Notes to the Consolidated Financial Statements
December 31, 2013
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Primco Management Inc. (the Company) was incorporated under the laws of the state of Delaware on October 14, 2010.
On October 10, 2012, the Companys board of directors adopted a resolution approving an amendment to our Articles of Incorporation to effectuate an increase of the authorized common shares from 25,000,000 par value $0.001 to 500,000,000 par value $0.001 and additionally authorized a 20 for 1 forward split increasing the number of issued and outstanding common shares from 9,245,600 common shares to 184,912,000 common shares. The forward split did not affect the number of authorized common shares or their par value.
On June 10, 2013, the Companys board of directors adopted a resolution approving an amendment to the Articles of Incorporation increasing the authorized common shares from 500,000,000 par value $0.001 to 2,000,000,000 par value $0.00001 and to designate 10,000,000 preferred shares, par value $0.00001, to be issued from time to time in one or more series as determined by the board of directors, with the balance being designated as 1,990,000,000 common shares.
On August 6, 2013, the Company filed a Certificate of Designation with the State of Delaware to create and issue a series of 10,000,000 preferred stock to be designated the Series A Preferred Stock .These shares rank senior to the common stock with respect to distributions or payments in the event of any liquidation, dissolution, or winding up of the Company.
On August 19, 2013, the Companys board of directors adopted a resolution approving an amendment to the Articles of Incorporation increasing the authorized shares from 2,000,000,000 par value $0.00001 to 5,000,000,000 par value $0.00001, with 10,000,000 preferred shares, par value $0.00001 and 4,990,000,000 common shares, par value $ 0.00001, to be issued from time to time in one or more series as determined by the board of directors.
Mergers and Acquisitions
Effective as of January 31, 2013, the Company executed a merger by entering into a stock purchase agreement whereby the Company acquired all of the assets, contracts and obligations of ESMG Inc. existing as of that date through a cashless exchange of stock. ESMG Inc., which was formed in the state of Nevada on October 9, 2012, is a formative multi-media entertainment enterprise with an active music production and distribution division, as well as having a business plan to launch a motion picture and TV production and distribution division; a radio content syndication division and an on-line interactive sports division. Accordingly, as of January 31, 2013, through the acquisition of ESMG Inc., the Company expanded its operations to include entertainment in addition to continuing to offer real estate management and development services.
On May 30, 2013, the Company completed and funded the acquisition of Top Sail Productions, Top Sail a music production company and record label with a multi-year US distribution agreement through WEA, a Warner Music Group Company. The Company purchased Top Sail from Chuck Gullo, the principal of Top Sail, who will continue as Senior Executive Consultant to assist in the operation of Top Sail and other
19
entertainment entities owned by the Company. The Company purchased the membership interests in Top Sail for a total of $440,000. The initial payment was $75,000 and $15,000 worth of the Companys 5,000,000 restricted common shares. The remaining $350,000 is being paid in installments until June 30, 2016.
On June 1, 2013 the board of directors entered into an Amendment and Plan of Reorganization with D & B Music, Inc. (previously known as D & B Records, Inc.) a Delaware corporation, in which D & B Music, Inc. merged with and into the Company. D & B Music, Inc, has a music catalog of 41 titles. The consideration paid by the company was the assumption by the Company of a promissory note for $242,000 due Pegasus Group, Inc. together with accrued and unpaid interest thereon of $114, 841 and the issuance of 7,000,000 of the Companys Series A preferred stock and 20,000,000 of the Companys common stock to the sole shareholder, David Michery, who the CEO and director of the Company.
Nature of operations
The Company is a real estate management and property development company and., through its wholly-owned subsidiaries of ESMG Inc, Top Sail Productions, LLC and D & B Music, Inc., the Company produces and distributes recorded music and intends to co-produce for distribution lower budgeted motion pictures.
In February, 2014 the Company expanded its operations to include the leasing and property management of facilities for the legal cultivation of medical cannabis, and the acquisition and/or entering into joint ventures with third parties involving the planning, staffing, management and operation of legalized medical marijuana dispensing and cultivation.
Development stage enterprise
The Company is a development stage company as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 915 "Development Stage Entities". Since October 14, 2010 the Company had been devoting substantially all of its efforts in real estate management and property development programs as well as the production and creation of recorded music by such artists as V.I.C., Tion Phipps, Jesse Scott, Kamp Hustle , Bungle Knot Dred as well as the exploitation of the Top Sail Productions Casey Kasem music library and the D & B music library.
As such, through December 31, 2013, the Company had not generated significant revenues from its operations. Due to startup costs, legal and accounting, consulting, research and development and operating expenses the Company has incurred accumulated net losses of $4,246,770 from inception through December 31, 2013. All losses accumulated since October 14, 2010 have been considered as part of the Company's development stage activities.
Use of estimates
The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates.
Revenue recognition
Operating revenue during the year ended December 31, 2013 consists of the physical and digital sale of recorded music. Operating revenue during the year ended December 31, 2012 consists of property management fees. Such income was recognized during the period in which the Company generated sales and/or provided services.
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Research and development
The Company records research and development expense as incurred.
Net loss per common share
Net loss per common share is computed by dividing net loss by the weighted average common shares outstanding during the period as defined by ASC Topic 260, "Earnings per Share". Basic earnings per common share (EPS) calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
Income taxes
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Financial Accounting Standards Board Accounting Standards Codification ASC 740,
Income Tax
, requires the recognition of the impact of a tax position in the financial statements only if that position is more likely than not of being sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position.
At December 31, 2013 and 2012, the Company had no unrecognized tax benefits. The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of December 31, 2013 and 2012, the Company had no accrued interest or penalties related to uncertain tax positions.
Concentration of cash
The Company maintains cash balances at a bank where amounts on deposit may exceed $250,000 throughout the year. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Recent accounting pronouncements
The Company does not believe recently issued accounting pronouncements will have any material impact on its financial position, results of operations or cash flows.
NOTE 2 GOING CONCERN
The Company is a development stage company and the management of the Company has devoted substantially all of its efforts to locating real estate properties for development and constriction and to the production and/or distribution of recorded music from the music artists it has developed and from the music catalogs that it has acquired. The Company expects operating costs to continue to exceed funds generated from operations until significant revenues are generated from its operations and from new financing sources.
The Company had only generated minimal revenues from its operations through December 31, 2013 mainly due to the unsuccessful and disappointing sale of recorded music from the music artists it has under contract. As a result, the Company expects to continue to incur operating losses in the near term, and
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the operations in the near future are expected to continue to require working capital. The ability of the Company to continue as a going concern is in turn dependent on its ability to raise capital to meet its operating requirements.
The Companys independent auditors, in their report on the financial statements for the years ended December 31, 2013 and 2012, expressed substantial doubt about the Companys ability to continue as a going concern. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
NOTE 3 - ACCOUNTS RECEIVABLE AND INVENTORY
Accounts receivable represents the net amount due from WEA/Warner Music Group from the sale of Top Sale Productions music CDs, and ESMGs digital music releases through December 31, 2013.
Inventory represents the finished cost of Top Sail Productions music CDs (including prepaid royalties to music artists) available for resale to consumers, less a reserve for defective CDs of $3,729.
NOTE 4 INTELLECTUAL PROPERTY RIGHTS
ESMG Inc., acquired the following intellectual property rights, which are reflected at their original cost as of December 31, 2013, less managements provision for loss/impairment in realizable value on costs associated with certain music artists who have digitally released their recorded music and have generated only minimal sales.
4A. Music related rights:
This represents the cost to acquire the exclusive right to produce and/or co-produce original recorded music, and subsequent production and marketing costs, for the worldwide distribution by ESMG Inc. of the following artists:
The majority of these costs have been financed initially through promissory notes which have been subsequently refinanced through short-term convertible debt instruments.
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|
|
| |
Artist
|
Cumulative Costs Through December 31, 2013
|
Management's Reserve for loss
|
Net realizable Value
|
Jessie Scoot
|
$300,000
|
$ 0
|
$300,000
|
V.I.C.
|
151,772
|
151,772
|
0
|
Hurricane Chris
|
150,000
|
10,000
|
140,000
|
Tion Phipps
|
150,000
|
150,000
|
0
|
Choo Biggz
|
257,500
|
107,500
|
150,000
|
Bruce-E-Bee
|
32,150
|
0
|
32,150
|
Downtown Attraction
|
62,570
|
0
|
62,570
|
Kamp Hustle
|
17,710
|
17,710
|
0
|
Bungle Knot Dred
|
16,475
|
16,475
|
0
|
Various Hip Hop Artists
|
4,225
|
0
|
4,225
|
Total December 31, 2013
|
$1,142,402
|
$453,457
|
$688,945
|
4B. Motion picture related rights
:
This represents:
(a)
ESMGs investment of $ 275,000 to co-produce with Gorilla Pictures and he right to distribute worldwide the animated motion picture rights to Bigfoots Big Halloween Adventures (the sequel to The Legend of Sasquatch). The ESMGs financing commitment is evidenced by a promissory note dated November 6, 2012 with Gorilla Pictures, which bears interest at the rate of 8% per annum from June 1, 2013; and
(b)
A co-production investment of $40,000 in the lower budget motion picture entitled Halloween Hell
NOTE 5 PREPAID EXPENSES
Prepaid expenses represent fees and costs totaling $ 135,000 incurred with Southridge Partners II, LLC Southridge) in connection with the Equity Purchase Agreement entered into by the Company on September 30, 2013 whereby Southridge has undertaken to purchase up to $ 10 million of the Companys issued common stock periodically over a 24 month period at a rate equal to 90% of the Companys trading price during the applicable period prior to drawdown. The Companys obligation to Southridge for their fee and legal costs is evidenced partly through a promissory note for $ 100,000 due June, 2014 and partly through a convertible note for $ 35,000 maturing August 20, 2014. Under the terms of this Agreement, the Company is required to register an S-1 for the authority to issue registered common shares, which it plans to do so by the end of second quarter 2014..
Management plans to use the net proceeds from this facility to make early retirement of convertible debt as well as to finance ongoing operations and new investments. Because the transaction is not triggered until the successful registration of the S-1, the total cost of $ 135,000 has been treated as a prepaid expense and will be expensed concurrent with the S-1 filing.
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NOTE 6 - LEASE DEPOSIT
The lease deposit of $ 8,714 represents a security deposit paid to the landlord against the lease of office space at 6725 Sunset Boulevard, Suite 420, Hollywood, CA 90028, which houses ESMG;s music and motion picture operations. The office lease commenced on August 31, 2013. The offices consist of 2,592 square feet for a lease term of 66 months. As an inducement for the Company to lease the space, a 50% rent abatement of $45,100.80 was allowed by the landlord for the first 12 months of occupation, so that the annualized rent for the first 12 months is $ 45,100.80, plus common areas charges. Thereafter, the rent becomes $92,897.28 in year two; $95,696.64 in year three; $98,573.76 in year four; $101,528.64 in year 5 and $52,280.64 for the final 6 months in year 6, plus an applicable increment for common area costs in all years. As a further concession, the landlord granted a tenant improvement allowance of up to $25,920 to cover the cost of initial (move-in) construction build and certain equipment required by the Company.
In addition, the Company remitted $ 35,000 on September 6, 2013 to open an escrow deposit to acquire a parcel of approximately 3.55 acres of land located in the city of Corona, California with already approved plans, permits and tract mapping etc. to construct 60 residential townhouses to be called Tuscany Villas. In addition, the Company obtained a certified appraisal on the property at a cost of $3,500. The total purchase price was subsequently reduced on December 5, 2013 to $4,100,000. The current property owner agreed to take back a first trust deed note in the property of $2,645,000, leaving the Company to fund the balance of $1,420,000 on or before the required escrow closing and funding date of January 14, 2014.
NOTE 7 - MUSIC CATALOG
The music catalog arises from the merger of D & B Music, Inc. into the Company on June 1, 2013. D & B Music, Inc. (formerly D & B Records, Inc.) has the worldwide rights to reproduce and distribute 41 fully produced titles.
The sole shareholder of D & B Music, Inc. at the time of merger was David Michery, the Companys CEO and President. The cost of $357,111 represents:
(a)
the assumption by the Company of a promissory note, originally dated February 1, 2009, payable in the amount of $242,000 to Pegasus Group, Inc., together with the assumption of accrued and unpaid interest thereon through June 30, 2013 of $114,841, for total consideration of $ 356,841 to acquire D & B Music, Inc.; plus
(b)
$ 270 par value of 7,000,000 preferred shares and 20,000,000 common shares issued to David Michery for the right to access and duplicate the recording masters associated with both the D & B Music catalog and David Micherys own music catalog, for exploitation by ESMG and distribution through WEA/Warner Music Group.
ESMG has begun to compile and rerelease albums of artists comprised in both music catalogs. Interest continues to accrue at the rate of 10% on the balance of principal due Pegasus Group, Inc.,
NOTE 8 FIXED ASSETS: FURNITURE AND EQUIPMENT
This represents the cost ($9,412) less accumulated depreciation through December 31, 2013 ($1,527) of furniture and equipment purchased for the operating offices of ESMG and Top Sail Productions, which offices became fully operational as of August 1, 2013 (see Note 6).
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NOTE 9- ACCRUED LIABILITIES
Accrued liabilities at December 31, 2013 represent the following:
| |
Accrued interest: D & B Music, Inc. (See Note 6)
|
$134,805
|
Other accrued interest on short-term debt
|
40,658
|
Accrued management compensation due CEO and CFO
|
125,712
|
Total accrued liabilities
|
$301,175
|
Accrued liabilities at December 31, 2012 represent accrued professional fees of $10,000.
NOTE 10 DUE TO AFFILIATED COMPANY
The amount due to affiliated company of $13,928 at December 31, 2013 represents the balance due to Michery Inc. for costs originally incurred by Michery, Inc. totaling $25,750 to acquire and initial test market music recorded by the music artist Bruce-E-Bee. Michery Inc. assigned all right and interest to this artist to ESMG Inc. on October 22, 2013, with the understanding that ESMG Inc., reimburse Michery, Inc. those costs. Michery Inc. is owned by our CEO, David Michery.
NOTE 11 INCOME TAXES
Through December 31, 2013, the Company incurred net operating losses for tax purposes of approximately $4.2 million.. The net operating loss carry forward for federal purposes may be used to reduce taxable income through the year 2033. The availability of the Companys net operating loss carry forward may be subject to limitation if there is a 50% or more change in the ownership of the Companys stock.
A reconciliation of the potential federal tax benefit computed at the statutory federal income tax rate of 34% to the provision for income taxes is as follows:
|
|
|
| |
|
Year ended December 31, 2013
|
Year Ended December 31, 2012
|
Year Ended December 31, 2011
|
Inception to Year Ended December 31, 2010
|
Net loss for period
|
$(4,048,486)
|
$(137,540)
|
$(48,744)
|
$(12,000)
|
Potential tax benefit at statutory rates
|
$(1,376,485)
|
$(46,764)
|
$(16,473)
|
$(4,080)
|
Change in valuation allowance
|
1,376,485
|
46,764
|
16,473
|
4,080
|
Provision for income taxes
|
$0
|
$0
|
$0
|
$0
|
The cumulative deferred tax asset at December 31, 2013 and 2012 was $1,443,802 and $ 67,417 respectively.
A 100% valuation allowance has been established against the deferred tax asset as the utilization of the loss carry forward cannot be reasonably assured. Significant components of the deferred tax assets (liability), computed at the statutory federal tax rate of 34% are as follows:
|
| |
|
2013
|
2012
|
Deferred tax asset
|
$1,443,802
|
$67,417
|
Valuation allowance
|
(1,443,802)
|
(67,417)
|
Net deferred tax asset
|
$0
|
$0
|
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Although the Company is not under examination, the tax years for 2010 and forward are subject to examination by United States tax authorities. The Companys practice is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31,2013 and 2012, however there was no accrued interest or penalties related to uncertain tax positions.
NOTE 12 RELATED PARTY TRANSACTIONS
Corporate office
The Company s corporate office premise located at 1875 Century Park East, Century City, CA 90067 is provided from Alan J, Bailey, our former CFO, on a month-to-month basis at no cost to the Company.
Acquisition of Bruce-E-Bee artist recording contract
As explained in Note 10, the Company assumed the obligation to reimburse Michery, Inc (a company owned by our CEO) the sum of $25,750 in reimbursement of the actual costs incurred by Michery, Inc. to acquire and initial test market music recorded by the music artist Bruce-E-Bee.
Merger of D & B Music, Inc.
As explained in Note 7, D & B Music, Inc.(formerly D & B Records, Inc.) merged with the Company on June 1, 2013. D & B Music, Inc. has the worldwide right to reproduce and distribute 41 fully produced titles. At the time of merger, the sole owner of D & B Music, Inc. was David Michery, our CEO. As a component of the merger, David Michery received 7,000,000 preferred shares and 20,000,000 common shares of the Company.
In 2012, the Company reported the following related party transactions at that time:
-
The Companys officer, who provided unsecured interest free advances, net of repayments, totaling $22,575 to the Company through September 30, 2012, forgave those advances upon his resignation as an officer on October 17, 2012. The advance forgiven was recorded as Additional Paid-In Capital.
-
The Company incurred $14,200 and $26,000 during the years ended December 31, 2012 and 2011, respectively, for consultation services to a firm whose officers were related to the former CEO of the Company.
-
The Companys sole source of revenue through September 30, 2012 was a property management agreement with New Visions Group , a company owned by a former CEO and director of the Company. Revenue recognized by the Company from this agreement during the years ended December 31, 2012 and 2011 amounted to $2,600 and $2,200, respectively.
NOTE 13 SHORT TERM DEBT
Short-term debt at December 31, 2013 represents the following:
| |
Balance of Promissory Note due GGAG, Inc.
|
200,000
|
Balance of Promissory Note due Pegasus Group, Inc.
|
228,000
|
Promissory Note due Southridge Partners II, LLC
|
100,000
|
Balance of Promissory Note due Gorilla Pictures
|
265,000
|
Total Notes Due
|
$793,000
|
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NOTE 11 - SHORT-TERM CONVERTIBLE DEBT AND DERIVATIVE LIABILITY
Short term convertible debt at December 31, 2013 represents the following:
|
|
|
| |
Convertible Debt Due:
|
Original Principal
|
Reduction through conversion to stock
|
Balance at December 31, 2013
|
Unamortized Discount
|
Asher Enterprises, Inc.
|
$220,500
|
$(95,500)
|
$125,000
|
$0
|
Magna Group, Inc./ Hanoever Holdings
|
222,500
|
(177,500)
|
45,000
|
(34,619)
|
Redwood Management, LLC
|
200,000
|
(200,000)
|
0
|
0
|
Redwood Fund II, LLC
|
150,000
|
(30,336)
|
119,664
|
(24,401)
|
WHC Capital, LLC
|
800,000
|
(300,000)
|
500,000
|
(47,107)
|
Fourth Street Fund LP
|
50,000
|
0
|
50,000
|
0
|
Southridge Partners II, LLC
|
35,000
|
0
|
35,000
|
(22,336)
|
Total
|
$1,678,000
|
$(802,336)
|
$874,664
|
$(128,463)
|
Nature of Derivative Liability
From time-to-time, the Company enters into convertible note agreements whereby the conversion feature is required to be bifurcated out as a derivative liability. Upon conversion of all or a portion of the convertible note, the derivative liability associated with the principal and interest converted is valued immediately before conversion using the Black-Scholes model. The change in fair value of the derivative liability associated with the principal and interest converted was recorded as a gain/loss on fair value of derivative liability in the accompanying statement of operations, with the remaining value of that portion of the derivative liability written off with a corresponding credit to additional paid-in capital.
The derivative liability at December 31, 2013 related to the following convertible notes, which had reached their 6 month convertible dates, but which had not yet been converted to the Companys stock
| |
|
Derivative liability
|
Magna Group, Inc.
|
$45,166
|
Redwood Fund II, LLC
|
145,773
|
Southridge Partners II, LLC
|
25,998
|
WHC Capital, LLC
|
70,134
|
|
$287,071
|
The following is the range of variables used in revaluing the derivative liabilities at December 31, 2013 and during the year then ended for derivatives that were revalued upon conversion of principle balances: .
| |
Annual dividend yield
|
0
|
Expected life (years) of
|
0.08 - 1.43
|
Risk-free interest rate
|
0.02 - 0.17%
|
Expected volatility
|
170.8 - 400.9%
|
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NOTE 12 SUBSEQUENT EVENTS
On February 12, 2014 the Company announced a significant change to its business model and the future direction of its real estate operations. Such changes subsequently included the following:
- The plan to acquire properties, which it will lease to licensed retailers and manufacturers of medical marijuana, initially in the greater Los Angeles area with subsequent plans to extend its operations to Western States where medical marijuana is permitted by state law. The leased facilities will meet all zoning and licensing requirements for the ongoing, legal dispensing of medical cannabis. Primco will not engage in the cultivation or sale of medical cannabis or any of its byproducts.
- The signing of a conditional lease for the launch of its first medical cannabis cultivation center. Plans call to subdivide the property into up to 6 separate nurseries to be sublet to fully licensed dispensaries in Los Angeles.
- A Joint Venture agreement with CanMed Ventures, a British Columbia company, to build and operate a 30,000 square foot cultivation facility for the production of medical marijuana, whereby the Company will own 100% of the building, land and equipment and has granted CanMED a 10-year management contract for the operation of the Joint Venture.
- An agreement to acquire Seattle based Suzie Q's, a medical marijuana collective fully licensed by the City of Seattle. The Agreement calls for the purchase of 100% of the assets of the Co-Op as well as the purchase and transfer of a Tier I Production License granted by the Washington State Liquor Board.
- The construction of a facility on Suzie Q's as its first medical-marijuana collective. Once completed, the new upgraded and fully compliant facility will pave the way for the issuance of the Producer/Processor License
.
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