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MAINSTREAM ENTERTAINMENT, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) We caution you that this report contains forward-looking statements regarding, among other things, financial, business, and operational matters. All statements that are included in this Quarterly Report, other than statements of historical fact, are forward-looking statements. Forward-looking statements involve known and unknown risks, assumptions, uncertainties, and other factors. Statements made in the future tense, and statements using words such as "may," "can," "could," "should," "predict," "aim'" "potential," "continue," "opportunity," "intend," "goal," "estimate," "expect," "expectations," "project," "projections," "plans," "anticipates," "believe," "think," "confident" "scheduled" or similar expressions are intended to identify forward-looking statements. Forward-looking statements are not a guarantee of performance and are subject to a number of risks and uncertainties, many of which are difficult to predict and are beyond our control. These risks and uncertainties could cause actual results to differ materially from those expressed in or implied by the forward-looking statements, and therefore should be carefully considered. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We disclaim any obligation to update any of these forward-looking statements as a result of new information, future events, or otherwise, except as expressly required by law. References in this Form 10-Q, unless another date is stated, are to March 31, 2012. As used herein, the "Company," "Mainstream," "we," "us," "our" and words of similar meaning refer to Mainstream Entertainment, Inc. Overview Mainstream Entertainment, Inc. is an entertainment production company originally formed as a limited liability company (Skreem Studios, LLC) in Florida, on October 7, 2005. The Company is and has historically been primarily engaged in music production and distribution in the United States and Europe. The Company initiated pre-commencement activity in May 2006, renting a studio facility, acquiring equipment, building out two studios and incurring other pre-operational expenses. On April 1, 2007, the Company was acquired by Insight Management Corporation (f/k/a Skreem Records Corporation) and commenced business operations. In June 2008, the majority stockholders authorized a name and entity change from Skreem Studios, LLC to Skreem Studios, Inc. On July 1, 2008, Insight Management Corporation commenced a reverse spin-off of Skreem Studios, Inc., whereby the shareholders of record as of July 1, 2008, received one share of Skreem Studios, Inc. for each share owned of Insight Management Corporation. Insight Management Corporation, as of July 1, 2008, is no longer related to the Company. On August 2, 2010, the Company changed its name to Mainstream Entertainment, Inc. On August 10, 2008, we suffered a break-in and substantial equipment was stolen. Our insurance paid $166,701 for our loss. We are a development stage company, which leases a recording studio equipped to provide all of the services necessary for recording and editing finished audio products. Our finished audio products will be compact disks and digital music files. We anticipate that we will publish hard copies of music on compact disks which we will produce. Our manufacturing process will entail recording music onto compact disks and other forms of digital media. We intend to offer these products for sale through traditional music distribution channels. The Studio, known locally as Gettings Studio, is located at 275 North Bayshore Dr., Ocoee, Florida 34761. It provides four recording studios, a "live" recording space that measures over 650 square feet, large enough for a 25-piece orchestra. It also has a client lounge, a conference room, wet bar, and shower accommodations. We also act as a producer. Our role as a producer includes identifying and contracting with musical groups and individual artists to promote their talent. This involves student coaching and guiding musicians, conducting recording sessions, overseeing the mixing and mastering process, and planning and directing the promotion and sale of the work product. Revenue will be initiated through prior industry contacts of the officers, internet advertising via a Company web page (which is not currently in place), direct contact and traditional print marketing. The Company cannot guarantee that any revenues will be generated. The Company and its predecessors have been unprofitable since 2005. To date, all revenues have been generated from a company located in France named NRJ Co., ("NRJ"). The Company related revenues were paid for music group "3rdWish", a music group whom Justin Martin, our Vice President is a member. Justin Martin is the 27 year old son of Jeff Martin, our majority shareholder. Our monthly "burn rate" consists of professional fees (which include legal and accounting fees) of approximately $2,800 and interest expense of approximately $1,100, for a total of $3,900 in monthly expenses. The Company is dependent upon loans made by the Company's majority shareholder, Jeffrey Martin (See "Liquidity and Capital Resources", below). The Company is completely dependent on Jeff Martin for its present and future funding (other than the limited revenue it has generated to date). Mr. Martin is not obligated to fund the Company and the Company cannot provide any assurance that Mr. Martin's funding will continue in the future. The cash available to the Company at March 31, 2012 is not sufficient to cover any of the average monthly expenditures before requiring additional capital. As of May 1, 2012, we had approximately $65 of cash available for operations. 16 -------------------------------------------------------------------------------- We had a net loss of $2,362 for the three months ended March 31, 2012, compared to a net loss of $28,733 for the three months ended March 31, 2011, a decrease in net loss of $26,371 or 91% from the prior period. We had a net loss of $21,899 for the six months ended March 31, 2012, compared to a net loss of $42,568 for the six months ended March 31, 2011, a decrease in net loss of $20,669 or 48% from the prior period. The Company had a deficit accumulated during the development stage of $702,568 and a working capital deficit of $281,303 as of March 31, 2012. For the year ending, September 30, 2011, we had a net loss of $72,161 and as of September 30, 2011, we had a working capital deficit of $262,367 and a deficit accumulated during the development state of $680,669. Our independent certifying accountant has expressed doubt about our ability to continue as a "going concern". In May 2011, the Company launched its first song titled "Mom's Song" which is being offered for sale on iTunes. The song may be heard on YouTube and iTunes. The song was written and performed by Justin Martin. In December 2011, the Company entered into an understanding with Barton Funeral Services, Inc. to record and produce music for a CD to sell to funeral homes at a total cost of $35,000. The Company received $19,500 in connection with this understanding prior to December 31, 2011 and $12,945 during the three months ended March 31, 2012. A final payment of $2,555 is due by July 31, 2012. The artist(s) engaged to record the music will be compensated as a percentage of sales of the record. The start of production of the CD began in the first calendar quarter of 2012 and will be completed by the end of the second calendar quarter of 2012. PLAN OF OPERATIONS The Company plans to focus on the contracting of music writers, artists, and producers with the intent of providing a professional recording and producing environment for them to create their material, then promoting their material through industry proven means including but not limited to, social media, websites, product placement, live performances and radio airplay. This promotion is for the purpose of creating a demand for the artists and their products thus positioning the Company to enter into contracts with larger well-established companies for further promotion of the artists. The process for finding and signing artists is multifaceted including, but not limited to, internet searches, contests, live scouting, and affiliations with other industry professionals globally. We plan to derive revenue from multiple sources including, but not limited to: · Percentage of sales and publishing income through sales of downloads through iTunes, Amazon MP3, etc., · Licensing of artists' products to third party users, · Percentage of live performances, management fees, and merchandising, · Internet advertising through affiliate programs such as Google AdSense, monetizing artists' websites and social media such as Facebook, YouTube, and Twitter, and · Profits realized from rental of recording studio time, video production, and creation of internet promotion for artists with previously secured investors or investment capital. Use of funds will include: · Up front studio costs, · Video production costs, · Creation of web content such as web sites, social media oversight and other web related activities, · General oversight of business and production operations, and · Accounting, both in house and outside accounting/auditing services. The Company searches continuously for talent for recording and performing. When an artist is found to be commercially viable, the Company will sign the artist to a contract, which is customary in the industry to include audio recordings, video recordings, live performances, merchandising, publishing revenues, endorsements, and management. These contracts will provide for a percentage of revenues generated by all of the above endeavors to be divided between the artist and the Company. The costs of this process are estimated at $5,000. 17 -------------------------------------------------------------------------------- The timeframe necessary to establish an artist varies according to the artist's prior endeavors as well as the amount of composition the artist has ready for recording or performance. In some instances, such as when the artist has sufficient composition material to begin immediately, the music product can be ready for digital distribution within 60 to 90 days. The Company will provide music recording and video production, promotion, and booking for the artists. Distribution of artists' material will be through standard industry outlets and includes both digital and hard copy production according to popularity and profitability of the artist. In addition, the Company will provide web sites and direction in the use of social networking including Facebook, YouTube, and Twitter. There is an approximate $6,500 cost associated with this phase and a completion time which is estimated around 60 to 90 days. We estimate revenues would be generated approximately 90 to 120 days after release of an artist's first product. The Company will seek funding from Jeff Martin, its majority shareholder, in order to cover these costs, provided that Mr. Martin is not under any obligation to provide the Company with funding. Distribution The Company plans to distribute the artists' products through internet sales, live performances, and in store product. In store product will be considered when internet and live performance demands show that production of CD and/or DVD product may be profitable. The Company will pursue licensing and sales agreements with third party distributors for overseas distribution and sales. Distribution costs will be borne by the individual agreements that we may sign with foreign companies. Social Networking An artist's main interest is the promotion of their own material, and in the interest of self-promotion they stay connected and reach out to their followers through continuous social networking. These artists generate thousands of followers through their Twitter accounts, Facebook pages, and YouTube videos. We plan to centralize these self-promotion efforts providing guidance of an artist's networking efforts as well as working to increase visibility through focused marketing. Through oversight and monitoring of this networking traffic, monetizing these efforts is planned to be realized through affiliate advertising programs, web based direct sales programs, and pay-per-click affiliations. This process could potentially prove to be a significant revenue source. Manpower, not money runs this phase of the operation. Publishing All artists will be asked to sign a Publishing Agreement as part of the Contract between the Company and the artist. This agreement will grant rights for the writer's compositions to the Company for which the Company will pay royalties based on the terms and conditions of the agreement. Revenues will be realized from the performance of or sales of any product containing the performances of the artist/writer, as well as through the licensing of those rights to third parties for performance and recording. No additional money will be needed for this phase. Charles Camorata, the Company's President and Chief Executive Officer, has the experience to run all publishing functions for the Company. The time frame will be structured whenever new music is written by one of our signed artists. The artist will submit the composition to the Company for publishing. The revenue stream will be split between the Company and the artist. Recording and Production The Company will provide recording and production of artists using facilities currently under contract. The cost of each individual artist will vary according to the amount of material to be recorded, which will be determined by the Company; therefore, the cost of producing each artist can be determined prior to production and can be controlled by the Company. The cost associated with this phase will be paid for by the contracting company. This process should begin within 90 days from signing a new artist or a recording company that will pay for the production and recording on a contractual basis. Results of Operations and Operating Expenses: The Three Months Ended March 31, 2012 Compared To The Three Months Ended March 31, 2011 We generated revenues of $21,000 for the three months ended March 31, 2012, compared to no revenues for the three months ended March 31, 2011. Revenues for the three months ended March 31, 2012 were due to the Barton Funeral Services contract. 18 -------------------------------------------------------------------------------- We had $17,929 of total operating expenses for the three months ended March 31, 2012, compared to $25,100 for the three months ended March 31, 2011, a decrease in total operating expenses of $7,171 or 28% from the prior period. The decrease in operating expenses was due to a $7,171 or 28% decrease in general and administrative expenses to $16,548 for the three months ended March 31, 2012, compared to $23,719 for the three months ended March 31, 2011. The decrease in general and administrative expenses was mainly due to decreased accounting, auditing and legal fees. We had a depreciation expense of $1,381 for both the three months ended March 31, 2012 and 2011, as there was no change in our depreciable asset base. We had total other expenses of $4,593 for the three months ended March 31, 2012, compared to $3,634 for the three months ended March 31, 2011, an increase in other expenses of $959 or 26% from the prior period, which was solely due to interest accrued on amounts owed to our largest shareholder and creditor, Jeffrey Martin (as described below). Interest expense increased due to increased borrowing from Mr. Martin. We had a net loss of $2,362 for the three months ended March 31, 2012, compared to a net loss of $28,734 for the three months ended March 31, 2011, a decrease in net loss of $26,372 or 91% from the prior period. The Six Months Ended March 31, 2012 Compared To The Six Months Ended March 31, 2011 We generated revenues of $22,000 for the six months ended March 31, 2012, compared to no revenues for the six months ended March 31, 2011. Revenues for the six months ended March 31, 2012 were due to the Barton Funeral Services contract. Cost of revenues was $840 for the six months ended March 31, 2012, compared to no cost of revenues for the three months ended March 31, 2011, due to the fact that we did not generate any revenues during such period. We had $33,952 of total operating expenses for the six months ended March 31, 2012, compared to $35,552 for the six months ended March 31, 2011, a decrease in total operating expenses of $1,600 or 4% from the prior period. The decrease in operating expenses was due to a $1,600 or 4% decrease in general and administrative expenses to $31,189 for the six months ended March 31, 2012, compared to $32,789 for the six months ended March 31, 2011. The decrease in general and administrative expenses was mainly due to decreased accounting, auditing and legal fees. We had a depreciation expense of $2,963 for both the six months ended March 31, 2012 and 2011, as there was no change in our depreciable asset base. We had total other expenses of $9,107 for the six months ended March 31, 2012, compared to $7,016 for the six months ended March 31, 2011, an increase in other expenses of $2,091 or 29% from the prior period, which was solely due to interest accrued on amounts owed to our largest shareholder and creditor, Jeffrey Martin (as described below). Interest expense increased due to increased borrowing from Mr. Martin. We had a net loss of $21,899 for the six months ended March 31, 2012, compared to a net loss of $42,568 for the six months ended March 31, 2011, a decrease in net loss of $20,669 or 48% from the prior period. Liquidity and Capital Resources As of March 31, 2012 the Company had $621 of total current assets consisting of $0 of cash, $560 of capitalized production costs, and $61 of prepaid expenses. As of the date of this filing, the Company has approximately $65 available for Company use. The Company does not believe that such funds will be sufficient to fund its expenses over the next twelve months. There can be no assurance that additional capital will be available to the Company. The Company currently has no agreements, arrangements, or understandings with any person to obtain funds through bank loans, lines of credit, or any other sources (other than through the Barton Funeral Services, Inc. agreement described below). The Company had total assets of $5,594 as of March 31, 2012, which included $621 of current assets and $4,973 of long-term assets consisting of equipment, net of depreciation. The Company had total current liabilities consisting solely of current liabilities of $281,924 as of March 31, 2012, which included $71,650 of accounts payable and accrued liabilities, $46,719 of accrued interest - related party, representing accrued interest on the loans payable to Jeffrey Martin, our largest shareholder, as described below, $11,445 of deposit for contract, relating to the contract with Barton Funeral Services, Inc., as described below, and $152,110 of related party notes payable to Mr. Martin. The Company had a deficit accumulated during the development stage of $702,568 and a working capital deficit of $281,303 as of March 31, 2012. 19 -------------------------------------------------------------------------------- Previously the Company has relied upon its majority shareholder to advance funds to allow it to operate. The plan of operation outlined above is not principally dependent upon debt financing. If the fund raising falls short of the goals outlined, the majority shareholder will continue to fund the Company as needed until profitability. Jeff Martin, as the majority shareholder, does not have an obligation to contribute any additional funds to the company. Mr. Martin's contribution is discretionary, but it is likely he will continue to fund the company if necessary. However, because the Company has no bank arrangements or plans currently in effect, its inability to raise equity financing for the above purposes will have a severe negative impact on the plan of operations outlined above. The Company had $6,739 of net cash provided by operations for the six months ended March 31, 2012, which was mainly due to $11,445 of customer deposits and $14,790 of increase in accounts payable and accrued expenses offset by $21,899 of net loss. The Company had $6,745 of net cash used in financing activities for the six months ended March 31, 2012, which was mainly due to payments on related party debt. Debt Financings and Related Party Notes: The Company is highly dependent on related party financing, specifically from its majority shareholder, Jeffrey Martin ("Related Party Notes"). All of the debt financing and related interest expense for the Company have been provided by and paid or accrued to Jeffrey Martin, the principal shareholder or entities controlled by him. The Related Party Notes are made formal through promissory notes. Other than these Related Party Notes, there are no other formal agreements between the Company and Jeffrey Martin regarding any future debt financing or the payment of related interest expenses. On February 26, 2008, the Company's former Parent Company, Insight Management Corporation (the "Former Parent Company), formerly known as Skreem Records Corporation, issued 500,000 common shares of the Former Parent Company common stock to relieve notes payable on behalf of both the Company and the Former Parent Company, for a total debt relieved of $250,000. The 500,000 Former Parent Company common shares were issued to Jeffrey Martin. The debt relieved related to the Company was $205,500, which was incurred by the Company's acquisition of equipment and operations such as rent, utilities and similar expenses. The debt relieved for the Former Parent Company was $44,500. The relative market value of the Former Parent Company common stock at the time of issuance was $0.50 per share. Therefore, no gain or loss on this extinguishment was recognized as the consideration given up by the former parent in the form of the Former Parent Company common stock was equal to the consideration received in relief of the notes payable of $250,000. This non-cash transaction was taken as a contribution from the Formal Parent Company in fiscal 2008. In December 2011, the Company entered into an understanding with Barton Funeral Services, Inc. to record and produce music for a CD to sell to funeral homes at a total cost of $35,000. The Company received $19,500 in connection with this understanding prior to December 31, 2011 and $12,945 during the three months ended March 31, 2012. A final payment of $2,555 is due by July 31, 2012. The artist(s) engaged to record the music will be compensated as a percentage of sales of the record. The start of production of the CD began in the first calendar quarter of 2012 and will be completed by the end of the second calendar quarter of 2012. We have budgeted the need for approximately $50,000 of additional funding during the next 12 months to continue our business operations, pay costs and expenses associated with our filing requirements with the Securities and Exchange Commission and undertake our business plan which funding may not be available on favorable terms, if at all. If we are unable to raise adequate working capital for fiscal 2012, we will be restricted in the implementation of our business plan. The financial statements included herein have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As shown in the accompanying financial statements, the Company has had minimal revenues and has accumulated losses since inception. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. These financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue as a going concern. Moving forward, we plan to seek out additional debt and/or equity financing to pay costs and expenses associated with our filing requirements with the Securities and Exchange Commission and business activities (as described herein); however, we do not currently have any specific plans to raise such additional financing at this time. The sale of additional equity securities, if undertaken by the Company and if accomplished, may result in dilution to our shareholders. We cannot assure you, however, that future financing will be available in amounts or on terms acceptable to us, or at all. 20 -------------------------------------------------------------------------------- At March 31, 2012 and September 30, 2011, interest in the amounts of $46,719 and $41,752, respectively, is accrued on the notes due and payable to Mr. Martin. Interest expense for the six months ended March 31, 2012 and 2011, and from inception was $9,107, $7,016 and $73,213 respectively. March 31, September 30, 2012 2011 Various unsecured demand notes to the principal shareholder with no stated interest rate; interest is being accrued at 8% and 5% per annum. At March 31, 2012 and September 30, 2011, the principal balance of the 5% notes was $21,749 and $21,700 and of the 8% notes was $18,967 and $21,500, respectively. $ 40,716 $ 43,200 Various unsecured demand notes to a business owned and controlled by the principal shareholder with a stated interest rate of 5% and 8% per annum. At March 31, 2012 and September 30, 2011, the principal balance of the 5% notes was $11,500 and $11,500 and of the 8% notes was $7,478 and $11,923, respectively. 18,978 23,423 Various unsecured demand notes to a corporation controlled by the principal shareholder with a stated interest rate of 8% per annum. 10,016 10,016 Various unsecured demand notes to a limited partnership controlled by the principal shareholder with stated interest rates of 5% and 6% per annum. At March 31, 2012 and September 30, 2010, the principal balance of the 5% notes were $24,150 and $24,150, respectively, and of the 6% notes were $10,750 and $10,750, respectively. 34,900 34,900 Various unsecured demand notes to a limited partnership controlled by the principal shareholder with stated interest rates of 5% and 6% per annum. At March 31, 2012 and September 30, 2011, the principal balance of the 5% notes was $41,500 and $41,500 and of the 6% notes was $6,000 and $6,000, respectively. 47,500 47,500 $ 152,110 $ 159,039 The related party creditor is Jeffrey Martin, the controlling shareholder of the Company who owns 73% of the Company's shares. On June 30, 2011, a note payable was forgiven and is no longer due. The Company recognized $1,215 of debt forgiveness income in conjunction with this event, consisting of $1,200 of principal and $15 of accrued interest. For the three month periods ending March 31, 2012 and 2011, and for the period from inception through March 31, 2012, the Company has recognized forgiveness of debt income in the amounts of $0, $0 and $15,418, respectively. |