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EX-32.2 - CERTIFICATION - Consorteum Holdings, Inc.consort_ex3202.txt
EX-31.2 - CERTIFICATION - Consorteum Holdings, Inc.consort_ex3102.txt
EX-32.1 - CERTIFICATION - Consorteum Holdings, Inc.consort_ex3201.txt
EX-31.1 - CERTIFICATION - Consorteum Holdings, Inc.consort_ex3101.txt


U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 333-140236 CONSORTEUM HOLDINGS, INC. ----------------------------- (Exact Name of Company as Specified in its Charter) Nevada ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 141 Adelaide Street West, Suite 550, Toronto. Ontario, M5H 3L5 Canada --------------------------------------------------------------- (Address of Principal Executive Offices) (866) 824-8854 -------------- (Company's Telephone Number) Suite 202 - 2900 John Street, Markham, Ontario L3R 5G3 Canada ----------------------------------------------------- (Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer (Do not check if a smaller reporting company) [_] Smaller reporting company [x] Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [X]. As of May 20, 2010, the Company had 93,953,715 shares of common stock issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2010 AND JUNE 30, 2009. 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2010 AND MARCH 31, 2009, AND CUMULATIVE FOR THE PERIOD FROM INCEPTION (NOVEMBER 7, 2005) THROUGH MARCH 31, 2010. 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED MARCH 31, 2010 AND MARCH 31, 2009, AND CUMULATIVE FOR THE PERIOD FROM INCEPTION (NOVEMBER 7, 2005) THROUGH MARCH 31, 2010. 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 - 16 -2-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Condensed Consolidated Balance Sheets (Expressed in U.S. Dollars) (Unaudited) MARCH 31 June 30 2010 2009 ----------- ----------- ASSETS CURRENT ASSETS Cash -- $ 185 Accounts receivable 17,605 7,303 Prepaid expense 22,697 1,285 Deferred debt issuance costs 35,700 -- ----------- ----------- TOTAL CURRENT ASSETS 76,002 8,773 INVESTMENTS IN AFFILIATED COMPANIES (Note 4) -- 86,123 EQUIPMENT, NET 6,012 6,774 INTANGIBLE ASSET (Note 5) 311,941 -- ----------- ----------- TOTAL ASSETS $ 393,955 $ 101,670 =========== =========== LIABILITIES CURRENT LIABILITIES Bank indebtedness (Note 6) $ 130,935 $ 87,765 Accounts payable 500,490 276,459 Accrued liabilities 1,373,455 1,730,325 Loans payable (Note 7) 1,077,239 917,944 Due to stockholders 215,878 30,779 ----------- ----------- TOTAL CURRENT LIABILITIES 3,297,997 3,043,272 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' DEFICIT CAPITAL STOCK (Note 9) Preferred stock, par value $0.001 per share; 100,000,000 shares authorized; none issued and outstanding. -- -- Common stock, par value $0.001 per share; 100,000,000 shares authorized; 85,953,715 (2009 - 46,859,750) shares issued and 70,667,680 (2009 - 46,859,750) shares outstanding. 85,954 46,860 TREASURY STOCK 15,286 -- DISCOUNT ON COMMON STOCK -- (116,224) ADDITIONAL PAID IN CAPITAL 1,807,717 -- COLLATERALIZED SHARES ISSUED (137,500) -- ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (168,359) 151,042 DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (4,507,140) (3,023,280) ----------- ----------- TOTAL STOCKHOLDERS' DEFICIT (2,904,042) (2,941,602) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 393,955 $ 101,670 =========== =========== (The accompanying notes are an integral part of these condensed consolidated financial statements.) -3-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Condensed Consolidated Statements of Operations and Comprehensive Loss For the Three and Nine-Month Periods Ended March 31, 2010 and 2009, and Cumulative for the Period from Inception (November 7, 2005) Through March 31, 2010 (Expressed in U.S. Dollars) (Unaudited) Cumulative for the period from Inception (November 7, 2005) FOR THE THREE-MONTH PERIODS ENDED FOR THE NINE-MONTH PERIODS ENDED Through MARCH 31, March 31, MARCH 31, March 31, March 31, 2010 2009 2010 2009 2010 ------------------------------------------------------------------------------------------ REVENUES $ -- $ 199 $ -- $ 199 $ 246,417 ------------------------------------------------------------------------------------------ OPERATING EXPENSES Management and consulting fees 256,299 113,580 753,996 399,369 2,555,471 General and administration expenses 115,262 249,845 448,055 256,540 1,234,223 Bad debt expense -- -- -- -- 99,738 Selling expenses -- -- -- -- 98,010 Depreciation expense 568 680 1,665 2,188 12,773 ------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 372,129 364,105 1,203,686 658,097 4,000,215 ------------------------------------------------------------------------------------------ LOSS FROM OPERATIONS (372,129) (363,906) (1,203,686) (657,898) (3,753,798) ------------------------------------------------------------------------------------------ OTHER EXPENSES Equity in net loss of an affiliated company (575) (4,173) (49,509) (13,125) (282,058) Write off of investment in an affiliated company -- -- -- -- (78,783) Interest and financing costs (42,494) (27,853) (230,665) (67,612) (392,501) ------------------------------------------------------------------------------------------ TOTAL OTHER EXPENSES (43,069) (32,026) (280,174) (80,737) (753,342) ------------------------------------------------------------------------------------------ NET LOSS (415,198) (331,880) (1,483,860) (738,635) (4,507,140) Foreign currency translation adjustment (87,993) 54,730 (319,401) 316,147 (168,359) ------------------------------------------------------------------------------------------ COMPREHENSIVE LOSS $ (503,191) $ (277,150) $ (1,803,261) $ (422,488) $ (4,675,499) ========================================================================================== LOSS PER SHARE BASIC $ (0.01) $ (0.00) $ (0.03) $ (0.01) ======================================================================= DILUTED $ (0.01) $ (0.00) $ (0.03) $ (0.01) ======================================================================= WEIGHTED AVERAGE NUMBER SHARES OUTSTANDING - BASIC 83,831,016 68,914,545 64,753,396 68,914,545 ======================================================================= WEIGHTED AVERAGE NUMBER SHARES OUTSTANDING - DILUTED 83,831,016 68,914,545 64,753,396 68,914,545 ======================================================================= (The accompanying notes are an integral part of these condensed consolidated financial statements.) -4-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Condensed Consolidated Statements of Cash Flows For the Nine-Month Periods Ended March 31, 2010 and 2009, and Cumulative for the Period from Inception (November 7, 2005) Through March 31, 2010 (Expressed in U.S. Dollars) (Unaudited) Cumulative for the period from Inception FOR THE NINE MONTH PERIODS ENDED (November 7, 2005) MARCH 31, March 31, Through March 31, 2010 2009 2010 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,483,860) $ (736,635) $(4,507,140) Adjustments for non-cash items: Equity in net loss of an affiliated company 52,429 13,125 284,978 Writeoff of investment in an affiliated company -- -- 78,213 Acquisition of intangible asset (265,225) -- (265,225) Depreciation 1,826 2,188 12,934 Stock issued for services rendered 1,069,143 -- 1,104,722 Options issued 158,436 -- 158,436 Debt issuance costs 406,697 -- 406,697 Changes in non-cash working capital, net of effects from reverse merger transaction: Accounts receivable (9,241) (642) (17,448) Prepaid expenses 1,472 -- 190 Accounts payable 198,264 186,143 420,530 Accrued liabilities (355,064) 183,841 2,079,974 ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES 485,003 (351,980) (243,141) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of equipment -- -- (19,249) Acquisition of investment -- -- (286,916) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES -- -- (306,165) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans 651,029 393,470 1,616,004 Repayment of loans (101,712) (3,628) (106,001) Proceeds from bank indebtedness 38,821 -- 148,687 Repayment of bank indebtedness (8,208) (16,201) (15,150) Proceeds from issuance of capital stock 576,864 -- 576,950 Proceeds from stockholders' advances 273,476 -- 1,528,801 Repayments of stockholders' advances (151,967) (31,081) (1,367,977) Repayment from related party (1,758,160) -- (1,758,160) ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES (479,857) 342,560 623,154 ----------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGE ON CASH (5,331) (2,355) (73,878) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (185) (11,775) -- CASH - BEGINNING OF PERIOD 185 16,049 -- ----------- ----------- ----------- CASH - END OF PERIOD $ -- $ 4,274 $ -- =========== =========== =========== (The accompanying notes are an integral part of these condensed consolidated financial statements.) -5-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 1. ORGANIZATION, DEVELOPMENT STAGE ACTIVITIES, AND GOING CONCERN Consorteum Holdings, Inc. ("Holdings" and subsequent to the reverse merger, the "Company"), formerly known as Implex Corporation, was incorporated in the State of Nevada on November 7, 2005. On April 9, 2009, Holdings changed its name to Consorteum Holdings, Inc. On June 15, 2009 Holdings entered into an agreement and plan of exchange whereby Holdings acquired 100% of the issued and outstanding shares of common stock of Consorteum Inc. ("Consorteum") from Consorteum's stockholders, by exchanging 39,999,750 shares of Holdings' common stock, in a reverse merger transaction. Consorteum is a company incorporated under the laws of the province of Ontario on April 3, 2006. Prior to the agreement and plan of exchange, Holdings had 29,860,000 shares of its common stock, issued and outstanding. At the closing of the exchange transaction, Holdings cancelled 23,000,000 shares of its common stock held by one stockholder. As a result of the exchange, the principal stockholders of Consorteum control 85% of Holdings. While Holdings is the legal parent, Consorteum became the parent for accounting purposes. Development Stage Activities ---------------------------- The Company provides pioneering technology solutions and management expertise to companies and organizations looking to develop, streamline or augment their methods of processing payment transactions. It operates as a technology and services aggregator to meet the diverse needs of its client base by leveraging its wide-ranging partner technologies to develop end-to-end, turn-key card and payment transaction processing solutions. Going Concern Assumption ------------------------ The Company's condensed consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and discharge of liabilities in the normal course of business. The Company's negative working capital and accumulated deficit during the development stage raise substantial doubt as to its ability to continue as a going concern. As of March 31, 2010, the Company had a negative working capital of $3,221,995 (June 30, 2009 - $3,034,499) and a deficit accumulated during the development stage of $4,507,140 (June 30, 2009 - $3,023,280), and is in the process of renegotiating loan extensions. The Company's continuance as a going concern is dependent on the successful efforts of its directors and principal stockholders in providing financial support in the short term; raising additional long-term equity or debt financing either from its own resources or from third parties; the successful negotiation of loan payments or extensions as they come due; and the attainment of key contracts. In the event that such resources are not secured, the assets may not be realized or liabilities discharged at their carrying amounts, and differences from the carrying amounts reported in these condensed consolidated financial statements could be material. -6-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 1. ORGANIZATION, DEVELOPMENT STAGE ACTIVITIES, AND GOING CONCERN (cont'd) Going Concern Assumption (cont'd) --------------------------------- The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern. 2. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("US GAAP") for complete financial statements. In the opinion of the Company's management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2010. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended June 30, 2009. BASIS OF CONSOLIDATION The condensed consolidated financial statements include Consorteum Inc., Consorteum Holdings Inc. and My Golf Rewards Canada Inc. from January 13, 2010 through March 31 2010. All material inter-company amounts have been eliminated. -7-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 3. FAIR VALUE MEASUREMENTS The Company adopted ASC 820, "Fair Measurement and Disclosure" as of June 15, 2009. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measured date, not adjusted for transaction costs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are described below: Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Other inputs that are directly or indirectly observable in the marketplace. Level 3 - Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Cash and cash equivalents (Level 1), other receivables, accounts payable, accrued liabilities, loans payable, and due to related parties (Level 2) are reflective in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. 4. INVESTMENTS IN AFFILIATED COMPANIES MARCH 31, June 30, 2010 2009 --------- --------- Acquisition costs 49% ownership interest in My Golf Rewards Canada Inc. $ 343,502 $ 343,502 --------- --------- Accumulated equity in net loss of My Golf Rewards Canada Inc. Balance, beginning of period (257,379) (224,945) Equity in net loss for the current year (48,934) (17,777) Translation adjustment 9,528 (14,657) --------- --------- Balance, end of period (296,785) (257,379) Consolidation (46,717) -- --------- --------- Total $ -- $ 86,123 ========= ========= On January 13, 2010, the Company purchased an additional 26% interest in My Golf Rewards Canada Inc. for a cash payment of $2 and the assumption of the liabilities. The assets, liabilities and operating results of My Golf Rewards Canada Inc. have been consolidated from that date. As at January 13, 2010, the Company owns 75% of the issued and outstanding shares of My Golf Rewards Canada Inc. Cumulative operating losses of $282,058 arising in My Golf Rewards Canada Inc. prior to January 13, 2010 have been accounted for under the equity method. -9-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 5. INTANGIBLE ASSET As a result of the acquisition of the additional interest in My Golf Rewards Canada Inc., the Company acquired an interest in the software license. Accordingly, the asset has been recorded at its estimated acquisition cost, which value has been supported by recent arms length negotiations. The asset will be amortized on a systematic basis over its estimated life. The license is subject to an annual renewal fee, which fee will be expensed as incurred. Purchase price allocation as follows: Purchase Price $ 46,717 -------- Cash $ 9,815 Accounts Receivable $168,654 -------- Total Assets $178,469 -------- Accounts Payable $357,542 Loan Payable $ 86,153 -------- Total Liabilities $443,695 -------- Negative Net Assets ($265,224) --------- Estimated Acquisition Cost $ 311,941 ========= 6. BANK INDEBTEDNESS Bank indebtedness is comprised of a Royal Bank of Canada ("RBC") demand term loan, in the amount of $92,296 (June 30, 2009 - $87,765) and an overdraft of $38,639 (June 30, 2009 - $nil). The loan is repayable on a monthly basis at $1,792 plus interest, at RBC's prime rate plus 2% per annum. The loan matures June 2013. The loan is secured by a general security agreement signed by the Company constituting a first ranking security interest in all personal properties of the Company and personal guarantees from certain stockholders. 7. LOANS PAYABLE MARCH 31, June 30, 2010 2009 ------- ------- Loan 1 Investment loan, secured against shares of an individual shareholder, interest rate of 18% per annum, principal due extended to February 13, 2011 299,130 229,091 Loan 2 Investment loan, secured against 1,500,000 shares of an individual shareholder, bearing no interest, due February 26, 2010. 200,000 -- Loan 3 Investment loan, unsecured, bearing no interest, no fixed terms of repayment. 145,721 146,166 Loan 4 Investment loan, unsecured, interest rate of 18%, per annum, no fixed terms of repayment. 98,279 83,887 Loan 5 Investment loan, unsecured, bearing no interest, monthly payments commencing January 30, 2010, interest of 15% accrued on late payments. 94,545 -- -10-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 7. LOANS PAYABLE (cont'd) MARCH 31, June 30, 2010 2009 ---------- ---------- Loan 6 Investment loan, unsecured, interest rate of 10% Per annum, no fixed terms of repayment. 85,800 -- Loan 7 Investment loan, unsecured, interest rate of 18% per annum, no fixed terms of repayment. 34,703 26,577 Loan 8 Investment loan, unsecured, interest rate of 3% per annum, demand loan no fixed date. 31,404 -- Loan 9 Investment loan, unsecured, interest rate of 18% per annum, principal due October 25, 2010. 30,212 23,138 Loan 10 Investment loan, unsecured, interest rate of 18% per annum, principal due extended to February 17, 2011. 29,907 22,905 Loan 11 Investment loan, unsecured, interest rate of 18% per annum, no fixed terms of repayment. 25,076 45,992 Loan 12 Investment loan, unsecured, non interest bearing With no fixed term of repayment. 2,462 -- Loan 13 Investment loan, secured against shares of an individual shareholder, interest rate of 18% per annum, no fixed terms of repayment. Debt has been converted to shares. -- 315,188 Loan 14 Investment loan, unsecured, bearing no interest, no fixed terms of repayment. -- 25,000 ---------- ---------- $1,077,239 $ 917,944 ========== ========== Certain of the loans were due for repayment in February 2010 and have been negotiated and extended. As of the date of this report extension terms have been agreed to for two outstanding loans and the Company continues to hold discussions on the balance of one defaulted loan (Loan 2). On February 3, 2010 the Company had negotiated a debt facility from an unrelated third party, which provided up to $404,746 in the form of a promissory note bearing interest at 15% per annum. The promissory note contained a conversion feature that allows the holder of the note to convert the note into shares of common stock of the Company at a 50% discount. Funds are advanced to the Company in tranches and immediately converted into common shares and as at March 31, 2010, a total of $124,000 of this facility has been advanced and converted into 17,500,000 common stock. -11-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 8. RELATED PARTY TRANSACTIONS AND BALANCES The following were charged to the Company by certain stockholders for services provided: MARCH 31, June 30, 2010 2009 a) Management and consulting fees $ 253,557 $ 407,455 ============================== b) General and administrative $ 44,797 $ 62,932 ============================== These transactions were in the normal course of business and recorded at an exchange value established and agreed upon by the related parties. Included in accrued liabilities is $519,460 (June 30, 2009 - $1,126,109) owed to certain stockholders, directors and officers for management fees, consulting fees and other expenses. Included in accounts payable as at June 30, 2009 was an amount of $122,693 owed to My Golf Rewards Canada Inc., an affiliated company, as part of the Company's equity investment obligation (see Note 4). Any such balances as of March 31, 2010 are now eliminated on consolidation. -12-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 9. CAPITAL STOCK The following transactions occurred during the nine-month period: On July 6, 2009, the Board of Directors passed a resolution to issue 3,280,000 shares of common stock to investor relations companies and specified consultants for purpose of building market awareness. The shares were issued between July 7 and September 14, 2009. On July 13, 2009, the Company issued 300,000 shares of the Company's common stock, pursuant to subscription agreements dated July 13, 2009, for a value of $130,988. On September 19, 2009, at a meeting of the Board of Directors, the Company granted 2,500,000 stock options pursuant to the stock option plan established by the Company. In addition, the Board of Directors approved an allotment of 5,800,000 common stock of the Company, valued at $0.15 per share of common stock, to satisfy liabilities owed to directors and officers of the Company. On November 24, 2009, the Company issued 3,125,000 shares of common stock to a company, in relation to marketing services provided for a value of $50,000. On November 25, 2009, the Company issued 3,125,000 shares of common stock to a company, in relation to marketing services provided for a value of $50,000. On December 1, 2009, the Company issued 1,500,000 shares of common stock to a company, in relation to issuance of debt of $130,000. On December 9, 2009, the Company issued 1,500,000 shares of common stock to a company pursuant to a six-month public and investor relation service contract for $60,000. On December 18, 2009, the Company issued 8,750,000 shares of common stock in relation to legal services provided for a value of $87,500. The common stock has been put into an escrow account until May 31, 2010 and will be released back to the Company if the services are paid in full, prior to that date. On January 18, 2010, the Company settled an outstanding debt of $300,000 plus interest with a company through the issuance of 1,500,000 restricted shares of common stock of the Company. On February 3, 2010, the holder of the promissory note converted $50,000 of the note into 6,500,000 shares of common stock of the Company. The funds received by the Company were used to fulfill debt obligations owed to two of the Company's executives. On March 1, 2010, the Company entered into a professional services agreement (the "PSA") with its corporate counsel, pursuant to which the Company agreed to issue 5,000,000 shares of its common stock to its corporate council as collateral for compensation for accrued and unpaid professional fees of $50,000 for the period between January 1, 2009 and June 30, 2009. On March 1, 2010, the Company issued a total of 3,000,000 shares of its common stock to a director and Chairman of the Board of the Company. Of this total 1,500,000 shares were issued as indemnification for the foreclosure and seizure by a Company creditor of the identical number of a director's shares posted by the director as collateral for a loan by the creditor to the Company. The remaining 1,500,000 shares were issued to the director at $0.01 cents a share to offset $15,000 of accrued expenses. On March 1, 2010, the holder of the promissory note converted $50,000 of the note into 7,500,000 shares of common stock of the Company. The funds received by the Company were used to fulfill debt obligations owed to the Company's executives. On March 11, 2010, the holder of the promissory note converted $24,000 of the note into 3,500,000 shares of common stock of the Company. The funds received by the Company were used to fulfill debt obligations owed to the Company's executives. -13-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 9. CAPITAL STOCK (cont'd) On March 11, 2010, a shareholder of the Company returned 1,500,000 shares to the Company's treasury. On March 18, 2010, two shareholders of the Company returned 1,000,000 shares each to the Company's treasury. On March 31, 2010, a shareholder of the Company returned 11,786,035 shares to the Company's treasury. WARRANTS As at March 31, 2010, 4,140,000 warrants were outstanding, having an exercise price of $0.001 per share of common stock with a remaining contractual life of 1.75 years. OPTIONS As at March 31, 2010, 2,500,000 options were outstanding, having an exercise price of $0.15 per share of common stock with a remaining contractual life of 2.48 years. These options were valued at $158,436 using the Black-Scholes model, using key assumptions of volatility of 62%, risk-free interest rate of 1.56%, a term life equivalent to the life of the options and reinvestment of all dividends in the Company of zero percent. The Company has a commitment to issue 500,000 stock options to a private investor as a bonus for a loan, and a further 50,000 stock options to an individual as a finder's fee which commitments were made on January 12, 2010. As at March 31, 2010, these options have not been issued. -14-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements March 31, 2010 and 2009 (Expressed in U.S. Dollars) (Unaudited) 10. INCOME TAXES At March 31, 2010, the Company has unused net operating loss carry-forwards of approximately $3,111,000 which expire at various dates through 2029. Most of this amount is subject to annual limitations under certain provisions of the Internal Revenue Code related to "changes in ownership". As of March 31, 2010, the deferred tax assets related to the aforementioned carry-forwards have been fully offset by valuation allowances, since utilization of such amounts is not presently expected in the foreseeable future. 11. CASH FLOW SUPPLEMENTAL INFORMATION During the period, the Company had cash flows arising from interest and income taxes paid as follows: Cumulative for the period from Inception Nine Months Nine Months (November 7, Ended Ended 2005) Through March 31, March 31, March 31, 2010 2009 2010 Income tax $ -- $ -- $ -- ================================================== Interest $ -- $ -- $ 57,104 ================================================== 12. COMMITMENTS AND CONTINGENCIES The Company has contractual commitments for various management and consulting fees and general and administrative expenses totaling approximately $192,100 for 2010. Of this amount, approximately $104,300, is committed to certain stockholders of the Company. -15-
CONSORTEUM HOLDINGS, INC. (FORMERLY IMPLEX CORPORATION) (A DEVELOPMENT STAGE COMPANY) Notes to Condensed Consolidated Financial Statements December 31, 2009 and 2008 (Expressed in U.S. Dollars) (Unaudited) 13. SUBSEQUENT EVENTS On May 5, 2010 the Company came to a settlement and conversion agreement with Quality Stocks and Illuminated Financial Relations Corp to convert $40,000 of previously advanced funding into 8,000,000 common shares of Consorteum Holdings. 4,000,000 shares were issued to each party. -16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. EXECUTIVE LEVEL OVERVIEW Consorteum, Inc. (hereafter "the Company") was incorporated under the laws of the Province of Ontario on April 3, 2006. On June 15, 2009, the Company became a wholly-owned subsidiary of Consorteum Holdings, Inc., a Nevada corporation ("CHI" or the "Parent"), as a result of the closing under an agreement and plan of exchange pursuant to which all of the Company stockholders exchanged all of their issued and outstanding shares of the Company for an equivalent number of shares of common stock of CHI. As a result of the exchange agreement closing, The Company will function as the operating company and CHI will be a holding company. The Company will focus on providing leading edge solutions to financial institutions, healthcare, government, associations, and private sector companies for electronic transaction processing and systems integration. The Company's services provide customized, innovative technology solutions that create, augment and enhance customers' existing systems. These enhancements and programs are aimed to serve underserved markets and provide equal opportunity for financial services to a greater audience. The Company works with a multitude of global technology partners that enable the Company to create customized solutions for each of its clients across a broad spectrum of industries. Until the closing of the exchange agreement, the Company relied on financing from sales of its common stock to related parties and private lending arrangements with individual investors. Management believes the Company's changed status as a subsidiary of a public company will make it easier to attain working capital stability, allowing the company to grow and meet its operational forecast. The Company continues to seek capital funding and required to raise an estimated $750,000 of operating capital in order to successfully implement the first phases of the various contract described in Item 1 entitled "The Business" in its filing on Form 10-K for the year ended June 30, 2009. To the extent that the Company receives less than the amount sought or receives it over time instead of one payment, management will be required to select which initiatives to deploy, which best generate best return of investment revenues and will have to defer other projects until receipt of additional capitalization funding. The Company has engaged one investment group and is currently in negotiations with several others for potential investor funding for the Company; however, the amount, terms and conditions of any such investment are still to be determined, and there can be no assurance that any such negotiations will result in a closing for all of the funds needed or be concluded successfully at all. The Company had several existing contracts in place that were to begin in the fourth quarter of 2009. Due to the financial constraints several of these project deployments have been moved to the second quarter of 2010. The Company recently signed an agreement with RoseBank Capital to raise (on a best-efforts basis) of upwards of $500,000 for the My Golf Rewards program. Additional funding is also being pursued. The Company expects to earn the majority of its revenues in the near future from transaction processing from its My Golf Rewards program, First Nations deployment, and its international payroll programs. QUARTERLY UPDATE. On January 12, 2010, the Board approved the issuance of 500,000 stock options to a private investor as a bonus for a loan advanced to the Company. In addition, the Board approved the issuance of 50,000 stock options to an individual as a finder's compensation fee. After review of the golf program and financial results, the Company decided to increase its ownership stake in My Golf Rewards Canada Inc. Consorteum is also in dialogue with an international group for expansion of the My Golf Rewards program. On January 13, 2010, the Company increased its ownership stake in My Golf Rewards Canada Inc, from 49% to 75%. The Company has committed to increasing its financial commitment in My Golf Rewards by $250,000 in return for the increase in its ownership position. The Company's has engaged RoseBank Capital to raise funding (on a best efforts basis) of up to $500,000 for the development of the program and expects to begin large-scale deployment this coming summer. -17-
On January 16, 2010, the Company signed a 50/50 joint venture agreement with John Bernard, a First Nation representative to create a First Nations financial services company providing financial products. The services will include benefit cards, payroll cards, prepaid services, merchant discount rates, and point of sale solutions. The Company is in the first stage of deployment and will be launching its first benefits card program within the next 45 days. On January 18, 2010, the Company settled an outstanding debt of $300,000 plus interest with Lucky Pearl Investments Ltd. through the issuance of 1,500,000 restricted shares of common stock of the Company. On January 18, 2010, the Company signed an agreement with NXSystems Inc. which enables the Company as agent to offer its clients global card issuance, multiple currency settlement, global electronic payments, e-wallets, and a variety of other financial products and services. The Company is currently working with NXSystems on several new projects including payment processing, ACH and EFT invoice settlement and international payroll. Additional new contract will be forthcoming. On January 20, 2010, the Company was contracted by Blue Sea Manning Ltd. to provide consulting services for their UK based recruiting company within the private yachting industry. The Company will provide Blue Sea Manning with global multi-currency settlement, payroll cards, expense cards and e-wallet functionality. The program is in current Beta testing and will be expanding to the entire company payroll within the next month. On January 26, 2010 the Company approved the issuing of 10,000,000 Convertible Preferred Shares to Mr. Craig Fielding and 10,000,000 Convertible Preferred Shares to Mr. Quent Rickerby in consideration of services to the corporation at a share price of $0.001 per share. On February 3, 2010, the Company obtained debt financing in the form of a promissory note from an unrelated company amounting to $404,746. The promissory note is due within twelve months and bears interest of 15% per annum. The promissory note contains a conversion feature that allows the holder of the note to convert the note into shares of common stock of the Company at a 50% discount of the average three dip bid on the day of conversion. The holder can convert the promissory note in whole or in part with the remaining balance of the debt accruing interest in the event of a partial conversion. On March 1, 2010 the Board, by unanimous written consent, and holders of a majority of the issued and outstanding shares of the Company's common stock approved an amendment to the Articles of Incorporation to increase the number of authorized shares of Common Stock to Five Hundred Million (500,000,000) shares from One Hundred Million (100,000,000) shares. The increase in the authorized shares will become effective upon filing the amendment with the Secretary of State of the State of Nevada which the Company anticipates will occur approximately mid June 2010. The Company is currently amending its Articles of Incorporation to create a class of Convertible Preferred Shares. Each Convertible Preferred Share may be converted into 2 common shares. On March 12, 2010 Richard C. Fox, P.A foreclosed on a pledge of 8,815,000 shares of common stock pledged by the Company's CEO, Craig A. Fielding, as collateral for $100,000 promissory note the Company delivered at the closing under the exchange agreement in June 2009. The Company will replace these shares by issuing Convertible Preferred Shares to Mr. Fielding when it amends its articles of incorporation to create a series of Convertible Preferred Shares. Once approved, the Company will issue Craig Fielding 4,407,500 Convertible Preference Shares to replace the 8,815,000 common shares Mr. Fielding had held in escrow and used to satisfy the outstanding $100,000 note due to Richard C. Fox, P.A. On March 14, 2010. Once approved, the Company will issue Craig Fielding 4,407,500 Convertible Preference Shares to replace the 8,815,000 common shares Mr. Fielding had held in escrow and used to satisfy the outstand $100,000 note due to Richard C. Fox, P.A. The financial results of the nine months ended on March 31, 2010 are reflective of an early stage company in its initial development phase that has been focused on capital funding, growth of its project management team for deployments of new and existing contracts. After review of the quarter and the first nine months of the current fiscal year, management's focus for 2010 continues to be on new global business development opportunities and expanding its technology partners in order to move the Company forward into the next growth phase of development. The Company is in final discussions on a number of overseas projects within the international payroll marketplace. These new projects will enable the company to deploy large-scale programs with increased revenue opportunities, while billing upfront consulting fees. -18-
LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2010, the Company had $76,002 in total current assets, compared to total current assets of $8,773 as of June, 30, 2009. The March 31, 2010 current assets were comprised of $17,605 in accounts receivable and $22,697 in prepaid expenses and $35,700 in deferred debt issuance costs. As at March 31, 2010, the Company's fixed assets consisted of computer equipment valued at $19,058 less accumulated depreciation of $32,248. Until the Company has the necessary financial operating capital to execute its business plan, revenues will be limited due to program deployment delays. Many of the existing contracts and initiatives require capital expenditure by the Company. RESULTS OF OPERATIONS The Company had revenues of $nil for the nine-months ended March 31, 2010, compared with $nil for the nine-months ended March 31, 2009. The Companies existing contracts require a ramp up period for revenue generation and continued project management and sales support. In addition the Company still requires significant capitalization for operations to fully execute the current contracts. The Company has engaged in a number of new contracts in 2010, that will see upfront management retainers for work done and more targeted revenue opportunities. For the nine-months ended March 31, 2010, the Company had a net loss of $1,483,860 compared to a net loss of $738,635 for the nine-months ended March 31, 2009. Operating expenses increased from $658,097 for the nine-months ended March 31, 2009 to $1,203,686 for the nine-months ended March 31, 2010. The substantial majority of the increase in costs for the past nine months can be attributed to the acquisition costs of Consorteum Holdings, Inc. and subsequent reverse merger. The Company continues to incur significant overhead costs for compliance requirement for the publicly trading entity. The Company has also incurred significant cost increases for auditing, accounting, legal, management, consulting, investor and public relations. OFF BALANCE SHEET ARRANGEMENTS The Company does not currently have any off-balance sheet arrangements. CONTRACTUAL OBLIGATIONS As at March 31, 2010 the Company did not have any significant contractual obligations with the exception of a contract to pay $100,000 in four equal quarterly installments of $25,000 to Fidelisoft under a software licensing agreement for the period September 2009 through August 2010. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: -19-
Risk and Uncertainties Factors that could affect the Company's future operating results and cause future results to vary materially from expectations include, but are not limited to, lower than anticipated retail transactions, and inability to control expenses, technology changes in the industry, relationships with processing agencies and networks, changes in its relationship with related parties providing operating services to the Company and general uncertain economic conditions. Negative developments in these or other risk factors could have material adverse effects on the Company's future financial position, results of operations and cash flow. Cash and Cash equivalents The Company considers all highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents. There are no cash equivalents at March 31, 2009 or March 31, 2010. Equipment, net Equipment is recorded at cost. Depreciation, based on the estimated useful life of the equipment, is provided at an annual rate of 30% based on the declining-balance method. Impairment of long lived assets In accordance with Statement of Financial Accounting Standard ("SFAS") No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS," long lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less cost to sell. As described in Note 1, the long-lived assets have been valued on a going concern basis. However, substantial doubt exists as to the ability of the Company to continue as a going concern. If the Company closes operations, the asset values may be materially impaired. Accounts Receivable The Company carries its accounts receivable at invoice amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. Revenue Recognition The Company recognizes revenue in accordance with U.S. Securities and Exchange Commission (the "SEC") Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB 104"). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4)collectability is reasonably assured. -20-
Equity Investments Equity investments include entities over which the Company exercises significant influence but does not exercise control. These are accounted for using the equity method of accounting and are initially recognized at cost net of any impairment losses. The Company's share of these entities' profits or losses after acquisition of its interest is recognized in the statement of operations and cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Company's share of losses of these investments equals or exceeds the carrying amount of the investment, the Company only recognizes further losses where it has incurred obligations or made payments on behalf of the affiliate. Joint ventures are entities over which the Company exercises control jointly with another party or parties. Joint ventures are also accounted for under the equity method as described above. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period. Foreign Currency Translations In accordance with the provision of SFAS No. 52, "FOREIGN CURRENCY TRANSLATION," the Company, whose functional currency is the Canadian dollar, translates its balance sheet into U.S. dollars at the prevailing rate at the balance sheet date and translates its revenues and expenses at the average rates prevailing during each reporting period. Net gains or losses resulting from the translation of financial statements are accumulated and charged directly to accumulated comprehensive income or (loss), a component of stockholders' equity or (deficit). Realized gains or losses resulting from foreign currency transactions are included in operations for the period. Comprehensive Income and Loss The Company applies the provisions of SFAS No. 130, "REPORTING COMPREHENSIVE INCOME." Unrealized gains and losses from foreign exchange translation are reported in the accompanying statements as comprehensive income or loss. Earnings or loss per share The Company accounts for earnings or loss per share pursuant to SFAS No. 128, "EARNINGS PER SHARE," which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus potentially dilutive securities outstanding for each year. The computation of diluted earnings (loss) per share has not been presented as its effect would be anti-dilutive. -21-
Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from those estimates. These estimates are reviewed on an ongoing basis and as adjustments become necessary, they are reported in earnings in the period in which they become known. Financial instruments Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments. The fair value of the financial instruments approximates their carrying values, unless otherwise noted. Financial risk is the risk that the Company's earnings are subject to fluctuations in interest risk or currency risk and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any. Concentration of credit risk SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk," requires disclosure of any significant off-balance-sheet risk and credit risk concentration. The Company does not have significant off-balance-sheet risk or credit concentration. The Company maintains cash with major financial institutions. From time to time, the Company has funds on deposit with commercial banks that exceed federally insured limits. Management does not consider this to be a significant credit risk as these banks and financial institutions are well-known. Comparative financial information Certain financial information for the year ended June 30, 2009, has been reclassified to conform with the financial statement presentation adopted in the current year. Recent accounting pronouncements In August 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")2009-05, "Measuring Liabilities at Fair Value" ("ASU 2009-05"), which clarifies, among other things, that when a quoted price in an active market for the identical liability is not available, an entity must measure fair value using one or more specified techniques. ASU 2009-05 was effective for the first reporting period, including interim periods, beginning after issuance. The company adopted the update effective July 1, 2009, with no impact on its financial statements. -22-
In October 2009, the FASB issued ASU 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"). ASU 2009-13 applies to revenue arrangements currently in the scope of FASB Accounting Standards Codification ("ASC") Subtopic 605-25, "Multiple Element Arrangements", and provides principles and application guidance on whether arrangements with multiple deliverables exist, how the deliverables should be separated, and the consideration allocated to the deliverables. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The company is currently reviewing the effect, if any, the proposed guidance will have on its financial statements. In December 2009, the FASB issued ASU 2009-17 which codifies SFAS No. 167, "Amendments to FASB Interpretations No. 46(R)" issued in June 2009. ASU 2009-17 requires a qualitative approach to indentifying a controlling financial interest in a variable interest entity ("VIE"), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. ASU 2009-17 is effective for annual reporting periods beginning after November 15, 2009. The Company does not expect the adoption of ASU 2009-17 to have a material impact on its financial statements. In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair Value Measurements" ("ASU 2010-6"). The standard amends ASC Topic 820, "Fair Value Measurements and Disclosures" to require additional disclosures related to transfers between levels in the hierarchy of fair value measurements. ASU 2010-6 is effective for interim and annual fiscal years beginning after December 15, 2009. The standard does not change how fair values are measured, accordingly the standard will not have an impact on the Company. The FASB issues ASUs to amend the authoritative literature in Accounting Standards Certification ("ASC"). There have been a number of ASUs to date that amend the original text of ASC. Except for the ASUs listed above, those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 4. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in the Company's periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. -23-
Under SEC Rules that affect the Company, the Company is required to provide management's report on internal control over financial reporting for its first fiscal year ending on or after December 15, 2009. The Company has prepared management's report as required. The Company is not required to file the auditor's attestation report on internal control over financial reporting until it files an annual report for its fiscal year ending on June 30, 2010. As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon the evaluation, the Company's principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. In addition, the Company's principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. ITEM 4T. CONTROLS AND PROCEDURES. Management's report on internal control over financial reporting The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company's financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of March 31, 2010. We identified the following material weakness in our internal control over financial reporting- we did not have adequately segregation of duties, in that we only had one person performing all accounting-related on-site duties. Because of the "barebones" level of relevant personnel, however, certain deficiencies which are cured by separation of duties cannot be cured, but only a monitored as a weakness. In addition, we do not have an independent person serving on the Audit Committee, and we also do not have any person with the qualifications to serve as an audit committee financial expert. Changes in internal control over financial reporting There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during our last quarter (our fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. -24-
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 1A. RISK FACTORS. The following risk factors apply to the Company, its business, the industry in which it operates and the common stock and market in which it trades. They should be read carefully by anyone with an interest in the Company who should consider the information together with the other material in this report. Some of the statements in "Risk Factors" are forward looking statements. RISKS RELATED TO OUR BUSINESS OPERATIONS THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN UNLESS WE RAISE SUBSTANTIAL AMOUNTS OF CAPITAL. In its report dated September 29, 2009, the independent registered public accounting firm for the company stated that the financial statements for the years ended June 30, 2009 and 2008 and for the period of inception (November 7, 2005) to June 30, 2009, were prepared assuming that the company would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of cash flow constraints, an accumulated deficit of $4,505,957 as at March 31, 2010 and recurring losses from operations. We continue to experience losses. Our ability to continue as a going concern is subject to the ability to generate a profit from new activities and/or obtain necessary funding from outside sources, including additional funds from the sale of the company's securities or loans from financial institutions/individuals where possible. The continued operating losses and stockholders' deficit increases the difficulty in meeting such goals and there can be no assurances that such methods will prove successful, or that these funds will be available at the times or in the amounts required on terms acceptable to us. WE HAVE A LIMITED OPERATING HISTORY Although we were incorporated in 2006, we are a development stage company. We have a limited operating history and will likely encounter the risks and difficulties frequently encountered by early stage companies. Such risks include, without limitation, the following: o amount and timing of operating costs and capital expenditures in relation to expansion of our business, operations, and infrastructure; o timeline to develop, test, coordinate, market and sell our card programs and processing procedures; o negotiation and implementation of strategic alliances or similar arrangements with companies with sufficient resources to support our programs and processing transactions; o need for acceptance of products; o ability to anticipate and adapt to a competitive market and rapid technological developments; and o dependence upon key personnel. -25-
We cannot be certain our strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition and results of operations could be materially and adversely affected. WE HAVE LIMITED SALES, MARKETING, AND DISTRIBUTION CAPABILITIES. WE WILL BE REQUIRED TO EITHER DEVELOP SUCH CAPABILITIES OR TO OUTSOURCE THESE ACTIVITIES TO THIRD PARTIES. We currently have limited sales, marketing and distribution capabilities. In order to succeed, we will be required to either develop such capabilities or to outsource these activities to third parties. We can provide no assurance that third parties will be interested in acting as our outsourced sales, marketing, and distribution arms on a timely basis, on commercially reasonable terms, or at all. If we are unable to establish sales, marketing, or distribution capabilities either by developing our own organization or by entering into agreements with others, we may be unable to successfully sell any products that we are able to begin to commercialize, which would have a material adverse effect upon our business, prospects, financial condition, and results of operations. Further, in the event that we are required to outsource these functions on disadvantageous terms, we may be required to pay a relatively large portion of our net revenue to these organizations, which would have a material adverse effect upon our business, prospects, financial condition, and results of operations. RISKS RELATING TO THE CREDIT CARD AND TRANSACTION PROCESSING INDUSTRY THE LEVEL OF TRANSACTIONS GENERATED BY OUR DIFFERENT CARD PROGRAMS IS SUBJECT TO SUBSTANTIAL SEASONAL VARIATION WHICH MAY CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE MATERIALLY. Historic industry experience is that the level of transactions is subject to seasonal variation. Transaction levels have consistently been higher in the last quarter of the year due to increased use of our prepaid credit card programs during the holiday season. Transaction levels are greater for our loyalty and reward programs during the second and third quarter of the year. The level of transactions drops in the first quarter, during which transaction levels are generally the lowest we experience during the year. As a result of these seasonal variations, our quarterly operating results, which depend in part on the number and value of the transactions processed, may fluctuate materially. THE STABILITY AND GROWTH OF MULTIPLE TYPES OF CARD PROGRAMS DEPENDS ON MAINTAINING AGREEMENTS WITH SPONSORSHIP BANKS, SOFTWARE PROVIDERS AND PROCESSORS. All of our supplier agreements such as those with banks, processing companies and software companies, have expiration dates. Although our suppliers are generally obligated to renew our agreements, they may have the option not to do so. Therefore, one or more of our critical suppliers such as a bank or processing company may terminate its contract at expiration. Although we would have notice of any such decision, we may not be able to replace the relationship in a timely manner or on favorable economic terms or at all. The requirement to replace any critical supplier relationship would also generate additional costs in the replacement process. The inability to maintain or replace these agreements could have a material adverse effect on our business, and financial condition or results of operations. -26-
WE DO NOT CONTROL THE TRANSACTION FEES FOR SOME OF OUR PROGRAMS IN THE MARKETS WHERE THEY OPERATE. THE INTERCHANGE FEES CHARGED AND SHARED ARE ESTABLISHED BY THE SPONSORING PROCESSORS OR FINANCIAL INSTITUTIONS. The amount of fees we receive per transaction is set in the markets in which we do business. We have and will continue to have card acceptance agreements with some banks under which fees are set. Also, we derive a portion of our revenues from "interchange fees" that are set by processors, financial institutions and the major card associations. We are not in a position to influence these fees. A significant decrease in the interchange fee could adversely affect our revenues. WE ARE DEPENDENT UPON ELECTRONIC FINANCIAL TRANSACTION PROCESSORS OR THE CARD ISSUING INSTITUTION TO PROVIDE ASSISTANCE IN OBTAINING SETTLEMENT OF FUNDS RELATING TO INTERCHANGE REVENUE AS WELL AS OTHER TRANSACTIONS FEES AGREED UPON. We have agreements in place related to transaction based fee revenues on credit and debit cards issued by banks. We also have in place arrangements for the settlement of these types of transactions, but in some cases we do not have a direct relationship with the card-issuing bank and we rely for settlement on the regulation rules that are administered by card associations (such as Visa or MasterCard and others). These contracts are typically terminable by a bank or processing company on 90 days notice. We have arrangements in place with our processing partners or card sponsoring institution to collect our fees via revenue splits at point of origin. The termination of a contract with any one of these parties could result in the loss of revenues. A LACK OF BUSINESS OPPORTUNITIES OR FINANCIAL RESOURCES MAY IMPEDE OUR ABILITY TO EXPAND AT DESIRED LEVELS, AND OUR FAILURE TO EXPAND OPERATIONS COULD HAVE AN ADVERSE IMPACT ON ITS FINANCIAL CONDITION. Our plans and opportunities will be focused on card issuing, transaction processing and providing financial services to our varied client base. The expansion and development of our business will depend on various factors including the following: o The demand for our card products, transaction processing and financial services product by the current markets. o The ability to form the appropriate relationships and obtain necessary approvals for the installation of our card programs. o The ability to install a transaction processing solution in an efficient and timely manner. o The ability to issue a sufficient numbers of cards which relate to loyalty, rebate, reward, prepaid and other card programs. o The availability of financing for the expansion of our business through partnerships, acquisition and hiring of additional personnel. o The increased acceptance of our card products in our target markets. o The increase of transaction fees revenue we receive. o The deployment of larger numbers of the different card types by us, and our different distribution channels o The continued use of our card product by cardholders. -27-
We expect that transaction levels on a newly created card program in a developing market will not increase significantly. We will work to improve the levels of usage of the card products by acquiring high-quality clients and eliminating less-developed potential markets and adding new transactions types that are compatible with our different products. However, we may not be successful in materially increasing transaction levels through these measures. OUR LOSS OF CURRENT RELATIONSHIPS WITH PROCESSORS, CARD PLANS AND FINANCIAL INSTITUTIONS WILL HAVE A MATERIAL ADVERSE EFFECT ON FUTURE REVENUES AND PROSPECTS. Our revenue will be derived primarily from fees paid by users of our card products, by fees shared between us and the processors and also by the interchange revenues shared with the major card plan providers. Therefore, our future success will be dependent on our ability to increase the transaction and fee revenues that are created which are greater than our expenses. There can be no assurances that our efforts to achieve this in the beginning will be successful. WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH THE LEADING SERVICE PROVIDERS WHO ARE MORE ESTABLISHED AND BETTER CAPITALIZED THAN US. We experience significant competition from banks, non-bank providers of card programs, major processors as well as multiple card program suppliers. Many of our competitors have materially greater financial resources than us and can therefore implement ever changing technological developments to meet the level of convenience that consumers demand. No assurance can be given that we will be able to compete successfully with our more established and better-capitalized competitors. RISKS RELATED TO OUR SHARES IN RECENT YEARS, THE STOCK MARKET IN GENERAL HAS EXPERIENCED PERIODIC PRICE AND VOLUME FLUCTUATIONS. THIS VOLATILITY HAS HAD A SIGNIFICANT EFFECT ON THE MARKET PRICE OF SECURITIES ISSUED BY MANY COMPANIES FOR REASONS OFTEN UNRELATED TO THEIR OPERATING PERFORMANCE. THESE BROAD MARKET FLUCTUATIONS MAY ADVERSELY AFFECT OUR STOCK PRICE, REGARDLESS OF OUR OPERATING RESULTS. THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY. The price of our common stock is quoted on the OTCBB and constantly changes. We expect that the market price of the common stock will continue to fluctuate. These fluctuations may result from a variety of factors, many of which are beyond our control. These factors include: o quarterly variations in our financial results; o operating results that vary from the expectations of management, securities analysts and investors; -28-
o changes in expectations as to our business, prospects, financial condition, and results of operations; o announcements by us or our competitors of material developments; o the operating and securities price performance of other companies that investors believe are comparable to us; o future sales of our equity or equity-related securities; o changes in general conditions in our industry and in the economy, the financial markets and the domestic or international political situation; o departures of key personnel; and o regulatory and intellectual property considerations. FUTURE SALES OF COMMON STOCK OR THE ISSUANCE OF SECURITIES SENIOR TO OUR COMMON STOCK OR CONVERTIBLE INTO, OR EXCHANGEABLE OR EXERCISABLE FOR, OUR COMMON STOCK COULD MATERIALLY ADVERSELY AFFECT THE TRADING PRICE OF THE COMMON STOCK, AND OUR ABILITY TO RAISE FUNDS IN NEW EQUITY OFFERINGS. Future sales of substantial amounts of our common stock or other equity-related securities in the public market or privately, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or other equity-related securities. We can make no prediction as to the effect, if any, that future sales of shares of common stock or equity-related securities, or the availability of shares of common stock for future sale, will have on the trading price of our common stock. There are currently 43,425,090 of our common stock available for sale. OUR COMMON STOCK IS SUBJECT TO THE PENNY STOCK REGULATIONS THAT IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK. AS A CONSEQUENCE, THE ABILITY OF OUR STOCKHOLDERS TO SELL SHARES OF OUR COMMON STOCK COULD BE IMPAIRED. The Securities and Exchange Commission (the "Commission") has adopted regulations that generally define a "penny stock" to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share subject to certain exceptions that are not applicable to our Company at present. Our common stock is subject to the penny stock rules that impose additional sales practice requirements on broker-dealers who sell these securities to persons other than established customers and accredited investors. The regulations require that prior to any transaction involving a penny stock, a risk disclosure schedule must be delivered to the buyer explaining the penny stock market and its risks. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase, and must have received the purchaser's written consent to the transaction prior to sale. As such the market liquidity for the common stock will be limited to the ability of broker-dealers to sell it in compliance with the above-mentioned disclosure requirements. -29-
You should be aware that, according to the Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include: o control of the market for the security by one or a few broker-dealers; o "boiler room" practices involving high-pressure sales tactics; o manipulation of prices through prearranged matching of purchases and sales; o the release of misleading information; o excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and o dumping of securities by broker-dealers after prices have been manipulated to a desired level, which hurts the price of the stock and causes investors to suffer loss. We are aware of the abuses that have occurred in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, we will strive within the confines of practical limitations to prevent such abuses with respect to our common stock. FAILURE TO REMAIN CURRENT IN REPORTING REQUIREMENTS COULD RESULT IN DELISTING FROM THE OVER THE COUNTER BULLETIN BOARD. Companies trading on the Over the Counter Bulletin Board ("OTCBB"), such as the Company, must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTCBB. If the Company fails to remain current in its reporting requirements, the Company could be delisted from the Bulletin Board. In addition, the Financial Industry Regulatory Authority ("FINRA"), which supervises the OTCBB, has adopted a change to its Eligibility Rule, in a filing with the SEC. The change makes those OTCBB issuers that are cited for filing delinquency in their Form 10-K/Form 10-Q three times in a 24-month period and those OTCBB issuers removed for failure to file such reports two times in a 24-month period ineligible for quotation on the OTCBB for a period of one year. The Company failed to file its Report on Form 10-Q for the period ended September 30, 2009 within the requisite time period, and, as a result, has one filing delinquency within the meaning of the Eligibility Rules. Under this rule, a company filing with the extension time set forth in a Notice of Late Filing (Form 12b-25) is not considered late. This rule does not apply to a company's Current Reports on Form 8-K. FAILURE TO MAINTAIN MARKET MAKERS MAY AFFECT VALUE OF OUR COMMON STOCK. If the Company is unable to maintain FINRA member broker/dealers as market makers, the liquidity of the common stock could be impaired, not only in the number of shares of common stock which could be bought and sold, but also through possible delays in the timing of transactions, and lower prices for the common stock than might otherwise prevail. Furthermore, the lack of market makers could result in persons being unable to buy or sell shares of the common stock on any secondary market. There can be no assurance the Company will be able to maintain such market makers. -30-
SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE MAY AFFECT MARKET PRICE. All the shares held by Consorteum Stockholders who received them in the Exchange Agreement transaction were issued in reliance on the section 4(2) exemption under the Securities Act of 1933. Such shares will not be available for sale in the open market without separate registration except in reliance upon Rule 144 under the Securities Act of 1933. In general, under Rule 144 a person (or persons whose shares are aggregated) who has beneficially owned shares acquired in a non-public transaction for at least six months, including persons who may be deemed affiliates of the Company (as that term is defined under that rule) would be entitled to sell within any three-month period a number of shares that does not exceed 1% of the then outstanding shares of common stock, provided that certain current Company information is then publicly available. As of May 21, 2010 there were 43,425,090 shares of our common stock eligible for sale pursuant to Rule 144. If a substantial number of the shares owned by these stockholders were sold pursuant to Rule 144 or a registered offering, the market price of the common stock at that time could be adversely affected. WE HAVE NEVER PAID ANY CASH DIVIDENDS BECAUSE WE HAVE NEVER HAD ANY EARNINGS, AND WE WILL NOT PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE. We have never paid any cash dividends on our common stock since we began our business operations because we have never had earnings from which any such dividends could be declared. Assuming we attain earnings in the future, we do not intend to pay cash dividends. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements which we may enter into with institutional lenders or otherwise may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and any other factors that the board of directors decides is relevant. See "Dividend Policy" and "Description of Securities - Common Stock". -31-
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS. The Exhibits listed below are filed herewith as part of this Report on Form 10-Q. EXHIBIT DESCRIPTION EXHIBIT 31.1 RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.2 RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.1 CERTIFICATION PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.2 CERTIFICATION PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Consorteum Holdings, Inc. ------------------------ Registrant May 24, 2010 /s/ Craig A. Fielding ----------------- ----------------------- Date Craig A. Fielding, CEO May 24, 2010 /s/ Peter Simpson ----------------- ----------------------- Date Peter Simpson, CFO -32-