,605,615.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
AGU ENTERTAINMENT CORP.
(Formerly Lexington Barron Technologies, Inc.)
FORM 10-QSB
INDEX
Page
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PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 2005 (unaudited) and December 31, 2004 (audited) 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficiency) for the Nine Months Ended
September 30, 2005 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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 15
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and use of proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 24
SIGNATURES 27
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.)
Condensed Consolidated Balance Sheets
As of September 30, 2005 (unaudited) and December 31, 2004
2005 2004
------------ ------------
Assets Unaudited
Current Assets:
Cash $ 4,796 $ 771,533
Accounts receivable, net of allowance of $109,341 and $0 500,956 507,482
Prepaid expenses 80,617 225,037
Assets held for sale 8,847,212 --
------------ ------------
Total current assets 9,433,581 1,504,052
Property and equipment, net of accumulated
depreciation of $239,461 and $123,260 566,514 9,110,373
Intangibles, net of accumulated amortization 1,184,213 913,735
Other assets 143,296 164,737
------------ ------------
Total assets $ 11,327,604 $ 11,692,897
============ ============
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Accounts payable $ 1,430,625 $ 501,514
Accounts payable - related parties 339,065 169,258
Notes payable, related parties - current portion 1,468,008 445,642
Convertible notes payable, net of unamortized discount 8,154,236 7,150,000
Equipment note - current portion 12,769 12,140
Capital leases payable - current portion 8,282 13,881
Accrued expenses 1,496,742 910,418
Other current liabilities 8,056 36,965
------------ ------------
Total current liabilities 12,917,783 9,239,818
Capital leases payable - long term portion 6,099 11,876
Equipment note - long term portion 27,012 36,668
Convertible notes payable - net of unamortized
discounts 2,292,445 854,178
------------ ------------
Total liabilities 15,243,339 10,142,540
------------ ------------
Stockholders' Equity (Deficiency):
Preferred stock, $0.0001 par value; 10,000,000 shares
authorized, -0- shares issued and outstanding -- --
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 25,605,615 and 23,392,576 shares
issued and outstanding 2,561 4,658,380
Additional paid-in capital 14,443,486 3,593,634
Accumulated deficit (18,361,782) (6,701,657)
------------ ------------
Total stockholders' (deficiency) equity (3,915,735) 1,550,357
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 11,327,604 $ 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 and Nine Months Ended September 30, 2005 and 2004
(Unaudited)
Three Months Nine Months
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues $ 94,080 $ -- $ 352,062 $ 15,000
Cost of sales and services performed 7,223 -- 57,306 --
------------ ------------ ------------ ------------
Gross profit 86,857 -- 294,756 15,000
------------ ------------ ------------ ------------
Operating Expenses
Promotion and advertising 58,206 575,618 167,068 1,072,849
Depreciation and amortization 190,678 56,970 430,961 123,958
Other general and administrative costs 1,646,871 1,168,610 5,915,149 3,030,132
------------ ------------ ------------ ------------
Total operating expenses 1,895,755 1,801,198 6,513,178 4,226,939
------------ ------------ ------------ ------------
Operating loss (1,808,898) (1,801,198) (6,218,422) (4,211,939)
Interest expense 2,344,779 54,752 5,441,703 99,905
Other income -- (10,760) -- (10,760)
------------ ------------ ------------ ------------
Loss before income taxes (4,153,677) (1,845,190) (11,660,125) (4,301,084)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (4,153,677) $ (1,845,190) (11,660,125) $ (4,301,084)
============ ============ ============ ============
Basic and diluted loss per share $ (0.16) $ (0.09) $ (0.47) $ (0.22)
============ ============ ============ ============
Weighted average common shares outstanding -
Basic and diluted 25,430,713 21,509,819 24,592,778 19,244,705
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
4
AGU Entertainment Corp. and Subsidiaries
(Formerly Lexington Barron Technologies, Inc.)
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
For the Nine Months Ended September 30, 2005
(Unaudited)
Retained
Additional Earnings
Paid-In (Accumulated
Shares Amount Capital Deficit) Total
----------------------------------------------------------------------
2005
Balance at December 31, 2004 23,392,576 4,658,380 3,593,634 (6,701,657) 1,550,357
To adjust for correction of par value (4,656,041) 4,656,041
Issuance of shares of common stock for services 398,683 40 1,011,527 -- 1,011,566
Issuance of shares of common stock to employees
for compensation 45,540 5 107,469 -- 107,474
Issuance of common stock as a price adjustment
for certain investors 405,000 41 (41) -- --
Common stock issued in connection with the acquisition
of property plant and equipment 97,800 10 244,490 -- 244,500
Issuance of warrants in connection with the issuance of
convertible debt -- -- 4,016,142 -- 4,016,142
Issuance of shares in settlement of liabilities 121,875 13 337,487 -- 337,500
Issuance of shares of common stock to directors for services 20,000 2 54,248 54,250
Other issuances of common stock to co-founders as an
adjustment of shares previously issued 500,000 50 (50) -- --
Issuances of shares of common stock in connection with
amending the terms of certain notes payable 60,000 6 137,994 -- 138,000
Issuance of shares of common stock as interest expense 8,575 -- 21,301 -- 21,301
Issuance of shares of common stock to a director as an
adjustment of shares previously issued 444,000 44 -44
Issuance of shares of common stock to a director in
connection with a termination letter 111,566 12 263,288 -- 263,300
Net loss -- -- -- (11,660,125) (11,660,125)
----------------------------------------------------------------------
Balance at September 30, 2005 25,605,615 $ 2,561 $ 14,443,486 $(18,361,782) $ (3,915,735)
======================================================================
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 Nine Months Ended September 30, 2005 and 2004
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $(11,660,125) $ (4,301,084)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 430,962 123,958
Stock based service expenses 1,123,890 245,077
Amortization of discount on note payable 4,189,409 11,644
Amortization of deferred financing fees 55,370
Decrease in accounts receivable 6,526 30,007
Decrease (increase) in prepaid expenses 144,417 (5,037)
Increase in other assets (33,926) (122,219)
Increase in accounts payable and accrued liabilities 2,022,743 644,575
(Decrease) increase in other liabilities (28,909) 30,000
------------ ------------
Net cash used in operating activities (3,749,643) (3,343,079)
------------ ------------
Cash flows from investing activities:
Disbursements for intangibles -- (151,035)
Disbursements for property and equipment (288,293) (206,137)
------------ ------------
Net cash used in investing activities (288,293) (357,172)
------------ ------------
Cash flows from financing activities:
Payment of notes payable (502,464) (8,439)
Proceeds from notes payable to related parties 1,026,003 281,910
Payment of notes payable to related parties (5,900) (40,094)
Payment on capital leases (11,376) (8,474)
Proceeds from the sale of common stock -- 60,000
Proceeds from convertible and other notes payable 2,764,936 3,279,000
------------ ------------
Net cash provided by financing activities 3,271,199 3,563,903
------------ ------------
Net (decrease) increase in cash (766,737) (136,348)
Cash, beginning of period 771,533 137,048
------------ ------------
Cash, end of period $ 4,796 $ 700
============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ --
============ ============
Cash paid for interest $ 537,295 $ 16,404
============ ============
Non-cash financing activities:
Common stock issued as payment for services $ 1,173,290 $ 245,077
============ ============
Conversion of liabilities to common stock $ 337,500 $ 740,702
============ ============
Equipment acquired through issuance of common stock $ 244,500 $ --
============ ============
Equipment acquired through capital lease obligations $ -- $ 14,637
============ ============
Common stock issued for financing expenses $ 159,301 $ --
============ ============
Warrants issued for convertibe debt $ 4,016,360 $ --
============ ============
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
September 30, 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, resulting in a change of control. 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.
In July 2004, AGU dissolved PMC.
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.
One of AGU's wholly-owned subsidiaries, The Tube Music Network, Inc. ("The
Tube"), airs traditional music videos and live concerts of contemporary music
material that is derived from archived video and music collection libraries.
Another wholly-owned subsidiary, AGU Music, Inc. ("AGU Music"), formerly Pyramid
Records International, Inc., is a production, marketing and distribution record
company. The Tube and AGU Music were subsidiaries of PMC when it was acquired by
AGU in April of 2004. In February of 2005, AGU formed two additional
subsidiaries, AGU Studios, Inc. ("AGU Studios") and 3200 Oakland Park Boulevard,
Inc., for the purpose of developing a media center for the film and
entertainment business. AGU Studios was originally conceived as a comprehensive
media entertainment center, which would offer film, television and music
production facilities, sound stages for recording, and executive offices for
AGU's operations and other entertainment industry organizations. However, the
Company has entered into an agreement to sell its real property (see Note 6) due
to continued liquidity problems and has abandoned the AGU Studios concept.
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. 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.
The accompanying financial statements reflect the results of the
operations of the Company and its subsidiaries for the nine months ended
September 30, 2005 and the results of the Company for the nine months ended
September 30, 2004.
7
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.
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.
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. SFAS 123R must be adopted no later than the first annual
reporting period of the first fiscal year that begins after December 15, 2005 by
small business issuers.
2. INTANGIBLES
Intangible assets at September 30, 2005 are as follows:
Value at Accumulated Balance at
acquisition amortization September 30, 2005
---------- ---------- ----------
Distribution agreement
(see note 3) $ 350,000 $ (174,800) $ 175,200
Contract rights 472,000 (23,600) 448,400
Other intangibles 651,035 (90,422) 560,613
---------- ---------- ----------
Total intangibles $1,473,035 $ (288,822) $1,184,213
========== ========== ==========
The distribution agreement is being amortized on a straight line basis
over a period of three years. Contract rights, which were acquired in April 2005
for stock, are being amortized over a five year period beginning in July of
2005, which corresponds to the initial term of an agreement to air The Tube in
certain markets. Other intangibles pertain to costs to develop network logos,
graphic templates and on-air intersticials for The Tube. The estimated useful
life of these assets is three years, and amortization of these assets commenced
in the second quarter of 2005. Aggregate amortization expense over the next five
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 $ 107,153
2006 428,212
2007 340,612
2008 166,737
2009 94,400
2010 47,200
8
3. NOTES PAYABLE
Convertible Notes
Convertible Notes Payable consists of the following at September 30, 2005
and December 31, 2004:
2005 2004
------------ ------------
First mortgage note secured by real property $ 6,750,000 $ 7,000,000
Second mortgage note secured by real property 3,000,000 3,000,000
Other convertible notes and subordinated debentures 3,994,236 1,475,000
------------ ------------
13,744,236 11,475,000
Less: current portion (8,154,236) (7,150,000)
Less: Discount on convertible mortgage and notes payable (3,297,555) (3,470,822)
------------ ------------
Notes payable, long term portion, net of discounts $ 2,292,445 $ 854,178
============ ============
On December 22, 2004, the Company closed on the purchase of a 162,000
square foot facility situated on 23 acres of land in Lauderdale Lakes, Florida
(the "Lauderdale Property"). 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 was due on June 20, 2005 and
was paid on July 1, 2005. The remaining balance of the note matures on December
20, 2005. The terms of the convertible mortgage promissory note require
quarterly prepayments of $145,000 into an escrow account for interest on the
note and real estate taxes on the property. Additional quarterly prepayments of
interest and real estate taxes in the amount of $145,000 were required to be put
into escrow beginning March 20, 2005. The Company did not make the required
prepayment on March 20, 2005. This amount was paid on behalf of the Company by
the holder of the $3 million second mortgage note (the "Mitchell Note") 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. The quarterly
payment due June 20, 2005 was paid on July 1, 2005. The remaining balance of the
note matures on December 22, 2006. 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 extended 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 extended the date for which the
registration statement is required to be declared effective to November 30,
2005. The $145,000 payment made on behalf of the Company and the $100,000
advanced to the Company are reflected in the Company's balance sheet as Other
Notes Payable. 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. These warrants were valued at $169,025 and were recorded as a
discount to the $245,000 loan. The discount is being amortized through August 1,
2005, and the unamortized balance of this discount at June 30, 2005 is $54,902.
The Mitchell Note is secured 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, the interest rate on the note was
increased to the default rate of 18%.
The Company did not pay the $245,000 plus accrued interest and lender
legal fees that was due on August 1, 2005, in accordance with the May 13, letter
agreement, nor has it filed a registration statement to register the required
securities. The holder of the Mitchell Note issued a default letter on August 2,
2005. On August 11, 2005, the Company entered into two letter agreements with
the holder of the Mitchell Note, pursuant to which (i) the holder of the
Mitchell Note agreed that the payment due on August 1, 2005 would be deferred
until September 1, 2005; (ii) the parties agreed that, until maturity of the
Mitchell Note, all monies due under the Mitchell Note, other than monies that
accrue interest at the 18% default rate, will bear interest at the lower of 18%
per annum or the highest rate permitted by law; (iii) the Company agreed to pay
the holder, upon the first monies it receives, in addition to the sums otherwise
due under the Mitchell Note, approximately $512,000 plus interest, attorneys'
fees in the amount of $1,000 and any further costs of collection (the "September
Payment"); (iv) the Company agreed to pay the holder, up to the September
Payment, any monies it receives upon the consummation of the terms of a
non-binding letter of intent relating to the sale of the Lauderdale Property;
(v) the lender agreed to extend the filing date and effective date of the
registration statement to December 31, 2005 and March 31, 2006, respectively;
and (vi) the parties agreed that there would be no further grace periods allowed
under the Mitchell Note. In addition, the letter agreement provides for the
issue to the holder of warrants to purchase an additional 150,000 shares of the
Company's common stock at an exercise price of $1.50 per share under the same
terms and conditions as the common stock purchase warrants previously issued to
the holder. The September Payment was made in September of 2005.
9
During the first nine months of 2005, the Company issued convertible
promissory notes to various accredited investors in the aggregate principal
amount of $715,000. These convertible promissory notes pay interest at 10% and
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. The Company issued a convertible promissory
note to an accredited investor in the aggregate principal amount of $50,000,
which pays interest at 4 1/2% and is due on the second anniversary issuance and
is convertible into shares of the Company's common stock at the option of each
holder at a conversion price of $2.00 per share. The Company issued a
convertible promissory note to an accredited investor in the aggregate principal
amount of $500,000, which pays interest at 4 1/2% and is due on January 1, 2007
and is convertible into shares of the Company's common stock at the option of
each holder at a conversion price of $2.00 per share. The Company also issued an
additional $700,000 of promissory notes on September 1, 2005 to a significant
stockholder, which mature on various dates between September 10, 2005 and
December 15, 2005. The Company also issued a 10% promissory note of $150,000 to
an accredited investor on June 27, 2005, which is due on its second anniversary.
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 September 30, 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 $345,806 ($331,000 plus accrued
interest of $14,508) 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
has not made any of the required payments under the settlement agreement and
received a default letter on August 1, 2005 demanding immediate repayment of all
amounts due under the ARK 21 Notes and related settlement agreement. The Company
is in discussions with the note holders to remedy the default. The Company does
not have the resources to satisfy this obligation.
During the first nine months of 2005, the Company received loans in the
aggregate amount of $977,803 from a stockholder of the Company who is a related
party. The loans pay interest at 10% and are due on December 31, 2005. The
Company also received loans from significant stockholders during the first nine
months of 2005 in the aggregate amount of $79,100. These loans pay interest at
10% and are due on September 30, 2005 and December 31, 2005. During the third
quarter of 2005, $5,900 of these loans was repaid. At September 30, 2005,
$30,000 of these loans was outstanding.
4. STOCKHOLDERS' EQUITY
During the first nine months of 2005, the Company issued 398,683 shares of
common stock to third parties in exchange for services performed. These services
were valued at $1,011,566 and this amount was charged to earnings during the
period. The Company also issued 65,540 shares of common stock to employees and
directors during the first nine months of 2005 and recorded compensation expense
of $161,724. In addition, the Company issued 444,000 shares of common stock to
its former chairman as an adjustment to the shares allocated to the original
investors of the Company and 111,566 shares of common stock in connection with
the terms of his termination agreement and recorded compensation expense of
$263,300, 405,000 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 for $244,500 and 121,875 shares of common stock in
settlement of a liability of $337,500. Also during this period, the Company
issued 60,000 shares in connection with amending the terms of certain notes
payable and 8,575 shares for payment of interest expense in lieu of cash. The
Company also issued 500,000 shares of common stock to two co-founders of the
Company as an adjustment to the shares allocated to the original investors of
the Company.
10
During the first nine months of 2005, the Company issued 2,395,000
detached common stock purchase warrants to acquire the Company's common stock in
connection with the issuance of convertible promissory notes. The warrants have
an exercise price between $2.00 and $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. The Company also issued 300,000
warrants at an exercise price of $1.50 per share to the holder of the Mitchell
Note in connection with advances made to the Company during the second quarter
of 2005. The aggregate value of the warrants issued during the first nine months
of 2005 was $4,016,042, 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. The unamortized balance of the discount for these notes as of
September 30, 2005 was $1,170,654. No warrants were exercised during the first
nine months of 2005 and 7,880,911 warrants were outstanding at September 30,
2005. The unamortized balance of the discount for all notes as of September 30,
2005 was $3,297,555.
5. LOSSES 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 September 30, 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 September 1, 2005, the Company entered into an agreement to sell the
Lauderdale Property to a local real estate developer. The purchase price to be
received for the Lauderdale Property is $15.0 million and is expected to be paid
in cash. The purchaser had until November 1, 2005 to examine the Lauderdale
Property, and if for any reason the purchaser was not satisfied with its
investigation, then prior to November 1, 2005, the purchaser was required to
notify the Company in writing that it was exercising its right to terminate the
purchase agreement. Because the Company did not receive such a notice prior to
November 1, the $1.5 million deposit placed into escrow by the purchaser upon
executing the purchase agreement became non-refundable.
Pursuant to the terms of the purchase agreement, the closing date is
expected to be prior to December 31, 2005. If the transaction fails to close due
to a default on the part of the purchaser, the deposit will be delivered by the
escrow agent to the Company as liquidated damages, and if the transaction fails
to close due to a default on the part of the Company, at the option of the
purchaser, the Deposit will be returned to the purchaser. Any such return will
not limit the purchaser's right to maintain an action for specific performance
by the Company. The Company may be required to obtain stockholder approval for
the sale of the Lauderdale Property.
In connection with the purchase and sale agreement for the Lauderdale
Property, the purchaser agreed to loan $2.5 million to the Company, to be
advanced in three tranches upon the Company meeting certain conditions. The
first two tranches, totaling $1.5 million, were received by the Company on
October 21, 2005. The third tranche of $1.0 million was received by the Company
on November 17, 2005.
11
The loan will accrue interest at a rate per annum of 6.5% with interest
due and payable monthly; provided however, in the event that no event of default
exists, the interest will be deferred and paid upon the maturity of the Loan.
The Loan will mature no later than a date that is earlier to occur of (i) the
date of closing of the purchase and sale of the Lauderdale Property and (ii)
December 23, 2005. In addition, the Loan will be secured by a third mortgage on
the Lauderdale Property. The proceeds of the loan were used to pay down certain
indebtedness and for working capital to continue the Company's business
operations.
The Company's Board of Directors and management determined that it was in
the best interest of the Company's stockholders to abandon the AGU Studios
concept and use the proceeds from the sale of the property to help alleviate the
Company's liquidity crisis, retire currently maturing debt, and provide
additional funds for working capital. The Company's Board of Directors and
management believe that selling the Lauderdale Property and focusing on the
Company's core businesses, the Tube Music Network Inc. and AGU Music, Inc. will
attract additional investors to the Company. The Company is currently unable to
predict the costs of relocating its continuing operations from the Lauderdale
Property into a permanent replacement facility.
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 alleged, 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. The dispute originated 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 complaint indicated that the plaintiffs were seeking
compensatory and punitive damages of no less than $1,812,500 for each of the six
causes of action alleged. On June 20, 2005, the Company and the Plaintiffs
entered into a Confidential Settlement Agreement and Mutual Release (the
"Agreement") wherein the parties agreed to resolve their differences without
admitting or acknowledging the validity of the position taken by the other
parties in the course of the litigation. Under the terms of the Agreement, the
Company paid JarredCherry $10,000 on June 28, 2005, and will pay $10,000 per
month for eight consecutive months commencing 30 days from the date of the
Agreement, as full and final settlement of the disputes. The complaint filed by
the Plaintiffs has since been dismissed.
On 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. 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 was originally conceived as 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. However,
the Company's continued liquidity problem requires the Company to sell the
Lauderdale Property and cease operations with respect to AGU Studios (see Note 6
for further information). 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 and nine months ending September 30, 2005 and 2004.
12
Three Months Nine Months
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues
AGU Music $ 76,670 $ -- $ 252,751 $ 15,000
AGU Studios 17,410 -- 99,311 --
The Tube -- -- -- --
----------- ----------- ----------- -----------
Consolidated revenues $ 94,080 $ -- $ 352,062 $ 15,000
=========== =========== =========== ===========
Operating loss
AGU Music (85,586) (551,837) (492,966) (1,504,418)
AGU Studios (37,373) -- (63,000) --
The Tube (470,993) (709,217) (2,365,665) (1,485,253)
----------- ----------- ----------- -----------
Segment loss (593,952) (1,261,054) (2,921,631) (2,989,671)
Corporate (1,214,946) (540,144) (3,296,791) (1,222,268)
----------- ----------- ----------- -----------
Consolidated operating loss $(1,808,898) $(1,801,198) $(6,218,422) $(4,211,939)
=========== =========== =========== ===========
The table below reconciles the measurement of segment profit shown in the
previous table to the Company's consolidated income before taxes:
Three Months Nine Months
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Total segment loss $ (593,952) $ (1,261,054) $ (2,921,631) $ (2,989,671)
Operating loss - corporate (1,214,946) (540,144) (3,296,791) (1,222,268)
Other income -- 10,760 -- 10,760
Interest expense (2,344,779) (54,752) (5,441,703) (99,905)
------------ ------------ ------------ ------------
Loss before income tax $ (4,153,677) $ (1,845,190) $(11,660,125) $ (4,301,084)
============ ============ ============ ============
8. RELATED PARTY TRANSACTIONS
During the first nine months of 2005, the Company received loans in the
aggregate amount of $977,803 from a stockholder of the Company who is a related
party. The loans pay interest at 10% and are due December 31, 2005. The Company
also received loans from significant stockholders during the first nine months
of 2005 in the aggregate amount of $48,200. These loans pay interest at 10% and
are due December 31, 2005. In addition to the ARK 21 Notes, as of September 30,
2005, the Company had outstanding loans payable to related parties in the
aggregate amount of $114,400 that were due Nov. 1, 2004. 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, effective
April 15, 2005, 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 $345,806 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 has not made any of the required payments under the
settlement agreement and received a default letter on August 1, 2005 demanding
immediate payment of all amounts due under the Ark21 Notes and related
settlement agreement.
For the period from January 1, 2005 through September 30, 2005, the
Company received various consulting services totaling approximately $193,000
from two stockholders. At September 30, 2005 approximately $124,000 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
September 30, 2005 was approximately $193,000.
13
Accounts payable to related parties at September 30, 2005 totaled
approximately $339,000. Included in this amount was $6,700 in director's fees
payable to a certain director and a $5,000 director's fee payable to a second
director.
During October and November 2005, the Company received various loans from
two significant stockholders totaling $111,000. These loans were repaid during
the same period from proceeds received in connection with the sale of the
Lauderdale property.
9. 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 and a stockholders deficiency of
approximately $3.9 million at September 30, 2005, as well as a net loss of
approximately $11.7 million for the nine months ending September 30, 2005 and de
minimis 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 sale of 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.
10. SUBSEQUENT EVENTS
In connection with the purchase and sale agreement for the Lauderdale
Property (see Note 6), the purchaser agreed to loan $2.5 million to the Company,
to be advanced in three tranches upon the Company meeting certain conditions.
The first two tranches, totaling $1.5 million, was received by the Company on
October 21, 2005. The third tranche of $1.0 million was received by the Company
on November 17, 2005.
On October 21, 2005, the Company issued a promissory note in the aggregate
principal amount of $250,000 (the "Buntrock Note") to the holder of the first
mortgage note secured by the Lauderdale Property, as consideration for past
defaults by the Company under the first mortgage. The Company did not receive
any additional cash proceeds in connection with the Buntrock Note. The Buntrock
Note bears interest at the applicable Internal Revenue Service federal interest
rate per annum, as adjusted from time to time, and matures on the earlier of (i)
the date of closing of the purchase and sale of the Lauderdale Property or (ii)
December 23, 2005. In the event of the continuation of any default in payment
for a period of ten days after such payment is due, the holder of the Buntrock
Note may declare the entire unpaid principal and interest immediately due and
payable. In order to compensate the holder of the Buntrock Note for loss and
expense occasioned by handling delinquent payments, the Company must pay, in
addition to any interest, a service charge equal to 5% of the amount of any
payment received by the holder ten days or more after the due date thereof. Upon
the occurrence of any default under the Buntrock Note or any default under the
loan documents related to the first mortgage on the Lauderdale Property, the
Company must pay the holder, on demand, interest on all sums outstanding under
the Buntrock Note at the lesser of (i) the maximum rate permitted by applicable
law or (ii) 18% per annum.
In addition, in connection with the Buntrock Note, the Company and the
holder of the first mortgage note on the Lauderdale Property entered into an
agreement pursuant to which the holder agreed to waive certain defaults under
the first mortgage and the Company agreed to issue 175,000 shares of the
Company's common stock to the holder and 125,000 shares the holder's legal
counsel.
14
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").
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
third 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. This new broadcasting concept is referred to
as "multicasting." In April of 2005, we signed an agreement with Raycom Media,
Inc. ("Raycom"), which will enable consumers in all of the markets served by
Raycom to receive The Tube with digital cable service or with television sets
that are enabled with digital tuners. Raycom owns and operates 39 television
stations in 20 states, which cover over 10% of United States television
households. We are currently in negotiations with several other broadcasters
with multicasting capabilities, 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
additional 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.
15
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 and beyond 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 not produced any
new music projects in 2005, and do not expect to release any new projects until
our liquidity situation improves. .
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 envisioned a facility that will
consist of approximately 75,000 square feet of office space available for lease,
as well as six sound stages, an audio production studio and a two and a half
acre back lot for film projects. The Company's expectation was that revenue
would be generated by offering technical and production services in the areas of
film, television and music production, and through the rental of office and
studio space. A limited amount of production activity did take place on the
Lauderdale Property in 2004 and in the first nine months 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 were
to have taken place. However, due to the Company's continuing liquidity problems
(see Liquidity and Capital Resources), we have decided to sell the Lauderdale
Property, and use the proceeds, $2.5 million of which the Company received in
October and November 2005 in the form of a bridge loan from the purchaser, to
pay down maturing debt and for working capital as we continue as a going
concern.
Because of the start up nature of our business throughout most of 2004,
our results of operations and cash flows in the third quarter of 2005 are not
comparable to the same period of a year ago.
Liquidity and Capital Resources
We do not have adequate cash to meet our current obligations as well as
our short and long term objectives, and we do not have the capital resources
necessary to implement our business plan. The growth and development of our
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. 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 $3.5 million, a stockholders deficiency of
approximately $3.9 million and de minimis cash on hand as of September 30, 2005,
as well as a net loss of approximately $11.7 million for the nine months ending
September 30, 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, 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,
potentially, new projects for AGU Music. 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 $6,948,000 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 $3,344,000 of the remaining convertible
promissory notes mature between the fourth quarter of 2006 and the third quarter
of 2007, and a $150,000 promissory note was to have matured on June 30, 2005. On
August 2, 2005, we issued 5,000 shares of our common stock and warrants to
purchase 25,000 shares of our common stock at an exercise price of $1.50 per
share in exchange for the holder of this note extending the maturity date of
this note to October 1, 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 and service our debt, we may
be forced to downsize certain operations, restructure our current debt
obligations, find a strategic partner, and 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.
16
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 was
due on June 25, 2005 and was paid on July 1, 2005. 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. The quarterly prepayment, which was due June 22,
2005 was paid by the Company on July 1, 2005, with the proceeds of a note issued
on the same date by the Company to a related party.
On September 1, 2005, we entered into an agreement to sell the Lauderdale
Property to a local real estate developer. The purchase price to be received for
the Lauderdale Property is $15.0 million and is expected to be received in cash.
The purchaser had until November 1, 2005 to examine the Lauderdale Property, and
if for any reason the purchaser was not satisfied with its investigation, then
prior to November 1, 2005, the purchaser was required to notify us in writing
that it was exercising its right to terminate the purchase agreement. Because we
did not receive such a notice prior to November 1, the $1.5 million deposit
placed into escrow by the purchaser upon executing the purchase agreement became
non-refundable.
Pursuant to the terms of the purchase agreement, the closing date is
expected to be prior to December 31, 2005. If the transaction fails to close due
to a default on the part of the purchaser, the deposit will be delivered by the
escrow agent to us as liquidated damages, and if the transaction fails to close
due to a default on our part, at the option of the purchaser, the deposit will
be returned to the purchaser. Any such return will not limit the purchaser's
right to maintain an action for specific performance by us. We may also be
required to obtain stockholder approval for the sale of the Lauderdale Property.
In connection with the purchase and sale agreement for the Lauderdale
Property, the purchaser agreed to loan $2.5 million to us, which was advanced to
us in three tranches during October and November of 2005. The loan will accrue
interest at a rate per annum of 6.5% with interest due and payable monthly;
provided however, in the event that no event of default exists, the interest
will be deferred and paid upon the maturity of the Loan. The Loan will mature no
later than a date that is earlier to occur of (i) the date of closing of the
purchase and sale of the Lauderdale Property and (ii) December 23, 2005. In
addition, the Loan will be secured by a third mortgage on the Lauderdale
Property. The proceeds of the loan were used to pay down certain indebtedness
and for working capital to continue our business operations.
Our Board of Directors and management determined that it was in the best
interest of our stockholders to abandon the AGU Studios concept and use the
proceeds from the sale of the property to help alleviate our liquidity crisis,
retire currently maturing debt, and provide additional funds for working
capital. We believe that selling the Lauderdale Property and focusing on our
core businesses, the Tube Music Network Inc., and AGU Music, Inc., will attract
additional investors to the Company. We are currently unable to predict the
costs of relocating our continuing operations from the Lauderdale Property into
a permanent replacement facility.
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.
17
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 extended 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
extended 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%.
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 was 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 $345,806
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 have not made any
of the required payments under the settlement agreement and received a default
letter on August 1, 2005 demanding immediate repayment of all amounts due under
the ARK 21 Notes and related settlement agreement. We currently do not have the
financial resources to repay these notes without completing an additional
financing, reducing expenses, selling assets or extending the maturity of the
ARK 21 Notes. In addition, defaults under the ARK 21 Notes cause a default,
pursuant to the cross default provision, under the first mortgage note of the
Lauderdale Property. To date, the holder of the first mortgage has not issued a
default notice relating to our default on the ARK21 Notes.
Prior to the hurricane damage and evacuation of the Lauderdale Property,
we had a monthly cash requirement of approximately $550,000, however, the need
for temporary office space and dividing the operations into different locations
will have an impact on our monthly costs. We are unable to predict the costs of
relocating our continuing operations from the Lauderdale Property into a
permanent replacement facility but believe our monthly costs will be reduced due
to the sale of the Lauderdale Property. We will need to raise additional capital
for the remainder of 2005 and 2006, 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 between $10 to $15 million over the
balance of 2005 and through 2006 to provide for these requirements. Management
is evaluating several alternatives, including the 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. Notwithstanding the $2.5 million
bridge loan we received from the sale of the Lauderdale Property, if we are not
successful in raising additional capital and closing on the sale of the
Lauderdale Property prior to December 31, 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 nine months of 2005 was $3,750,000,
which was primarily the result of our operating loss of $6,218,000, 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
$3,343,000. We expect to continue to generate negative cash flows from
operations until such time as we can gain national distribution for, and
generate significant advertising revenues from, The Tube. No assurances can be
given as to when or if we will be able to develop profitable operations.
Cash used in investing activities in the nine months of 2005 amounted to
$288,000, as compared to $357,000 in 2004. The decrease was due to a $51,000
investment for certain intangible assets for The Tube in 2004, and severe
liquidity restraints, which have limited our 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 $1.0 million of capital expenditures over the next twelve
months.
18
We received cash from financing activities in the first nine months of
2005 in the amount of $3, 271,000, as compared to $3,564,000 in the same period
of a year ago. The decrease was due to repayments of certain debt 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 September 30, 2005, we had approximately $15.3 million of debt
outstanding, approximately $8.2 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 the sale of the
Lauderdale Property and obtaining additional financing. We also currently do not
have funds available for working capital requirements beyond December 15, 2005.
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. We may also need to seek protection under the federal
bankruptcy laws or be forced into bankruptcy by our creditors.
The Company's financial condition and operating results, specifically a
working capital deficiency of approximately $3.5 million and accumulated deficit
of approximately $18.4 million at September 30, 2005, as well as a net loss of
approximately $11.7 million for the nine months ending September 30, 2005 and de
minimis 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 sale of the Lauderdale
Property
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 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.
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.
Results of Operations for the Three Months ended September 30, 2005 and 2004
Revenues were $94,000 in the three months ended September 30, 2005 and $0
in the three months ended September 30, 2004. Approximately $77,000 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 $69,000 and AGU
Studios had gross profit of $17,000 during the period.
Operating expenses were $1,896,000 and $1,801,000 in the three months
ended September 30, 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, and complete the sale of the Lauderdale Property.
19
Interest expense in the three months ended September 30, 2005 was
$2,345,000, as compared to $55,000 in 2004, and includes $1,877,587 for the
reduction of debt discounts and the amortization of deferred financing fees. The
remainder of the increase in interest expense was 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 quarter ended September 30, 2005 was $4,154,000, as
compared to $1,845,000 in the prior year.
Results of Operations for the Nine Months ended September 30, 2005 and 2004
Revenues were $352,000 for the nine months ended September 30, 2005 and
$15,000 for the nine months ended September 30, 2004. Approximately $213,000 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 $216,000
and AGU Studios had gross profit of $79,000 during the period.
Operating expenses were $6,513,000 and $4,227,000 for the nine months
ended September 30, 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 and sale of the Lauderdale Property.
Interest expense for the nine months ended September 30, 2005 was
$5,442,000, as compared to $100,000 for the nine months ended September 30,
2004, and includes $4,245,000 for the reduction 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 nine months ended September 30, 2005 was $11,660,000,
as compared to $4,301,000 in the prior year.
We anticipate entering into several additional affiliate agreements with
digital broadcasters, which will allow The Tube to be seen in approximately 20
million homes in 2006. While we expect this market penetration to generate a
substantial increase in marketing, promotion and other expenses at The Tube , we
also expect that our revenues will ultimately increase sufficiently enough to
cover these increases. Thus, we believe that our results of operations in fiscal
2004 and 2005 are not indicative of our projected results of operations in
fiscal 2006 and beyond.
20
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.
21
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
indicated that the plaintiffs commenced an action against the Company. The
plaintiffs alleged, 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. The dispute originated 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 complaint indicated that the plaintiffs were seeking
compensatory and punitive damages of no less than $1,812,500 for each of the six
causes of action alleged. On June 20, 2005, the Company and the plaintiffs
entered into a Confidential Settlement Agreement and Mutual Release (the
"Agreement") wherein the parties agreed to resolve their differences without
admitting or acknowledging the validity of the position taken by the other
parties in the course of the litigation. Under the terms of the Agreement, the
Company paid the plaintiffs $10,000 on June 28, 2005, and will pay $10,000 per
month for eight consecutive months commencing 30 days from the date of the
Agreement, as full and final settlement of the disputes. The complaint filed by
the Plaintiffs has since been dismissed. To date the Company has paid $45,000.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first nine months of 2005 the Company issued convertible
promissory notes to various accredited investors in the aggregate principal
amount of $1,265,000. The $1,265,000 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
between $2.00 and $3.00 per share. In connection with the issuance of the
convertible notes, the Company issued to the holders an aggregate of 760,000
warrants to purchase the Company's common stock. The common stock purchase
warrants have from two to five year terms and the exercise price between $2.00
and $3.00 per share. The common stock purchase warrants were valued at
$2,016,360, and this amount was recorded as a discount to the convertible
promissory notes. The unamortized balance of the discount for these notes as of
September 30, 2005 was $1,226,324.
During the first nine months of 2005, the Company issued 398,683 shares of
common stock to third parties in exchange for services performed. These services
were valued at $969,118 and this amount was charged to earnings during the
period. The Company also issued 65,540 shares of common stock to employees and
directors during the first nine months of 2005 and recorded compensation expense
of $161,724. In addition, the Company issued 555,566 shares of common stock to
its former chairman as an adjustment to the shares allocated to the original
investors of the Company and in connection with the terms of his employment
agreement, 405,000 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 and 121,875 shares of common stock in
settlement of a liability. Also during this period, the Company issued 60,000
shares of common stock in connection with amending the terms of certain notes
payable and 8,575 shares of common stock for payment of interest expense in lieu
of cash.
No underwriters or brokers were employed in the transactions. The
securities will be deemed restricted securities for the purposes of the
Securities Act.
See the Company's Current Reports on Form 8-K filed with the Securities
and Exchange Commission on April 20, 2005, April 28, 2005, May 11, 2005, May 20,
2005, August 2, 2005 and September 8, 2005.
The Company maintains that the issuances of these securities were exempt
from registration under the Securities Act of 1933, as amended (the"Securities
Act"), in reliance upon Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder as transactions by an issuer not involving a public
offering. In addition, certain of the securities were issued as bonuses to
employees pursuant to the Company's benefit plan approved by its stockholders.
22
Item 3. DEFAULTS UPON SENIOR SECURITIES
On August 2, 2005, the holder of the Mitchell Note issued a default letter
for the Company's failure to pay monthly interest payment from April 2005 to
August 2005, the Company's failure to repay $245,000 of additional advances to
the Company prior to August 1, 2005, and the Company's failure to file a
registration statement with the SEC prior to June 30, 2005. On August 11, 2005,
the Company entered into two letter agreements with the holder of the Mitchell
Note, pursuant to which (i) the holder of the Mitchell Note agreed that the
payment due on August 1, 2005 would be deferred until September 1, 2005; (ii)
the parties agreed that, until maturity of the Mitchell Note, all monies due
under the Mitchell Note, other than monies that accrue interest at the 18%
default rate, will bear interest at the lower of 18% per annum or the highest
rate permitted by law; (iii) the Company agreed to pay the holder, upon the
first monies it receives, in addition to the sums otherwise due under the
Mitchell Note, approximately $512,000 plus interest, attorneys' fees in the
amount of $1,000 and any further costs of collection (the "September Payment");
(iv) the Company agreed to pay the holder, up to the September Payment, any
monies it receives upon the consummation of the terms of a non-binding letter of
intent relating to the sale of the Lauderdale Property; (v) the lender agreed to
extend the filing date and effective date of the registration statement to
December 31, 2005 and March 31, 2006, respectively; and (vi) the parties agreed
that there would be no further grace periods allowed under the Mitchell Note. In
addition, the letter agreement provides for the issue to the holder of warrants
to purchase an additional 150,000 shares of the Company's common stock at an
exercise price of $1.50 per share under the same terms and conditions as the
common stock purchase warrants previously issued to the holder.
On August 3, 2005, the holder of the first mortgage note issued a default
letter to the Company pursuant to the cross default provision of the note, which
was triggered by the Company's default on the Mitchell Note. On August 19, 2005,
the holder of the first mortgage note issued a letter acknowledging the cure of
the Mitchell Note and accepting the cure under the first mortgage note.
On March 3, 2004, the Company's AGU Music subsidiary 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 $345,806
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. The Company has not made any of the required payments under the
settlement agreement and received a default letter on August 1, 2005 demanding
immediate repayment of all amounts due under the ARK 21 Notes and related
settlement agreement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
On August 4, 2005, we issued a convertible promissory note in the
aggregate principal amount of $50,000 and warrants to purchase 16,667 shares of
our restricted common stock to an accredited investor. The promissory note
accrues interest on the principal balance at an annual rate of 10% and matures
on August 4, 2007. At any time, the holder of the promissory note may convert
the principal of the promissory note into shares of our common stock at the
conversion price of $3.00 per share. The warrants have an exercise price of
$3.00 per share and are exercisable until August 4, 2007. We maintain that the
issuance of these securities is exempt under the Securities Act of 1933, as
amended, in reliance upon Regulation D promulgated thereunder as a transaction
by an issuer not involving a public offering.
23
On August 25, 2005, we issued a convertible promissory note in the
aggregate principal amount of $50,000 and warrants to purchase 21,667 shares of
our restricted common stock to an accredited investor. The promissory note
accrues interest on the principal balance at an annual rate of 4.5% and matures
on August 25, 2007. The interest on the promissory note is compounded quarterly
beginning November 25, 2005. At any time, the holder of the promissory note may
convert the principal and interest of the promissory note into shares of our
common stock at the conversion price of $2.00 per share. The warrants have an
exercise price of $2.00 per share and are exercisable until February 25, 2007.
The Company granted "piggy-back registration" rights for the shares of common
stock underlying the promissory note and the warrant. We maintain that the
issuance of these securities is exempt under the Securities Act of 1933, as
amended, in reliance upon Regulation D promulgated there under as a transaction
by an issuer not involving a public offering.
On November 1, 2005, the Company and Tarragon entered into a First
Amendment to the Agreement for Purchase and Sale, dated as of November 1, 2005
(the "First Amendment"), pursuant to which the Company agreed to extend the
investigation period from November 1, 2005 to November 15, 2005, during which
period Tarragon was permitted to examine the Lauderdale Property.
On December 2, 2005, the Company and Tarragon entered into a Second
Amendment to the Agreement for Purchase and Sale, dated as of December 1, 2005
(the "Second Amendment"), pursuant to which the Company agreed to provide
Tarragon with an option of extending the closing date of the transaction to
December 31, 2005 from December 15, 2005. In order to exercise the option,
Tarragon was required to forward to the Company, on or before December 2, 2005,
an additional security deposit in an amount equal to $1,000,000 ("Extension
Additional Deposit"). On December 2, 2005, Tarragon exercised the option to
extend the closing date and paid the Extension Additional Deposit to the
Company. The Extension Additional Deposit will be credited to Tarragon's
obligation to pay the purchase price on the closing date and is fully
non-refundable to Tarragon, except in the event that the Company defaults under
the Agreement for Purchase and Sale or any permitted right of termination under
the Agreement for Purchase and Sale in favor of Tarragon.
In connection with the extension of the closing date, Tarragon agreed to
provide the Company with a credit at closing to cover the Company's expenses for
the Lauderdale Property during the extension period. In addition, Tarragon also
agreed to comply with the Company's obligations under the Tri-Party Developer's
Agreement, dated as of November 4, 2005, by and among the City of Lauderdale
Lakes, the Company and Tarragon to demolish the building on the Lauderdale Lakes
property no later than February 15, 2006.
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
stockholders 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)
24
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)
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 10-KSB filed March 31,
2005)
4.6 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 August 2, 2004)
4.7 Promissory Note issued by AGU Entertainment Corp. to Robert Jaffee
(incorporated by reference to the Registrant's Form 8-K filed August
2, 2005).
4.8 Warrant to purchase up to 400,000 shares of common stock of AGU
Entertainment Corp. issued to Robert Jaffee (incorporated by
reference to the Registrant's Form 8-K filed August 2, 2005).
4.9 $500,000 Promissory Note, dated August 31, 2005, issued to Robert
Alan Kast by AGU Entertainment Corp. (incorporated herein by
reference to the Registrant's Form 8-K filed on September 8, 2005).
4.10 $200,000 Promissory Note, dated August 31, 2005, issued to Daniel K.
Kast and Lenore S. Kast by AGU Entertainment Corp. (incorporated
herein by reference to the Registrant's Form 8-K filed on September
8, 2005).
4.11 Warrant to subscribe for 100,000 shares of common stock of AGU
Entertainment Corp. issued to Robert Alan Kast (incorporated herein
by reference to the Registrant's Form 8-K filed on September 8,
2005).
4.12 Warrant to subscribe for 200,000 shares of common stock of AGU
Entertainment Corp. issued to Robert Alan Kast (incorporated herein
by reference to the Registrant's Form 8-K filed on September 8,
2005).
4.13 Warrant to subscribe for 100,000 shares of common stock of AGU
Entertainment Corp. issued to Robert Alan Kast (incorporated herein
by reference to the Registrant's Form 8-K filed on September 8,
2005).
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4.14 Warrant to subscribe for 150,000 shares of common stock of AGU
Entertainment Corp. issued to Robert Alan Kast (incorporated herein
by reference to the Registrant's Form 8-K filed on September 8,
2005).
4.15 Warrant to subscribe for 200,000 shares of common stock of AGU
Entertainment Corp. issued to Daniel K. Kast and Lenore S. Kast
(incorporated herein by reference to the Registrant's Form 8-K filed
on September 8, 2005).
4.16 Warrant to subscribe for 21,667 shares of common stock of AGU
Entertainment Corp. issued to Arnold Palmer.
4.17 $50,000 Promissory Note issued by AGU Entertainment Corp. to Arnold
Palmer.
4.18 Warrant to subscribe for 16,667 shares of common stock of AGU
Entertainment Corp. issued to Ron Moore.
4.19 $50,000 Promissory Note issued by AGU Entertainment Corp. to Ron
Moore.
10.1 Loan Agreement dated July 25, 2005, David Levy, Les Garland,
Victoria Levy, Marc Gelberg, Greg Catinella and John W. Poling
(incorporated herein by reference to the Registrant's Form 8-K filed
August 2, 2004).
10.2 Letter Agreement, dated August 11, 2005, by and between AGU
Entertainment Corp. and Mitchell Entertainment Company regarding
extension of maturity date (incorporated by reference to the
Registrants Form 10-QSB for the fiscal quarter ended June 30, 2005).
10.3 Letter Agreement, dated August 11, 2005, by and between AGU
Entertainment Corp. and Mitchell Entertainment Company regarding
extension of due date for filing of registration statement
(incorporated by reference to the Registrants Form 10-QSB for the
fiscal quarter ended June 30, 2005).
10.4 Agreement for Purchase and Sale, dated as of August 29, 2005, by and
between AGU Entertainment Corp. and Tarragon South Development Corp.
(includes the Side Letter) (incorporated herein by reference to the
Registrant's Form 8-K filed on November 17, 2005).
10.5 Consulting Agreement, dated as of August 31, 2005, by and between
AGU Entertainment Corp. and DKK-RK Enterprises, Inc. (incorporated
herein by reference to the Registrant's Form 8-K filed on September
8, 2005).
10.6 Letter Agreement, dated September 2, 2005, by and between AGU
Entertainment Corp., The Tube Music Network, Inc. and AGU Music Inc.
and Robert Alan Kast (incorporated herein by reference to the
Registrant's Form 8-K filed on September 8, 2005).
10.7 Amendment No. 3 to Agreement for Purchase and Sale, dated as of
December 2, 2005, by and between Charley Zeches, in her capacity as
Trustee of Lakes Holding Trust U/A and AGU Entertainment Corp.
10.8 First Amendment to Agreement for Purchase and Sale, dated as of
November 1, 2005, by and between AGU Entertainment and Tarragon
South Development Corp.
10.9 Second Amendment to Agreement for Purchase and Sale, dated as of
December 2, 2005, by and between AGU Entertainment and Tarragon
South Development Corp.
31.1 Certification of David C. Levy, Chief Executive Officer of the
Company, dated December 9, 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 December 9, 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 December 9, 2005 pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: December 9, 2005 /s/ John W. Poling
-----------------------------
Name: John W. Poling
Title: Chief Financial Officer
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