UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SeptemberJune 30, 20132014
Commission file number 000-51770
| CMG HOLDINGS GROUP, INC. |
| (Exact name of registrant as specified in its charter) |
| Nevada | 87-0733770 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number including area code (646) 688-6381
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or small reporting company. See the definition of "large accelerated filer," "accelerated filer" and "small reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
As of August 14, 2014, there were 289,366,364 shares of common stock of the registrant issued and outstanding.
CMG HOLDINGS GROUP, INC.
FORM 10-Q
| Item # | Description | Page Numbers | ||
| ITEM 1 | CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | 3 | ||
| 19 | ||||
| PART II OTHER INFORMATION | ||||
| ITEM 1 | LEGAL PROCEEDINGS | 20 | ||
| ITEM 1A | ||||
| 20 | ||||
| 20 | ||||
| 20 | ||||
| 20 |
ITEM 1:1- CONSOLIDATED FINANCIAL STATEMENTS
CMG HOLDINGS GROUP, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERSIX MONTHS ENDED SEPTEMBERAND THREE MONTHS ENDED JUNE 30, 20132014 AND 20122013
CONTENTS
| Consolidated Statements of Cash Flows for the | 6 | |||
| Notes to Consolidated Financial Statements (Unaudited) | 7 |
| September 30, 2013 | December 31, 2012 | |||||||
| ASSETS | (Unaudited) | |||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 278,185 | $ | 238,124 | ||||
| Marketable securities | 1,754,550 | 274,651 | ||||||
| Accounts receivable | 399,449 | 252,567 | ||||||
| Prepaid assets | 6,575 | 15,000 | ||||||
| Total Current Assets | 2,438,759 | 780,342 | ||||||
| Other non-current assets | 59,116 | 57,833 | ||||||
| TOTAL ASSETS | $ | 2,497,875 | $ | 838,175 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 745,209 | $ | 546,852 | ||||
| Accounts payable – related party | 71,900 | 19,625 | ||||||
| Accrued liabilities | 717,623 | 722,549 | ||||||
| Deferred income | 13,370 | 13,370 | ||||||
| Derivative liabilities | 78,129 | 145,970 | ||||||
| Short term debt, net of unamortized discount of $0 and $47,012, respectively | 164,443 | 150,431 | ||||||
| Total Current Liabilities | 1,790,674 | 1,598,797 | ||||||
| Notes Payable, net of debt discount of $0 and $7,739, respectively | - | 629,261 | ||||||
| TOTAL LIABILITIES | 1,790,674 | 2,228,058 | ||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Preferred stock: | ||||||||
| Series A Convertible Preferred Stock; 5,000,000 shares authorized; par value $0.001 per share; none issued and outstanding | - | - | ||||||
| Series B Convertible Preferred Stock; 5,000,000 shares authorized; par value $0.001 per share; none shares issued and outstanding | - | 50 | ||||||
| Common Stock: | ||||||||
| 450,000,000 shares authorized, par value $.001 per share; 294,987,917 and 294,687,917 shares issued, 294,950,743 and 294,650,743 outstanding | 294,914 | 294,614 | ||||||
| Additional paid in capital | 14,495,641 | 14,469,341 | ||||||
| Treasury Stock, 37,174 and 37,174 shares held, respectively. | 37 | 37 | ||||||
| Accumulated deficit | (14,083,441 | ) | (16,153,925 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | 707,201 | (1,389,883 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 2,497,875 | $ | 838,175 | ||||
Consolidated Balance Sheet
| June 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 1,017,098 | $ | 476,588 | ||||
| Marketable securities | 141,703 | 764,088 | ||||||
| Accounts receivable, net of allowance of $0 and $0, respectively | 168,811 | 287,094 | ||||||
| Prepaid expenses and other current assets | 8,400 | 8,400 | ||||||
| Total Current Assets | 1,336,012 | 1,536,170 | ||||||
| Other noncurrent assets | 82,282 | 60,078 | ||||||
| TOTAL ASSETS | $ | 1,418,294 | $ | 1,596,248 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 1,504,408 | $ | 627,695 | ||||
| Deferred compensation | 65,000 | 486,875 | ||||||
| Accrued liabilities | 293,711 | 593,710 | ||||||
| Deferred income | 13,370 | 13,370 | ||||||
| Derivative liabilities | 3,195 | 11,121 | ||||||
| Short term debt, net of unamortized discount of $0 and $0, respectively | 9,943 | 9,943 | ||||||
| Total Current Liabilities | 1,889,627 | 1,742,714 | ||||||
| TOTAL LIABILITIES | 1,889,627 | 1,742,714 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Preferred stock: | ||||||||
| Series A Convertible Preferred Stock; 5,000,000 shares authorized; par value $0.001 per share; no shares issued and outstanding as of June 30, 2014 and December 31, 2013 | — | — | ||||||
| Series B Convertible Preferred Stock; 5,000,000 shares authorized; par value $0.001 per share; 0 and 0 shares issued and outstanding as of June 30, 2014 and December 31, 2013 | — | — | ||||||
| Common Stock: | ||||||||
| 450,000,000 shares authorized, par value $.001 per share; 289,329,190 and 283,657,190 shares issued and outstanding as of June 30, 2014 and December 31, 2013 | 289,329 | 283,657 | ||||||
| Additional paid in capital | 15,367,019 | 14,529,751 | ||||||
| Treasury Stock, 37,174 and 37,174 shares held, respectively, at cost of -0-, as of June 30, 2014 and December 31, 2013. | — | — | ||||||
| Accumulated deficit | $ | (16,127,681 | ) | (14,959,874 | ) | |||
| TOTAL STOCKHOLDERS' DEFICIT | (471,333 | ) | (146,466 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 1,418,794 | $ | 1,596,248 | ||||
The accompanying notes to unaudited consolidatedare an integral part of these financial statements.
TableCMG Holdings, Inc.
Statement of Contents
For the Three Months Ended September 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| REVENUES | $ | 1,048,407 | $ | 374,104 | $ | 6,441,216 | $ | 7,517,163 | ||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Cost of revenues | 722,819 | 422,233 | 4,526,627 | 5,355,980 | ||||||||||||
| Depreciation and amortization | - | - | - | 74,850 | ||||||||||||
| General and administrative | 725,858 | 794,688 | 2,073,031 | 2,752,554 | ||||||||||||
| Total Operating Expenses | 1,448,677 | 1,216,921 | 6,599,658 | 8,183,384 | ||||||||||||
OPERATING LOSS | (400,270 | ) | (842,817 | ) | (158,442 | ) | (666,221 | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Gain (loss) on derivative liability | 153,096 | (4,990 | ) | 165,938 | (598,153 | ) | ||||||||||
| Gain on extinguishment of debt | 183,332 | 75,618 | 793,732 | 75,618 | ||||||||||||
Unrealized gain (loss) on marketable securities | (45,800 | ) | - | 1,479,899 | - | |||||||||||
| Other income (expense) | (65 | ) | (19,083 | ) | (5,465 | ) | (19,083 | ) | ||||||||
| Interest expense | (6,092 | ) | (103,167 | ) | (205,178 | ) | (790,992 | ) | ||||||||
| Total Other Income (Expense) | 284,471 | (551,622 | ) | 2,228,926 | (1,332,610 | ) | ||||||||||
| Income (loss) from continuing operations | (115,799 | ) | (894,439 | ) | 2,070,484 | (1,998,831 | ) | |||||||||
| Loss from discontinued operations | - | (146,698 | ) | - | (503,626 | ) | ||||||||||
| Income on sale of discontinued operations | - | 4,115,771 | - | 4,115,771 | ||||||||||||
| NET INCOME (LOSS) | $ | (115,799 | ) | $ | 3,074,634 | $ | 2,070,484 | $ | 1,613,314 | |||||||
| BASIC INCOME (LOSS) PER COMMON SHARE FROM DISCONTINED OPERATIONS | $ | - | $ | 0.01 | $ | - | $ | 0.02 | ||||||||
| DILUTED INCOME (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS | $ | (0.00 | ) | $ | (0.00 | ) | $ | 0.01 | $ | (0.01 | ) | |||||
| BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS | $ | (0.00 | ) | $ | 0.00 | $ | 0.01 | $ | 0.01 | |||||||
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | 295,829,864 | 272,515,699 | 295,054,040 | 218,628,520 | ||||||||||||
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | 295,829,864 | 293,562,646 | 306,462,999 | 239,675,467 | ||||||||||||
(Unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Revenues | $ | 5,971,726 | $ | 4,369,640 | $ | 7,526,474 | $ | 5,392,809 | ||||||||
| Operating Expenses: | ||||||||||||||||
| Cost of revenues | 5,367,651 | 3,261,774 | 6,248,643 | 3,803,808 | ||||||||||||
| Depreciation and amortization expense | — | — | — | — | ||||||||||||
| General and administrative expenses | 1,291,225 | 716,835 | 2,185,513 | 1,347,173 | ||||||||||||
| Research and development expenses | 93,750 | 93,750 | — | |||||||||||||
| Total Operating Expenses | 6,752,626 | 3,978,609 | 8,527,906 | 5,150,981 | ||||||||||||
| Operating Income (Loss) | (780,900 | ) | 391,031 | (1,001,432 | ) | 241,828 | ||||||||||
| Other Income (Expense): | ||||||||||||||||
| Gain (loss) on derivative liability | (381 | ) | 69,771 | 7,926 | 12,842 | |||||||||||
| Realized gain (loss) on marketable securities | 233,515 | — | 427,002 | — | ||||||||||||
| Unrealized gain (loss) on marketable securities | (511,511 | ) | 1,525,699 | (509,055 | ) | 1,525,699 | ||||||||||
| Costs related acquisition of Good Gaming | (87,500 | ) | — | (87,500 | ) | — | ||||||||||
| Other income (expense) | (58 | ) | (5,400 | ) | (4,616 | ) | (5,400 | ) | ||||||||
| Gain on settlement of debt | — | 610,400 | — | 610,400 | ||||||||||||
| Interest Income (expense) | 1 | (116,472 | ) | (132 | ) | (199,086 | ) | |||||||||
| Total Other Income (Expense) | (365,934 | ) | 2,083,998 | (166,375 | ) | 1,944,455 | ||||||||||
| Loss from continuing operations | (1,146,834 | ) | 2,475,029 | (1,167,807 | ) | 2,186,283 | ||||||||||
| Loss from discontinued operations | — | — | — | |||||||||||||
| Net Income (Loss) | $ | (1,146,834 | ) | $ | 2,475,029 | $ | (1,167,807 | ) | $ | 2,186,283 | ||||||
| Basic loss per common shares for discontinued operations | $ | — | $ | — | $ | — | $ | — | ||||||||
| Basic loss per common shares for continued operations | $ | — | $ | 0.01 | $ | — | $ | 0.01 | ||||||||
| Basic weighted average common shares outstanding | 294,016,103 | 294,650,743 | 289,352,619 | 294,650,743 | ||||||||||||
The accompanying notes to unaudited consolidatedare an integral part of these financial statements
TableCMG Holdings, Inc.
Statements of ContentsCash Flows
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,167,807 | ) | $ | 2,186,283 | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Shares issued for services | 120,813 | — | ||||||
| Warrants issued for compensation | 619,627 | — | ||||||
| Costs related to acquisition of Good Gaming | 87,500 | — | ||||||
| Unrealized gain on marketable securities | 509,055 | (1,525,699 | ) | |||||
| Realized gain on marketable securities | (427,002 | ) | — | |||||
| (Gain) on settlement of debt | (610,400 | ) | ||||||
| (Gain) loss on derivatives | (7,926 | ) | (12,842 | ) | ||||
| Amortization of debt discount | — | 149,874 | ||||||
| Changes in: | ||||||||
| Accounts receivable | 118,283 | 52,703 | ||||||
| Prepaid expense and other current assets | (3,803 | ) | 12,439 | |||||
| Deferred income | — | (320 | ) | |||||
| Accrued liabilities | (300,000 | ) | 68,773 | |||||
| Accounts payable | 876,713 | (126,578 | ) | |||||
| Accounts payable, related party | — | 51,975 | ||||||
| Deferred compensation | (421,875 | ) | — | |||||
| Cash provided by (used in) operating activities | 3,578 | 246,208 | ||||||
| CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES | ||||||||
| Cash paid for purchase of fixed assets | (18,400 | ) | — | |||||
| Proceeds from sales of marketable securities | 540,332 | — | ||||||
| Net cash from (used) in investing activities | 521,932 | — | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments on related parties debt | — | — | ||||||
| Advance from related parties | — | — | ||||||
| Payment on short term debt | (52,500 | ) | ||||||
| Proceeds from issuance of debt | — | 104,500 | ||||||
| Net change in line of credit | — | — | ||||||
| Proceeds from sales of common stock | 15,000 | — | ||||||
| Net cash provided by financing activities | 15,000 | 52,000 | ||||||
| Net increase in cash | 540,510 | 298,208 | ||||||
| Cash, beginning of period | 476,588 | 238,124 | ||||||
| Cash, end of period | 1,017,098 | 536,332 | ||||||
| $ | — | |||||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 201 | $ | 25,000 | ||||
| Income taxes paid | $ | — | $ | — | ||||
| Non-cash investing and financing activity: | ||||||||
| Reclassification of accounts payable to short term debt | $ | — | $ | — | ||||
| Discount on notes payable from derivative liability | $ | — | $ | 98,097 | ||||
| Reclassification of derivative liabilities to additional paid-in capital | $ | — | $ | — | ||||
| Common stock issued for settlement of notes payable | $ | — | $ | 26,600 | ||||
| Reclassification of debt from short term to long term | $ | — | $ | — | ||||
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
NOTE 1: DESCRIPTION OF CASH FLOWSBUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2013 | 2012 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income from continuing operations | $ | 2,070,484 | $ | 1,613,314 | ||||
| Adjustments to reconcile net income | ||||||||
| to net cash provided by (used in) operating activities: | ||||||||
| Unrealized gain on marketable securities | (1,479,899 | ) | - | |||||
| Shares issued for services | - | 194,100 | ||||||
| Loss on debt servicing | - | 19,879 | ||||||
| Gain on sale of subsidiary | - | (4,115,771 | ) | |||||
| Amortization of intangibles | - | 74,580 | ||||||
| (Gain) loss on derivatives | (165,938 | ) | 598,153 | |||||
| Amortization of debt discount | 152,848 | 659,280 | ||||||
| Gain on extinguishment of debt | (793,732 | ) | (75,618 | ) | ||||
| Changes in: | ||||||||
| Accounts receivable | (146,882 | ) | (88,725 | ) | ||||
| Prepaid expense and other current assets | 7,142 | (4,727 | ) | |||||
| Deferred income | - | (30,036 | ) | |||||
| Accrued liabilities | 93,406 | 943,444 | ||||||
| Accounts payable | 270,257 | (63,292 | ) | |||||
| Accounts payable, related party | (19,625 | ) | (113,505 | ) | ||||
| Cash provided used in continuing operations | (11,939 | ) | (388,924 | ) | ||||
| Cash provided by discontinued operations | - | 73,265 | ||||||
| Net cash used in operating activities | (11,939 | ) | (315,299 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash used in continuing operations | - | - | ||||||
| Cash used in discontinued operations | - | (4,841 | ) | |||||
| Net cash used in investing activities | - | (4,841 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Advances from related parties | - | 8,804 | ||||||
| Payments on related parties debt | - | (16,000 | ) | |||||
| Payments on short term debt | (52,500 | ) | - | |||||
| Proceeds from issuance of debt | 104,500 | 37,500 | ||||||
| Net change in line of credit | - | 2,361 | ||||||
| Cash provided by continuing operations | 52,000 | 32,665 | ||||||
| Cash provided by discontinued operations | - | 415,640 | ||||||
| Net cash provided by financing activities | 52,000 | 448,305 | ||||||
| Net increase in cash | 40,061 | 128,165 | ||||||
| Cash, beginning of period | 238,124 | 337,779 | ||||||
| Cash, end of period | 278,185 | $ | 465,944 | |||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 25,000 | $ | 4,675 | ||||
| Income taxes paid | $ | - | $ | - | ||||
Creative Management Group, Inc. was formed in Delaware on August 13, 2002 as a limited liability company named Creative Management Group, LLC. On August 7, 2007, this entity converted to unaudited consolidated financial statements.
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2013 | 2012 | |||||||
| Non-cash investing and financing activity: | ||||||||
| Reclassification of accounts payable to short term debt | $ | - | $ | 522,943 | ||||
| Reclassification of accrued liabilities to short term debt | $ | - | $ | 545,000 | ||||
| Discount on notes payable from derivative liability | $ | 98,097 | $ | 596,019 | ||||
| Discount on shares issued with notes payable | $ | - | $ | 11,486 | ||||
| Reclassification of derivative liabilities to additional paid-in capital | $ | - | $ | 991,596 | ||||
| Common stock issued for settlement of notes payable | $ | 26,600 | $ | 628,735 | ||||
| Cancellation of common stock and preferred stock | 2,550 | |||||||
On April 1, 2009, the Company, through a newly formed wholly owned subsidiary CMGO Capital, Inc., a Nevada corporation, completed the acquisition of XA, The Experiential Agency, Inc. On March 31, 2010, the Company and AudioEye, Inc. (“AudioEye”) completed the final Stock Purchase Agreement under which the Company acquired all of the outstanding capital stock of AudioEye. On June 22, 2011 the Company entered into a Master Agreement subject to shareholder approval as may be required under applicable law and subject to closing conditions with AudioEye Acquisition Corp., a Nevada corporation where the shareholders of AudioEye Acquisition Corp. exchanged 100% of the stock in AudioEye Acquisition Corp for 80% of the capital stock of AudioEye. The Company retained 15% of AudioEye subject to transfer restrictions in accordance with the Master Agreement; on October 2012, the Company distributed to its shareholders, in the form of a dividend, 5% of the capital stock of AudioEye in accordance with provisions of the Master Agreement.
On March 28, 2014, CMG Holdings, Inc. (the “Company” or “CMG”), completed its acquisition of 100% of the shares of Good Gaming, Inc. (“GGI”) by entering into a Share Exchange Agreement (the “SEA”) with BMB Financial, Inc. and Jackie Beckford, the then shareholders of GGI. The sole owner of BMB Financial, Inc. is also the sole owner of Infinite Alpha, Inc. which provides consulting services to CMG. Pursuant to the SEA, the Company received 100% of the shares of GGI in exchange for 5,000,000 shares of the Company’s common stock, $33,000 in equipment and consultant compensation and a commitment to pay $200,000 in development costs, of which $50,000 of the development costs had been advanced by the Company. In addition, pursuant to the SEA, CMG shall adopt an incentive plan for GGI which shall entitle the GGI officers, directors and employees to receive up to 30% of the net profits of GGI and up to 30% of the proceeds, in the event of a sale of GGI or its assets.
CMG HOLDINGS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJune 30, 20132014
(Unaudited)
Principles of Consolidation
The consolidated financial statements include the accounts of CMG Holdings Group, Inc., CMG Acquisition, Inc., CMGO Capital, Inc., XA, The Experiential Agency, Inc., CMGO Logistics, Inc., USaveCT ("XA") and USaveNJ,GGI after elimination of all significant inter-company accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the Financial Accounting Standards Board (“FASB”) issued ASC 820 which defines fair value, establishes a framework for measuring fair value,United States requires management to make estimates and expands disclosures about fair value measurements. The provisionsassumptions that affect the reported amounts of ASC 820 were effective January 1, 2008. ASC 820 delays the effective date for nonfinancial assets and liabilities exceptand disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Estimates are used when accounting for items thatallowance for doubtful accounts, depreciation, and contingencies. Actual results could differ from those estimates.
Concentrations of Risk
The Company maintains its cash balances at two financial institutions where they are recognizedinsured by the Federal Deposit Insurance Corporation up to $250,000 each. At June 30, 2014 and December 31, 2013, neither of these accounts was in excess of the limit. The Company also maintains a money market investment account at one securities firm where the account is insured by the Securities Investor Protection Corporation up to $500,000 for the bankruptcy, etc., of the securities firm. At June 30, 2014 and December 31, 2013, the account had no balance in excess of the limit. For the quarter ended June 30, 2014 and the year ended December 31, 2013, one customer exceeds 10% of the Company’s total revenue, representing 88% and 72% of the Company’s total revenues, respectively.
Revenue and Cost Recognition
The Company earns revenues by providing event management services under individually negotiated contracts with varying terms, recognizing revenue in accordance with ASC 605, Revenue Recognition, only when the price is fixed or discloseddeterminable, persuasive evidence of an arrangement exists, the services have been provided and collectability is assured. In arrangements where key indicators suggest the Company acts as principal, the Company records the gross amount billed to the client as revenue and the related costs incurred as cost of revenues as the services are provided.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are amounts due from event management services, are unsecured and are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis and do not bear interest, although a finance charge may be applied to amounts outstanding more than thirty days. Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions. There were no allowances for doubtful accounts as of June 30, 2014 or December 31, 2013.
Share-Based Compensation
The Company accounts for share-based compensation to employees in accordance with Accounting Standards Codification subtopic 718-10, Stock Compensation(“ASC 718-10”) and share-based compensation to non-employees in accordance with ASC 505-50Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services. ASC 718-10 and 505-50 require the measurement and recognition of compensation expense for all share-based payment awards, including stock options based on the estimated fair values.
| 8 |
CMG HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
Derivative Instruments
The Company accounts for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging, and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008.balance sheet.
As defined in ASC 820,The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing and able market participantsparticipants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for the measurement date (exit price).Company’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, The Company utilizesseeks to validate the model’s output to market data or assumptions that market participants would use in pricingtransactions. Depending on the asset or liability, including assumptions about riskavailability of observable inputs and the risks inherent in the inputs to theprices, different valuation technique. These inputs canmodels could produce materially different fair value estimates. The values presented may not represent future fair values and may not be readily observable, market corroborated, or generally unobservable.realizable. The Company classifiescategorizes its fair value balancesestimates in accordance with ASC 820, Fair Value Measurements (ASC 820), based on the observabilityhierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets, which is generally between three and five years. Depreciation expense was $0 and $0 for the quarter ended June 30, 2014 and December 31, 2013, respectively.
Intangible Assets
Intangible assets are stated at cost, net of accumulated amortization. Amortization is computed using the straight-line method over the estimated useful life of the respective asset, which is three years. Amortization expense was $0 and $0 for the quarter ended June 30, 2014 and the year ended December 31, 2013, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those inputs. temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Basic and Diluted Net Loss per Share
The Company computes net loss per share in accordance with ASC 260, Earnings Per Share, which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
CMG HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Fair Value Measurements
ASC 820 and ASC 825, Financial Instruments (ASC 825), requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy that prioritizesbased on the level of independent, objective evidence surrounding the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The following table sets forth by level withinwith the fair value hierarchy the Company’s financial assets and liabilities that were accounted formeasured at fair value as of Septemberon June 30, 20132014 and December 31, 2011. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.2013:
| June 30, 2014 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Marketable trading securities | $ | 141,703 | $ | - | $ | - | $ | 141,703 | ||||||||
| Derivative Liabilities | $ | - | $ | - | $ | 3,195 | $ | 3,195 | ||||||||
| December 31, 2013 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Marketable trading securities | $ | 764,088 | $ | - | $ | - | $ | 764,088 | ||||||||
| Derivative Liabilities | $ | - | $ | - | $ | 11,121 | $ | 11,121 | ||||||||
CMG HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
| September 30, 2013 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Marketable trading securities | $ | 1,754,550 | $ | - | $ | - | $ | 1,754,550 | ||||||||
| Derivative Liabilities | $ | - | $ | - | $ | 78,129 | $ | 78,129 | ||||||||
| December 31, 2012 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Marketable trading securities | $ | 3,000 | $ | - | $ | - | $ | 3,000 | ||||||||
| Derivative Liabilities | $ | - | $ | - | $ | 145,970 | $ | 145,970 | ||||||||
Investments in Debt and Equity Securities
The Company applies the provisions of Accounting Standards Codification 320, “Investments Investments – Debt and Equity Securities”Securities, regarding marketable securities. The Company invests in securities that are intended to be bought and held principally for the purpose of selling them in the near term, and as a result, classifies such investments as trading securities. Trading securities are recorded at fair value on the balance sheet with changes in fair value being reflected as unrealized gains or losses in the current period. In addition, the Company classifies the cash flows from purchases, sales, and maturities of trading securities as cash flows from operating activities.
Details of the Company's marketable trading securities as of SeptemberJune 30, 20132014 and December 31, 20122013 are as follows:
| June 30, 2014 | December 31, 2013 | |||||||
| Aggregate fair value | $ | 141,703 | $ | 764,088 | ||||
| Gross unrealized holding gains | 113,714 | 622,769 | ||||||
| Proceeds from sales ($1,113,354 stocks plus $85,000 options) | $ | 540,332 | $ | 658,021 | ||||
| Gross realized gains (stocks and options) | 427,002 | 524,668 | ||||||
| Gross realized losses | - | - | ||||||
| Other than temporary impairment | - | - | ||||||
NOTE 2 - EQUITY
Preferred Stock
Series B Preferred Stock and Inventory Purchase
On March 31, 2011 the Company acquired 20,000 cartoon animated cels (the “Cel Art”) from Continental Investments Group, Inc. (the “Agreement”). The Company issued 50,000 shares of its Series B Convertible Preferred Stock to Continental Investments Group, Inc. as consideration for the Cel Art, such shares of Series B Convertible Preferred Stock having a stated value per share of $100. The Cel Art consists of collectible, hand-painted cartoon animation cels. The shares of Series B Preferred Stock are convertible into common shares of the Company at the stated value of $100 per share divided by the volume weighted average trading price for the 30 days prior to conversion. The preferred shares are non-voting and do not receive dividends. The Company determined the fair value of the preferred stock to be $3,240,502 on the acquisition date based on the number of shares of common stock the preferred shares could be converted into and the market price of the common stock on the agreement date. The cartoon animated cels are valued at the lower of cost or market. As of December 31, 2011, Management wrote down the inventory to zero. The Company also analyzed the embedded conversion option for derivative accounting consideration under ASC 815-15 and determined that the conversion option should be classified as equity. During the year ended December 31, 2011, the Company determined that due to uncertainties related to future sales of the Cel Art, the entire balance should be reserved as of December 31, 2011.
During August 2013, the Company entered into a Termination Agreement and Release (the “Agreement”) with Continental Investments Group (Continental), the holder of a $85,000 convertible note payable of the Company and the holder of 2,500,000 shares of restricted common stock. The Agreement calls for the termination and cancellation of a Sale and Purchase agreement, whereby the Company agreed to issue 50,000 shares of Series B Convertible Preferred Stock in exchange for 20,000 cartoon animated Cels. The Agreement also calls for the cancellation of the $85,000 convertible note and related interest and for Continental to return the 2,500,000 shares of restricted common stock.
Common Stock
On January 29, 2014, the Company sold 1,500,000 shares of its common stock for $0.01 per share and net proceeds of $15,000.
On March 28, 2014, the Company issued 5,000,000 shares of its common stock pursuant to the acquisition of its subsidiary. The shares were valued at a total of $87,500 or $0.0175 per share, the closing price of the company’s common stock on the OTCQB.
On April 7, 2014, the Company issued 522,000 shares of its common stock pursuant to a consulting agreement. The shares were valued at a total of $8,613 or $0.0165 per share, the closing price of the company’s common stock on the OTCQB.
On May 9, 2014, the Company issued to a total of 6,000,000 shares of Common Stock to its three former directors of the Company, with each former director receiving 2,000,000 shares, pursuant to the agreements between the Company and each of the former directors dated February 5, 2014.
On June 30, 2014, the Company canceled 7,350,000 shares of common stock pursuant to a settlement agreement with CMGO Investors LLC and Craig Boden.
CMG HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
Common Stock Warrants
During 2011, eight individuals purchased 3,870,000 shares of common stock, 774,000 A Warrants and 774,000 B Warrants for $217,000. A total of 574,000 and 200,000 A Warrants are exercisable at a strike price of $0.25 and $0.10, respectively for three years; 574,000 and 200,000 B Warrants are exercisable at a strike price of $0.50 and $0.20, respectively for three years. The Company can call each of the Warrants after twelve months if the price of the Common Shares of the Company in the Market is 150% of the Warrant strike price for 10 consecutive days.
During March 31, 2010, 250,000 shares of warrants issued to AudioEye at an exercise price of $0.07 per share and a term of 5 years. See Note 5 for additional information on the derivative liability.
On April 7, 2014, we issued to our newly appointed CEO and Chairman of the Board of Directors, as compensation, a warrant to purchase a total of 40,000,000 shares of Common Stock at the exercise price of $0.0155 with a term of 5 years.
A summary of warrant activity for the six months ended June 30, 2014 and the years ended December 31, 2013 and 2012 is as follows:
| Outstanding and Exercisable | Weighted average Exercise Price | |||||||||
| December 31, 2011 | 1,798,000 | $ | 0.28 | |||||||
| Granted | — | — | ||||||||
| Exercised | — | — | ||||||||
| December 31, 2012 | 1,798,000 | $ | 0.28 | |||||||
| Granted | — | — | ||||||||
| Exercised | — | — | ||||||||
| December 31, 2013 | 1,798,000 | $ | 0.28 | |||||||
| Granted | 40,000,000 | $ | 0.016 | |||||||
| Exercised | — | — | ||||||||
| Expired | (748,000 | ) | ||||||||
| June 30, 2014 | 41,050,000 | $ | 0.02 | |||||||
As of June 30, 2014, the warrants have a weighted average remaining life of 4.64 years with $0 aggregate intrinsic value.
CMG HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
NOTE 3 - NOTES PAYABLE
Paul Sherman Agreement
| September 30, 2013 | December 31, 2012 | |||||||
| Aggregate fair value | $ | 1,754,550 | $ | 3,000 | ||||
| Gross unrealized holding gains | 1,479,899 | - | ||||||
| Gross unrealized holding losses | - | - | ||||||
| Transfer of cost method investment to marketable securities | 274,651 | |||||||
| Proceeds from sales | $ | - | $ | -- | ||||
| Gross realized gains | - | -- | ||||||
| Gross realized losses | - | -- | ||||||
| Other than temporary impairment | - | -- | ||||||
On May 12, 2012, the Company modified its July 24, 2011 agreement with Paul Sherman into a $9,943 convertible promissory note bearing interest at 2% and due on May 15, 2013. The convertible promissory note is convertible at a price equal to the close price on the day prior to Paul Sherman’s request for conversion, but not to go below $.001. The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 and determined that the instrument should be classified as a liability. The fair value of the embedded conversion option resulted in a discount of $8,875 on the date of the note. The discount is being amortized over the term of the note to interest expense. The discount balance was $0 and $0 as of June 30, 2014 and December 31, 2013, respectively. Amortization of $0 and $3,376 was recognized as interest expense during the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. The convertible promissory note has an outstanding balance of $9,943 and $9,943 as of June 30, 2014 and December 31, 2013, respectively.
NOTE 4 - DERIVATIVE LIABILITIES
The Company has variousa convertible instrumentsinstrument outstanding more fully described in Note 3. Because the number of shares to be issued upon settlement cannot be determined under these instruments, the Company cannot determine whether it will have sufficient authorized shares at a given date to settle any other of its share-settleable instruments. As a result, underIn accordance with ASC 815-15 “Derivatives and Hedging”, all otherthe convertible share-settleable instruments must beare classified as liabilities.
CMG HOLDINGS GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJune 30, 20132014
(Unaudited)
Embedded Derivative Liabilities in Convertible Notes
During the nine monthsyears ended September 30,December 31, 2013 and 2012, the Company recognized new derivative liabilities of $98,097 and $721,590, respectively, as a result of new convertible debt issuances. The fair value of these derivative liabilities exceeded the principal balance of the related notes payable by $0 and $0 for the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. As a result of conversion of notes payable described above, the Company reclassified $0 and $9,240,920 from equity and $0 and $0 of derivative liabilities to equity during the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. The Company recognized a $165,938 gain of $11,121 and $598,153 loss,a gain of $210,810 on derivatives due to change in fair value of the liability forduring the ninesix months ended SeptemberJune 30, 20132014 and 2012,the year ended December 31, 2013, respectively. The fair value of the Company’s embedded derivative liabilities was $78,129$0 and $145,970$11,121 at SeptemberJune 30, 20132014 and December 31, 2012,2013, respectively.
Warrants
During the fiscal year 2011, 899,000774,000 A Warrants and 899,000774,000 B warrants were issued to individuals. The Company determined that the instruments embedded in the warrants should be classified as liabilities. During March 31, 2010, 250,000 shares of warrants issued to AudioEye at an exercise price of $0.07 per share and a term of 5 years.
Under ASC 815-15, “Derivatives and Hedging” the liabilities were subsequently measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. The fair value of all outstanding warrants as of SeptemberJune 30, 20132014 and December 31, 20122013 was $1,750$3,195 and $12,007,$11,121, respectively. The Company recognized $10,257an expense of $381 and $4,532 asa gain on derivative$10,196 related to the warrants for the ninethree months ended SeptemberJune 30, 2014 and the year ended December 31, 2013, and 2012, respectively.
The following table summarizes the derivative liabilities included in the consolidated balance sheet:
| Derivative Liabilities | ||||
| Balance at December 31, 2012 | $ | 145,970 | ||
| ASC 815-15 additions | 98,097 | |||
| Change in fair value | (85,712) | |||
| ASC 815-15 deletions | (80,226) | |||
| Balance at September 30, 2013 | $ | 78,129 | ||
| Gain/(Loss) on Derivative Liability | ||||||||
For the Nine Months Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
| Change in fair value | (85,712 | ) | 459,333 | |||||
| Convertible debt settled in cash | (80,226 | ) | ||||||
| Excess of fair value of liabilities over note payable | - | 138,820 | ||||||
| Total (Gain)/Loss on Derivative Liability | (165,938 | ) | 598,153 | |||||
| Derivative Liabilities | ||||
| Balance at December 31, 2011 | $ | 444,150 | ||
| ASC 815-15 additions | 721,590 | |||
| Change in fair value | 192,025 | |||
| ASC 815-15 deletions | (1,211,795 | ) | ||
| Balance at December 31, 2012 | 145,970 | |||
| ASC 815-15 additions | 98,097 | |||
| Change in fair value | (210,180 | ) | ||
| ASC 815-15 deletions | (22,766 | ) | ||
| Balance at December 31, 2013 | 11,121 | |||
| ASC 815-15 additions | 5,013 | |||
| Change in fair value | (1,818 | ) | ||
| ASC 815-15 deletions | (11,121 | ) | ||
| Balance at June 30, 2014 | $ | 3,195 | ||
The Company values its warrant derivatives and all other share settable instrument using the Black-Scholes option pricing model. Assumption used include (1) 0.01%0.06% to 1.96%0.13% risk-free interest rate, (2) life is the remaining contractual life of the instrument (3) expected volatility 70%55% to 426%239%, (4) zero expected dividends, (5) exercise price as set forth in the agreements, (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.
NOTE 5 - LEGAL PROCEEDINGS
We are subject to certain claims and litigation in the ordinary course of business. It is the opinion of management that the outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
On April 21, 2011, the Company was served with a lawsuit that was filed in Clark County, Nevada against the Company by A to Z Holdings, LLC and seven other individuals or entities. The complaint alleges, among other things, that the Company’s Board of Directors did not have the power to designate series A and B preferred stock without amending the articles of incorporation. The complaint also alleges any such amendment would require shareholder approval and filing of a proxy statement. On April 20, 2012, the Company settled with A to Z Holdings, LLC and seven other individuals or entities for $10,000. The Company has accrued this settlement liability as of September
| 14 |
CMG HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013.2014
(Unaudited)
On July 6, 2011, the Company was served with a lawsuit filed in the Circuit Court for the County of Multnomah, Oregon. The complaint alleges breach of contract and entitlement to consulting fees from the Company. The Company disagrees with the allegations contained in the Complaint and intends to vigorously defend the matter and otherwise enforce its rights with respect to the matter. The Company has retained counsel and is prepared to defend this lawsuit. The Company believes that the claims are frivolous pursuant to the terms of the contract. The case was settled inon September 28, 2012 for $30,000. The Company has accrued for this liability as of September 30,March 31, 2014 and December 31, 2013.
On March 28, 2014 we received a letter from a former Chief Executive Officer of our subsidiary, XA, claiming unpaid severance and paid- time-off. Total of the contingent claim amounted to $250,661. We are currently in the process to settle the claim.
NOTE 6 – EARNINGS PER SHARE- ACQUISITION OF GOOD GAMING, INC.
On March 28, 2014, CMG Holdings, Inc. (the “Company” or “CMG”), completed its acquisition of 100% of the componentsshares of basicGood Gaming, Inc. (“GGI”) by entering into a Share Exchange Agreement (the “SEA”) with BMB Financial, Inc. and dilutedJackie Beckford, the then shareholders of GGI. The sole owner of BMB Financial, Inc. is also the sole owner of Infinite Alpha, Inc. which provides consulting services to CMG. The transaction was completed under the purchase method of accounting. Pursuant to the SEA, the Company received 100% of the shares of GGI in exchange for 5,000,000 shares of the Company’s common stock, $33,000 in equipment and consultant compensation and a commitment to pay $200,000 in development costs, of which $50,000 of the development costs had been advanced by the Company. In addition, pursuant to the SEA, CMG shall adopt an incentive plan for GGI which shall entitle the GGI officers, directors and employees to receive up to 30% of the net income per common share is presentedprofits of GGI and up to 30% of the proceeds, in the tables below:event of a sale of GGI or its assets. In accordance with the purchase method of accounting, the Company recorded a charge of $87,500.
NOTE 7 - RELATED PARTY TRANSACTIONS
| For the nine months ended | ||||||||||||
| September 30, 2013 | ||||||||||||
| Weighted | ||||||||||||
| Average | ||||||||||||
| Shares | Per | |||||||||||
| Income | Outstanding | Share | ||||||||||
| Basic: | ||||||||||||
| Income attributable to common stock | 2,070,484 | 295,054,040 | 0.01 | |||||||||
| Effect of Dilutive Securities: | ||||||||||||
| Convertible Debt | - | 11,408,959 | ||||||||||
| Diluted: | ||||||||||||
| Income attributable to common stock, including assumed conversions | 2,070,484 | 306,462,999 | 0.01 | |||||||||
The Company had outstanding accounts payable to a former officer and director who was a related party at December 31, 2012 of $19,625. The payables represent legal and administrative fees paid on behalf of the Company. These payables were settled during the year ended December 31, 2013.
XA has made business reimbursements to a consulting firm which is controlled by its former CEO. The accounts payable in the amount of $47,912 and $47,912 is included in account payable as of June 30, 2014 and December 31, 2013, respectively. Total amount submitted to the Company for reimbursement from the computationconsulting firm is $0 and $142,060 for the three months ended June 30, 2014 and the year ended 2013, respectively.
NOTE 8 - SEGMENTS
The Company splits its business activities during the six months ended June 30, 2014 into three reportable segments. Each segment represents an entity of weighted average dilutedwhich are included in the consolidation. The table below represents the operations results for each segment or entity, for the six months ended June 30, 2014.
| XA | Good Gaming | CMG Holdings Group | Totals | |||||||||||||
| Revenue | $ | 7,526,474 | $ | — | $ | — | $ | 7,526,474 | ||||||||
| Operating expenses | 7,430,732 | 93,750 | 1,003,424 | 8,527,906 | ||||||||||||
| Operating Income (Loss) | 95,742 | (93,750 | ) | (1,003,424 | ) | (1,001,432 | ) | |||||||||
| Other Income (Expense) | — | — | (166,375 | ) | (166,375 | ) | ||||||||||
| Net Income (Loss) | $ | 95,742 | $ | (93,750 | ) | $ | (1,169,799 | ) | $ | (1,169,799 | ) | |||||
| 15 |
CMG HOLDINGS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
NOTE 9 – RESIGNATION OF CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD.
On September 26, 2012, Alan Morell officially resigned as Chief Executive Officer and Director of the Company. In conjunction with the resignation, Mr. Morell was issued a convertible note for $525,000 representing the amount of accrued salary owed to him by the company up to the date of resignation and assumed all obligations related to a Smith Barney Credit Line that was secured by Mr. Morell’s security accounts and issued another convertible note to Morell for $112,000. The notes bore interest at 2% and were due on April 26, 2014. The notes were convertible beginning on November 15, 2012 at a conversion price of $0.06 per share. In June 2013, the Company issued 2,800,000 shares of common stock becauseto settle the impactnotes totaling $637,000, resulting in a gain on settlement of these potentially dilutive securities was anti dilutive totaled 1,798,000debt of $610,400.
On May 9, 2014, the Company issued to a total of 6,000,000 shares of Common Stock to its three former directors of the Company, with each former director receiving 2,000,000 shares, pursuant to the agreements between the Company and each of the former directors dated February 5, 2014.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company subsidiary rents office space for its office at Chicago and New York. The lease expires in March 31, 2021 for its Chicago office. During 2013, the nine month period ended September 30, 2013.
| Year ending December 31, 2013 | ||||
| 2014 | $ | 143,353 | ||
| 2015 | 196,805 | |||
| 2016 | 202,572 | |||
| 2018 | 208,440 | |||
| 2019 | 141,784 | |||
| After | 214,205 | |||
Except as discussed above in Note 5, The Company is not the subject of notes payable.
On March 28, 2014 we received a letter from a former Chief Executive Officer of our subsidiary, XA, claiming unpaid severance and paid- time-off. Total of the contingent claim amounted to $250,661. We are currently in the process to settle the claim.
FORWARD LOOKING STATEMENTS
The following discussion of our productsfinancial condition and technologies,results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the competitive nature of and anticipated growthnotes to those financial statements appearing elsewhere in our markets, our ability to achieve cost reductions, the status of evolving technologies and their growth potential, the adoption of future industry standards, expectations as to our financing and liquidity requirements and arrangements, the need for additional capital, and other matters that are not historical facts.this Report.
Certain statements in this Report constitute forward-looking statements. These forward-looking statements are based oninclude statements, which involve risks and uncertainties, regarding, among other things, (a) our current expectations, estimates,projected sales, profitability, and projections aboutcash flows, (b) our growth strategy, (c) anticipated trends in our industry, management’s beliefs,(d) our future financing plans, and certain assumptions made(e) our anticipated needs for, and use of, working capital. They are generally identifiable by it. Words such as “anticipates”, “appears”, “believe,”, “expects”, “intends”, “plans”, “believes, “seeks”, “assume,use of the words “may,” “estimates”, “may”, “will” and variations“will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or similar expressions are intended to identifyother variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements. All statements contained in this Quarterly Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. Therefore, actual results could differ materially and adversely from those results expressedfiling will in any forward-looking statements, as a result of various factors. Readers are cautioned not to place undue reliance on forward-looking statements, which are based only upon information available as of the date of this report.fact occur. You should not place undue reliance on ourthese forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Ourstatements.
The forward-looking statements are based on the information currently available to us and speak only as of the date on which this Quarterly Report was filed withthey are made, and, except to the Securities and Exchange Commission (“SEC”). We expressly disclaim anyextent required by federal securities laws, we undertake no obligation to revise or update publicly any forward-looking statements even if subsequentto reflect events cause our expectationsor circumstances after the date on which the statements are made or to change regardingreflect the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders. occurrence of unanticipated events.
Unless the context indicates otherwise, the terms “Company”, “Corporate”, “CMGO”, “our”, and “we” refer to CMG Holdings Group, Inc. and its subsidiaries.
RECENT DEVELOPMENTS
Since the departure of Ron Burkhardt, XA continues to grow, hiring several new staff members to further meet the varied needs of our growing clientele. Instead of relying on only a few large scale projects each year, XA’s new generation of event planners are seeking to broaden the client base. Current projects include international charity galas and initiatives, large-scale multi city brand awareness tours; professional sports based technologically innovative installations and re-branding and programming for luxury hospitality groups.
Good Gaming has engaged Caxy Interactive as its web developer as of April, 2014. Good Gaming is currently in Iteration 4 of the design process for its web platform and updated media/splash page. The overall user interface look and feel has been locked in for PC and Mobile web browsing.
Good Gaming is on track for a limited Open Beta for the beginning of September, with most features of its web platform being functional or fully completed. Based on feedback Good Gaming garners during Open Beta, it anticipates going live with the web platform in the beginning of September.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODMONTHS ENDED SEPTEMBERJUNE 30, 2013
Gross revenues increased from 374,104$4,369,640 for the three months ended SeptemberJune 30, 20122013 to $1,048,407$5,971,726 for the three months ended SeptemberJune 30, 2013.2014. The increase in revenues was mainly due to the delivery of the NBC marketing event by our subsidiary XA, The Experiential Agency, Inc. (XA) during the three months ended June 30, 2014.
Cost of revenue increased from $3,261,774 for the three months ended June 30, 2013 to $5,367,651 for the three months ended June 30, 2014. The increase in cost of goods sold was due to the increase in revenues of XA, The Experiential Agency, Inc. (XA).
Operating expenses increased from $3,978,609 for the three months ended June 30, 2013 to $6,752,626 for the three months ended June 30, 2014. The increase in operating expenses is due to the increase in revenues of our subsidiary XA and research and development expenses of Good Gaming. In addition, the Company incurred non-cash charges of $619,627, $120,813 and $87,500 in connection with the issuance of warrants issued to our Chief Executive Officer, shares of common stock issued to former directors and a consultant and costs affiliated with the acquisition of Good Gaming, Inc., respectively.
Net income decreased from $2,475,029 for the three months ended June 30, 2013 to a net loss of $1,146,834 for the three months ended June 30, 2014. The decrease in earnings is due to the differences of realized and unrealized gains of marketable securities incurred during the three months ended June 30, 2014 and June 30, 2013 and the non-cash charges incurred in our operating expenses. In addition, during the three months ended June 30, 2013, the Company realized a gain of $610,400 in connection with the settlement of debt as compared to $0 during the three months ended June 30, 2014.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2014
Gross revenues increased from $5,392,809 for the six months ended June 30, 2013 to $7,526,474 for the six months ended June 30, 2014. The increase in revenues was mainly due to market and economic conditions in our event marketing, event management and public relations and consulting business of XA, The Experiential Agency, Inc. (XA) as well as the sale of Audio Eye on August 17, 2012.
Cost of revenue increased from $422,233$3,803,808 for the threesix months ended SeptemberJune 30, 20122013 to $722,819$6,248,643 for the threesix months ended SeptemberJune 30, 2013.2014. The increase in cost of goods sold was due to market and economic conditionsthe increase in our event marketing, event management and public relations and consulting businessrevenues of XA, The Experiential Agency, Inc. (XA) as well as the sale of Audio Eye on August 17, 2012.
Operating expenses increased from $1,216,921$5,150,981 for the threesix months ended SeptemberJune 30, 20122013 to $ 1,448,677$8,527,906 for the threesix months ended SeptemberJune 30, 2013.2014. The increase in operating expenses is mainly due to the increase in costrevenues of revenuesour subsidiary XA and research and development expenses of Good Gaming. In addition, the Company incurred non-cash charges of $619,627, $120,813 and $87,500 in connection with the issuance of warrants issued to our Chief Executive Officer, shares of common stock issued to former directors and a consultant and costs affiliated with the acquisition of Good Gaming, Inc., respectively.
Net income decreased from $422,233$2,186,283 for the threesix months ended SeptemberJune 30, 2012 to $722,819 for the three months ended September 30, 2013.
The table below reflects the Company’s results of operations from $4,115,771by entity for the ninesix months ended SeptemberJune 30, 2012 to $0 for the nine months ended September 30, 2013 associated to the spinoff transaction related to AudioEye, Inc.
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| XA | Good Gaming | CMG Holdings Group | Totals | |||||||||||||
| Revenue | $ | 7,526,474 | $ | — | $ | — | $ | 7,526,474 | ||||||||
| Operating expenses | 7,430,732 | 93,750 | 1,003,424 | 8,527,906 | ||||||||||||
| Operating Income (Loss) | 95,742 | (93,750 | ) | (1,003,424 | ) | (1,001,432 | ) | |||||||||
| Other Income (Expense) | — | — | (166,375 | ) | (166,375 | ) | ||||||||||
| Net Income (Loss) | $ | 95,742 | $ | (93,750 | ) | $ | (1,169,799 | ) | $ | (1,169,799 | ) | |||||
LIQUIDITY AND CAPITAL RESOURCES:RESOURCES
As of SeptemberJune 30, 2013,2014, the Company’s cash on hand was $278,185.
Cash used infrom investing activities for the ninesix months ended SeptemberJune 30, 20132014 was $0$521,932 as compared to cash from or used in investing activities of $4,841$0 for the ninesix months ended SeptemberJune 30, 2012.
Cash provided by financing activities for the ninesix months ended SeptemberJune 30, 20132014 was $52,000,$15,000, as compared to $448,305$52,000 provided for the ninesix months ended SeptemberJune 30, 2012.2013. The decrease during the nine months ended September 30, 2013,of $37,000 was primarily due to the decrease by $415,640 in cash provided by discontinued operations.
| Title of Class | Name | Shares | Percent | |||||||
| Common Stock | Alan Morell | 18,622,944 | 6.3 | % | ||||||
| Common Stock | Jeffrey Devlin | 0 | 0 | % | ||||||
| All Directors, Executive Officers and 5% shareholders | 18,622,944 | 6.3 | % | |||||||
ITEM 4: CONTROLS3 - QUANTITATIVE AND PROCEDURESQUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined inSecurities Exchange Act Rules 13a-15(f)of 1934 and 15d-15(f)) as of the end of the period covered by this report and concluded that our disclosure controls and procedures wereare not effective to ensure that all material information required to be disclosed inprovide the information under this Quarterly Report on Form 10-Q has been made known to them in a timely fashion. We are in the process of improving our internal control over financial reporting in an effort to remediate these deficiencies through improved supervision and training of our accounting staff. These deficiencies have been disclosed to our Board of Directors. We believe that this effort is sufficient to fully remedy these deficiencies and we are continuing our efforts to improve and strengthen our control processes and procedures. Our Chief Executive Officer, Chief Financial Officer and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2014. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 3, 2014, the Company’s disclosure controls and procedures were not effective due to the identification of a material weakness in our internal control over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after December 31, 2013.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2014 based on the framework stated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 1992). Furthermore, due to our financial situation, the Company will be implementing further internal controls as the Company becomes operative so as to fully comply with the standards set by the Committee of Sponsoring Organizations of the Treadway Commission.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on its evaluation as of December 31, 2013, our management concluded that our internal controls over financial reporting were not effective as of December 31, 2013 due to the identification of a material weakness. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our Chief Financial Officer.
In performing this assessment, management has identified the following material weaknesses as of December 31, 2013:
| ● | There is a lack of segregation of duties necessary for a good system of internal control due to insufficient accounting staff due to the size of the Company | |
| ● | Lack of a formal review process that includes multiple levels of reviews | |
| ● | Employees and management lack the qualifications and training to fulfill their assigned accounting and reporting functions | |
| ● | Inadequate design of controls over significant accounts and processes |
| ● | Inadequate documentation of the components of internal control in general | |
| ● | Failure in the operating effectiveness over controls related to valuing and recording equity based payments to employees and non-employees | |
| ● | Failure in the operating effectiveness over controls related to valuing and recording debt instruments including those with conversion options and the related embedded derivative liabilities |
| ● | Failure in the operating effectiveness over controls related to recording revenue and expense transactions in the proper period | |
| ● | Failure in the operating effectiveness over controls related to evaluating and recording related party transactions |
The Company is not required by current SEC rules to include, and does not include, an auditor's attestation report. The Company's registered public accounting firm has not attested to Management's reports on the Company's internal control over financial reporting. As of June 30, 2014 no changes have occurred.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
On April 7, 2014, the Board of Directors of the Company appointed Mr. Glenn Laken as the Company’s Chief Executive Officer. Mr. Jeffrey Devlin remained as the Company’s acting Chief Financial Officer.
Except for the above, no change in the Company’s internal control over financial reporting occurred during the period ended June 30, 2014, that materially affected, or is reasonably likely to materially affect, the Company s internal control over financial reporting.
ITEM 1 – LEGAL PROCEEDINGS
We are subject to certain claims and litigation in the ordinary course of business. It is the opinion of management that the outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
On July 6, 2011, the Company was served with a lawsuit filed in the Circuit Court for the County of Multnomah, Oregon. The complaint alleges breach of contract and entitlement to consulting fees from the Company. The case was settled in 2012 for $30,000. The Company$30,000 and the settlement amount has accrued for this liability as of June 30, 2013.
ITEM 1A – RISK FACTORS
The Company is a smaller reporting company and is therefore not required to provide this information.
ITEM 2: - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 9, 2014, the Company issued to a total of 6,000,000 shares of Common Stock to its three former directors of the Company, with each former director receiving 2,000,000 shares, pursuant to the agreements between the Company and each of the former directors dated February 5, 2014.
Except as disclosed above, all unregistered sales of the Company’s securities have been disclosed on the Company’s current reports on Form 8-K.
ITEM 3 – DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
ITEM 5 – OTHER INFORMATION
None.
ITEM 6 – EXHIBITS
Exhibit Number | Description of Exhibit | Filing Reference | ||
| 31.01 | Certification of | Filed herewith. |
| 31.02 | Certification of | Filed herewith. | ||
| 32.01 | CEO and CFO Certification Pursuant to Section 906 of the | Filed herewith. | ||
| 101.INS | XBRL Instance Document. | |||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||
* The XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
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SIGNATURES
Pursuant to Shareholders.
| CMG HOLDINGS GROUP, INC. | ||
| Dated: August 14, 2014 | By: | /s/ Glenn Laken | ||||||
Glenn Laken Chief Executive Officer | ||||||||
| Dated: August 14, 2014 | By: | /s/Jeffrey Devlin | ||||||
Jeffrey Devlin Chief Financial Officer |
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