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EX-31.2 - CERTIFICATION - Consorteum Holdings, Inc.consorteum_10q-ex3102.htm
EX-31.1 - CERTIFICATION - Consorteum Holdings, Inc.consorteum_10q-ex3101.htm
EX-32.2 - CERTIFICATION - Consorteum Holdings, Inc.consorteum_10q-ex3202.htm
EX-32.1 - CERTIFICATION - Consorteum Holdings, Inc.consorteum_10q-ex3201.htm
EXCEL - IDEA: XBRL DOCUMENT - Consorteum Holdings, Inc.Financial_Report.xls
EX-10.1 - TERM SHEET AGREEMENT FOR $30 MILLION EQUITY FINANCING - Consorteum Holdings, Inc.consorteum_10q-ex1001.htm

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2012

 

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: 000-53153

 

Consorteum Holdings Inc.


(Exact Name of Company as Specified in its Charter)

 

Nevada

 

45-2671583

(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)

 

6 – 14845 Yonge Street, Suite #348, Aurora, Ontario, Canada, L4G 6H8

(Address of Principal Executive Offices)

 

(888) 702-3410

(Company's Telephone Number)

 

 

(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 S 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 S

 

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes £ No S

 

As of February 19, 2013, the Company had 309,216,404 shares of common stock issued and outstanding.

 

Transitional Small Business Disclosure Format (check one): Yes £ No S

 

 
 

 

 

FORWARD LOOKING STATEMENTS.

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. In evaluating such statements, prospective investors should review carefully various risks and uncertainties identified in this release and matters set in the Company's SEC filings. These risks and uncertainties could cause the Company's actual results to differ materially from those indicated in the forward-looking statements. We caution that words used in this document such as "expects," "anticipates," "believes," "may," and "optimistic," as well as similar words and expressions used herein, identify and refer to statements describing events that may or may not occur in the future.

 

These forward-looking statements and the matters to which they refer are subject to considerable uncertainty that may cause actual results to be materially different from those described herein. There are numerous factors that could cause actual results to be different than those anticipated or predicted by us, including: (i) a deterioration in economic conditions in general; (ii) a decrease in demand for our products or services in particular; (iii) our loss of a key employee or employees; (iv) regulatory changes, including further changes in the area of credit card regulation or implementation of new regulations in furtherance of the new legislation that may have an adverse affect on the demand for our products or services; (v) increases in our operating expenses resulting from increased costs of labor and/or consulting services; (vi) our inability to exploit existing or secure additional sources of revenues or capital to fund operations; (vii) a failure to collect upon or otherwise secure the benefits of existing contractual commitments with third parties, including our customers; and (viii) other factors and risks identified in our SEC filings. This list provides examples of factors that could affect the results described by forward-looking statements contained in this press release; however, this list is not exhaustive and many other factors could impact our business and it is impossible to predict with any accuracy which factors could result in negative impacts.

 

These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

2
 

 

Consorteum Holdings Inc.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED FINANCIAL STATEMENTS

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Consolidated Balance Sheets as of December 31, 2012 and June 30, 2012 (Unaudited) 4
   

Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended December 31, 2012 and 2011 (Unaudited)

5

   

Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2012 and 2011 (Unaudited) 

6

   

Notes to Consolidated Financial Statements (Unaudited) 

7

 

 

 

 

 

 

3
 

 

Consorteum Holdings Inc.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   December 31,   June 30, 
   2012   2012 (1) 
ASSETS        
Current Assets:          
Cash – current assets  $54,001   $9,371 
           
Property and equipment, net of accumulated depreciation   2,130    2,734 
Deferred finance charges   9,562     
Investment, at cost   30,793      
Intangible assets, net   216,941    145,000 
Total assets   313,427   $157,105 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current Liabilities:          
Accounts payable and accrued expenses  $1,237,592   $1,143,351 
Loans payable-short term   1,272,603    1,235,085 
Convertible promissory notes   1,736,548    1,098,973 
Due to stockholders   194,201    196,085 
Total current liabilities   4,440,944    3,673,494 
           
Convertible loans payable, net of short-term portion   2,247,464    2,189,490 
Total liabilities   6,688,408    5,862,984 
           
Stockholders' Deficit:          
Preferred stock, $0.001 par value, 100,000,000 shares Authorized:          
Preferred A stock, $0.001 par value, 5,000,000 shares authorized:5,000,000 and zero issued and outstanding at December 31, 2012 and June 30, 2012, respectively   5,000     
Preferred B stock, $0.001 par value, 15,000,000 shares authorized:4,000,000 and zero issued and outstanding at December 31, 2012 and June 30, 2012, respectively   4,000     
Preferred C stock, $0.001 par value, 40,000,000 shares authorized: zero issued and outstanding        
Common stock; $.001 par value; 500,000,000 shares authorized; 309,216,464 issued and outstanding at December 31, 2012 and June 30, 2012, respectively   309,217    309,217 
Collateralized shares issued   (137,500)   (137,500)
Shares committed to be issued   35,000    35,000 
Additional paid-in capital   3,448,602    3,428,065 
Accumulated other comprehensive loss   (148,201)   (102,571)
Accumulated deficit during prior development activities   (7,617,031)   (7,617,031)
Deficit accumulated during the development stage   (2,274,068)   (1,621,059)
Total stockholders’ deficit   (6,374,981)   (5,705,879)
           
Total liabilities and stockholders’ deficit  $313,427   $157,105 

 

(1) Amounts derived from audited consolidated financial statements included in Form 10-K.

 

See Notes to Unaudited Consolidated Financial Statements.

 

4
 

 

Consorteum Holdings Inc.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
   Cumulative from Inception
(July 1, 2011)
Through
December 31,
 
   2012   2011   2012   2011   2012 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Revenues:  $   $   $   $   $ 
                          
Operating expenses:                         
Selling, General and administration expenses   260,807    298,760    458,269    527,117    1,698,077 
Total operating expenses   260,807    298,760    458,269    527,117    1,698,077 
                          
Operating loss   (260,807)   (298,760)   (458,269)   (527,117)   (1,698,077)
                          
Other income (expense):                         
Gain on settlement of debt                     68,813 
Interest expense   (96,531)   (86,171)   (194,740)   (149,831)   (664,804)
Total other expense, net   (96,531)   (86,171)   (194,740)   (149,831)   (575,991)
                          
Net loss   (357,338)   (384,931)   (653,009)   (676,948)   (2,274,068)
                          
Foreign currency translation adjustment   24,771    (148,412)   (45,630)   (55,956)   23,308 
                          
Comprehensive loss  $(332,567)  $(533,343)  $(698,639)  $(732,904)  $(2,250,760)
                          
Basic and diluted loss per common share  $(0.00)  $(0.00)               
                          
Basic and diluted weighted average common shares outstanding   309,216,464    304,147,714    309,216,464    304,147,714      

 

 

See Notes to Unaudited Consolidated Financial Statements.

 

5
 

 

Consorteum Holdings Inc.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  

           Cumulative from 
           Inception 
           (July 1, 2011) 
   Six Months Ended December 31,   Through 
   2012   2011   December 31, 2012 
   (Unaudited)   (Unaudited)   (Unaudited) 
Cash flows from operating activities:               
Net loss  $(653,009)  $(676,948)  $(2,274,068)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation   604    591    1,780 
Stock issued on reverse merger           (68,813)
Amortization of debt discount   1,665    15,938    1,665 
Amortization of deferred finance charges   7,318    3,623    66,459 
Amortization of intangible asset   -17,000        17,000 
Stock-based compensation   26,750    37,917    217,980 
Fair value of preferred shares issued for services       138,000     
Changes in operating assets and liabilities:               
Accounts payable and accrued liabilities   75,754    22,342    499,360 
Accrued Expenses       36,719     
Accrued interest   181,096    149,831    592,365 
                
Net cash used in operating activities   (342,822)   (271,987)   (946,272)
                
Cash flows used in investing activities:               
Purchase of license agreement   (88,941)       (233,941)
Purchase of investment   (30,390)       (30,390)
Net cash used in investing activities   (119,331)       (264,331)
                
Cash flows from financing activities:               
Proceeds from loans           141,482 
Deferred finance costs   (16,803)       (16,803)
Repayment of bank indebtedness           (121,938)
Proceeds from stockholders' advances       626    195,585 
Repayment of stockholders' advances   (12,777)       (12,777)
Repayment of convertible promissory notes             (4,020)
Proceeds from the issuance of convertible promissory notes   533,520    267,747    1,075,277 
                
Net cash provided by financing activities   503,940    268,373    1,256,806 
                
Effect of exchange rate on cash   2,843    (27)   4,157 
                
Net increase (decrease) in cash   44,630    (3,641)   50,360 
                
Cash, beginning of period   9,371    3,641    3,641 
Cash, end of period  $54,001   $   $54,001 
                
Supplemental disclosures of cash flow information:               
Cash paid for interest  $   $   $ 
Cash paid for income taxes  $   $   $ 
                
Non-cash investing and financing activities:               
Conversion of convertible note payable  $   $   $101,375 
Fair value of convertible notes issued related to acquisition  $   $2,073,646   $2,073,646 
Debt discount related to convertible debt  $2,787   $   $2,787 

  

See Notes to Unaudited Consolidated Financial Statements.

 

6
 

 

Consorteum Holdings Inc.

(A DEVELOPMENT STAGE COMPANY)

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Organization, Business and Going Concern

 

Consorteum Holdings, Inc. (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.

 

In October 2012, we secured a license to market and license the CAPSA technology from Tarsin. The licensing agreement provides the Company with an exclusive right to license the CAPSA software platform in selected geographical markets throughout Canada, and Mexico, along with select customers within the United States and is capable of providing digital media to a wide range of mobile handsets, and provides for the ability to securely transmit financial information to individual handset owners. Tarsin provides us with the proven capabilities in the mobile handset market, which we can use to ensure cross functionality of mobile applications across a wide variety of handsets.  The ability to deliver next generation services to all customers depends on our ability to develop an application that is agnostic to the type of smart phone deployed.  The CAPSA platform was developed with the specific purpose of deploying rich multimedia content across diverse handsets.  We intend to leverage the license agreement with Tarsin in the mobile sports betting and casino gaming vertical to monetize its applications in branded partnership relationships.

  

In July 2012, we entered into negotiations with Knockout Gaming Limited (“Knockout”), an Isle of Man corporation organized under the laws of the Isle of Man, to resell their online gaming licensed platform, Fireplay. We conducted our due diligence and entered into a licensing and reselling agreement in December 2012. At that time, we paid $30,000 to Knockout as an interim payment against a future equity position in Knockout. Post funding as discussed in Note 9, we intend to negotiate for up to a 10% equity position in Knockout.

 

Going Concern Assumption

 

We have secured working capital of approximately $533,000 during the six months ended December 31, 2012. On February 15, 2013, we have raised additional capital totaling net proceeds of approximately $37,000 for pay for services related to our public filings. We require additional equity or debt financing to meet our obligations as they become due. In the event that such financing is not secured, the Company will not be able to satisfy its liabilities.  Furthermore, certain debt is past due and is secured by all assets of the Company.  We are attempting to restructure some of the debt and secure additional financing to satisfy our existing obligations and provide for sufficient working capital to meet the Company’s future obligations but there are no guarantees that we will be able to do so. Our convertible notes of approximately $2.2 million reflected as non-current liabilities will be satisfied through the issuance of common stock, which is in our control and expected to be completed no later than the Company’s quarterly period ended March 31, 2013.

 

As discussed in Note 9, we entered into a binding term sheet for $30,000,000 in financing which will not begin funding until after April 6, 2013; however, the funding source will use its best efforts to secure a bridge loan of $2,000,000 prior to such date to fund the working capital needs of the Company and its strategic partners.

 

The accompanying 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.

 

The foregoing unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, these consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited consolidated interim financial statements should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended June 30, 2012. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for all the interim periods presented. Operating results for the three-month period ended December 31, 2012 and for the six months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the year ending June 30, 2013.

 

7
 

 

2. Summary of Significant Accounting Policies

 

The accounting policies of the Company are in accordance with accounting principles generally accepted in the United States of America, and their basis of application is consistent with that of the previous year.

 

Basis of Presentation

The consolidated financial statements include the accounts of Consorteum Holdings, Inc., Consorteum Inc., and My Golf Rewards Canada, Inc. All significant intercompany balances and transactions are eliminated on consolidation.

 

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. Significant areas requiring the use of estimates relate the valuation of stock-based compensation. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Actual results will ultimately differ from those estimates.

 

Earnings or loss per share

The Company accounts for earnings or loss per share pursuant to ASC 260, "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.

 

The Company excluded 10,000,000 and 10,000,000 options and 3,352,184 and 2,392,184 warrants from the calculation three and six-month periods ended December 31, 2012 and 2011, respectively as the exercise prices were in excess of the average closing price of the Company’s common stock.  In addition, all conversion prices of convertible debt were in excess of the average closing price of the Company’s common stock, and accordingly, excluded from dilutive share calculation.  Preferred shares outstanding of 9,000,000 are convertible into common stock on a one-to-one basis.  However, the effects of these shares would be anti-dilutive due to the net loss in the applicable periods.

 

Recent Accounting Pronouncements

The FASB issues ASUs to amend the authoritative literature in 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.

 

8
 

 

3. Intangible Assets

 

On October 10, 2012, we entered into a licensing agreement with Tarsin for rights to the CAPSA technology; the agreement is for a term of three (3) years. In connection therewith, we acquired exclusive rights to market, sell and service CAPSA in Canada, Mexico, as well as select customers in the United States. We must pay $100,000, annually, beginning in year two of the agreement. Under the license, we are subject to a royalty of 12.5% of revenues generated by the Company from the CAPSA technology. The Company also retains the “Right of First Negotiation” to enter into markets in the United States which do not overlap with the existing contractual relationships that Tarsin has with Stations Casino in Nevada. Through the date of the license agreement, we advanced Tarsin approximately $234,000 and applied such amount to the license. Amortization of said license during the six months ended December 31, 2012 and 2011 was $17,000 and zero, respectively. The Company will continue to amortize approximately $17,000 per quarter over the term of the license.

 

4. Loans Payable and Convertible Promissory Notes

 

Loans payable are as follows:

 

   December 31,   June 30, 
   2012   2012 
Loans payable, bearing interest at rates between 10% and 18% per annum. Interest payable monthly. These loans are substantially past due and in default, unsecured and payable on demand.  Accrued interest of $278,182 and $212,201 at December 31, 2012 and June 30, 2012, respectively  $1,272,603   $1,235,085 
Less: Current portion   (1,272,603)   (1,235,085)
Loans payable, non-current  $   $ 

 

Convertible Promissory Notes are as follows:

 

   December 31,   June  30, 
   2012   2012 
Convertible promissory notes assumed in accordance with asset purchase agreement with Media Exchange Group bearing interest between 5% to 8% per annum, convertible into shares of common stock at a rate ranging from $0.01 to $0.05.  Accrued interest of $468,259 and $408,251 at December 31, 2012 and June 30, 2012, respectively. These notes were convertible upon the merger that occurred in July 2011. No demand for cash settlement may be made.  $2,247,464   $2,189,490 
           
Convertible promissory notes, bearing interest between 5% and 18% per annum, maturing between October 2010 and December 2013. Interest is payable at maturity. The promissory notes are convertible at any time at the option of the holder, into shares of common stock at either a rate ranging from $0.008 to $0.05, or at 35% discount of market, or at the price of the next qualified financing. Accrued interest of $159,231 and $135,865 at December 31, 2012 and June 30, 2012. The notes are substantially in default at June 30, 2012. Notes issued during the six months ended are not currently in default.   1,389,430    762,242 
           
Convertible promissory notes, bearing interest between at 5% per annum, maturing October 2012 to May 2013. Interest payable monthly. The notes are convertible at any time at the option of the holder, into shares of common stock at a rate from $0.02 to $0.05, each. Accrued interest of $22,618 and $12,231 at December 31, 2012 and June 30, 2012, respectively. Approximately $40,000 of such notes are currently in default.   347,118    336,731 
           
Convertible promissory notes  $3,984,012   $3,288,463 
Less: short-term portion   (1,736,548)   (1,098,973)
Convertible promissory notes long-term portion  $2,247,464   $2,198,490 

 

9
 

 

Convertible Notes Issued

 

In December 2012, the Company issued two (2) $100,000 convertible notes to one individual. The notes bear interest at 8% and mature in December 2013, at which time all principal and accrued interest is due and payable.  The notes and accrued interest thereon are convertible at $0.02 per share into the Company’s common stock at the option of the holder at any time prior to maturity.  

 

In addition, the same individual paid for certain expenses totaling approximately $19,000 during the three months ended December 31, 2012. Although the advances have no formal agreement to date, they have been included in convertible debt as they are expected to be convertible under similar terms as noted above.

 

The Company recognized interest expense of approximately $97,000, $86,000, $195,000, $150,000, and $645,000 during the three and six months ended December 31, 2012 and the period from Inception to December 31, 2012, respectively.

 

5. Due to Stockholders

 

The amounts due to stockholders are non-interest bearing, unsecured and have no fixed terms of repayment. Stockholders advanced the Company approximately $5,350 and $1,000 during the six months ended December 31, 2012 and 2011, respectively. Stockholders were repaid approximately $18,000 and zero during the six months ended December 31, 2012 and 2011, respectively.

 

6. Commitments and Contingencies

 

Employment Contracts

 

The Company has entered in an employment agreement with Mr. Patrick Shuster, as Chief Operating Officer of Consorteum Holdings Inc., Inc.  Below is a summary of the terms of such agreement:

 

  £ Retroactive to September 1, 2012
  £ Base salary of $240,000
  £ 5,000,000 options to purchase common stock at $0.002 per share which vest in equal installments from September 1, 2012 through December 31, 2016; provided, however, that all remaining options shall vest immediately upon the termination with cause of the agreement;
  £ 2,000,000 shares of Series A Preferred, fully vested on September 21, 2012; and
  £ 2,000,000 shares of Series B Preferred, fully vested on September 21, 2012
  £ Unspecified pension and compensation retirement plan;
  £ Incentive compensation amounting to 5 to 50% of base salary with revenue targets ranging from $0- $2,000,000 and in excess of $10,000,000.  Additionally, Mr. Shuster is entitled to a cash compensation amounting to 2% of the purchase price in the event of a sale of the Company and 3% of capital raised.

 

10
 

 

The Company has entered in an employment agreement with Mr. Craig Fielding, as Chief Executive Officer of Consorteum Holdings Inc.  Below is a summary of the terms of such agreement:

 

  £ Retroactive to September 1, 2012
  £ Base salary of $240,000
  £ 5,000,000 options to purchase common stock at $0.002 per share, which vest in equal installments from September 1, 2012 through December 31, 2016; provided, however, that all remaining options shall vest immediately upon the termination with cause of the agreement;
  £ 3,000,000 shares of Series A Preferred, fully vested on September 21, 2012; and
  £ 2,000,000 shares of Series B Preferred, fully vested on September 21, 2012
  £ Unspecified pension and compensation retirement plan;
  £ Incentive compensation amounting to 5 to 50% of base salary with revenue targets ranging from $0- $2,000,000 and in excess of $10,000,000.  Additionally, Mr. Fielding is entitled to a cash compensation amounting to 2% of the purchase price in the event of a sale of the Company and 3% of capital raised.

 

In October 2012, the Company and Cellura, as well as certain of the individual defendants named in an action entered into a settlement agreement (“Settlement Agreement”) pursuant to which (among other matters) Cellura agreed to discontinue the Action against the Company and file a stipulation of discontinuance with prejudice with the Court in which the Action was pending. The parties also agreed to exchange general releases with each other such that all claims by Cellura and his affiliates against the Company will be resolved. In connection therewith, the Company will pay Mr. Cellura approximately $46,000, which is reflected in our consolidated balance sheets at December 31, 2012 and June 30, 2012.

  

7. Stockholders’ Deficit

 

Common Stock

 

There were no common stock issuances for the three months ended December 31, 2012.

 

The Company is authorized to issue 500,000,000 shares of common stock and 100,000,000 shares of preferred stock. At the present time, assuming all of the rights and obligations to issue approximately 248,000,000 shares of our common stock under convertible notes, warrants and stock options became due as of September 30, 2012, we would not have sufficient authorized common shares to fulfill as such obligations. However, our two officers, who are also directors, control sufficient votes through their holdings of Series A and B Preferred stock to increase the authorized shares at any time, when deemed appropriate. We intend to increase our authorized common shares from 500 million to 1 billion in the near future.

 

Preferred Stock

 

As of December 31, 2012, the Company has 100,000,000 preferred shares authorized, having a par value of $.001 per share.

 

In November 2011, the Company’s board of directors approved an amendment of the Company’s Articles of Incorporation, whereby the designations of Series A and Series B preferred stock were established, and the number of Series A preferred shares to be issued at 5,000,000 and the number of Series B preferred shares to be issued at 15,000,000. The rights and privileges of the Series A shares consist of super voting rights at 200 votes per share held, conversion rights on a one-to-one basis with common stock, and liquidation preference as described below. The rights and privileges of the Series B shares have voting rights equal to one vote per share held, conversion rights equal to Series A and liquidation preference as described below.

 

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Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any common stock or Series B preferred stock liquidation preference, the holders of the Series A preferred stock shall be entitled to be paid out of the assets of the Company an amount per share of Series A Preferred Stock equal to the product of (i) the original amount paid by the holder thereof for each share of Series A Preferred Stock owned by such holder as of the effective date of such liquidation, multiplied by (ii) the number of shares of Series A Preferred Stock owned of record by such holder as of the liquidation date (as adjusted for any combinations, splits, recapitalization and the like with respect to such shares).  Series B preferred stock is next in liquidation preference after the Series A preferred stock, and is computed consistently with the formula above for the Series A preferred stock. See below for authorization of Series C Preferred Stock.

 

On September 21, 2012, the Company’s board of directors approved designations for Series C Preferred Stock. In connection therewith, we filed the designations with Nevada Secretary of State to reserve 40,000,000 shares of Series C Preferred Stock. The shares are voting, will pay no dividend, each shares convertible into four (4) shares of common stock, and have a liquidation preference after the Series A & B Preferred Stock.

 

On September 21, 2012, the Company’s board of directors approved two employment agreements which provide for the issuance and immediate vesting of 5,000,000 shares of Series A Preferred stock and 4,000,000 shares of Series B Preferred stock. In connection therewith, we recorded compensation expense of $18,000 based on the underlying value of the common stock of $0.002 per share on the date of grant.

 

Warrants

 

There were no warrants issued to purchase common stock during the six months ended December 31, 2012. As of December 31, 2012, there were 3,352,184 warrants outstanding.

 

Options

 

On September 21, 2012, in connection with two employment agreements (Note 7), we granted options to purchase 10,000,000 shares of common stock at $0.002 per share which vest in equal installments from September 1, 2012 through December 31, 2016; provided, however, that all remaining options shall vest immediately upon the termination with cause of the agreements. The fair value of the options at the late of grant was estimated using the Black Scholes option pricing model. The option issuances to the two employees were accounted for as a modification of existing options as the existing options were extinguished with concurrent issuance of these new options. The new options extended the vesting period and repriced the options. The Company valued the extinguished options immediately before extinguishment and compared the value of unvested shares to the new option issuance and determined that any incremental value was insignificant. Accordingly, the remaining option value on the original options of approximately $42,000 will be recognized over the term of the original options. In connection therewith, we recorded compensation in the amount of $8,750 during the six months ended December 31, 2012.

 

During the six months ended December, 2012, 6,000,000 stock options were cancelled or forfeited.

 

As of December 31, 2012, we had 10,000,000 options outstanding.

 

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9. Subsequent Events

 

Funding Arrangement

On February 6, 2013, the Company entered into a binding term sheet commitment (the “Term Sheet”) for a $30,000,000 funding agreement with AIC Group Holdings Limited, a corporation organized under the laws of the British Virgin Islands (“AIC” or “Funder”). Other than the Term Sheet, there is no other relationship between the registrant and its affiliates and AIC.

 

AIC has agreed to lend $30,000,000 to the Company in six (6) consecutive monthly installments (the “Loan”) with the first portion of the funding to begin not later than 60 days from the date of the Term Sheet. The installments will vary in size depending upon the working capital requirements of the Company at the time each installment is due. AIC may extend only the first installment one time for a period of up to 45 days. The Loan will bear interest at the rate of six percent (6%) per annum, payable quarterly in arrears beginning one year from the funding of the first portion of the Loan. The Loan and all remaining accrued and unpaid interest is due and repayable seven (7) years after the first funding installment; provided, however, that the Company may extend the repayment date for two successive one year periods by giving 90 day prior notice to AIC and paying an extension fee of 2% of the principal amount of the Loan to be renewed. If AIC defaults in making any installment of the Loan, then the Loan shall terminate forthwith and the Company shall have no repayment obligation to AIC. The Company may prepay all or any portion of the Loan at any time without premium or penalty. The Company will grant AIC a first priority security interest in and to all of its assets including its Intellectual Property (“IP”) as collateral security for the Loan. If the Company defaults in making any repayment of interest or principal or under any other material terms and conditions of the Loan, AIC shall have the rights of a secured party under the security agreement to foreclose on the Company collateral to satisfy the Loan. The Company will pay a total of four percent (4%) of the Loan in origination fees to two consultants as each portion of the Loan is funded, and a one time administrative fee of $150,000 that will be refunded if the funding of the Loan does not occur as scheduled.

 

AIC has agreed to use its best efforts to provide directly or through an affiliate a bridge loan for $2,000,000 (the “Bridge Loan”) within sixty (60) days of the execution of the Term Sheet. The Bridge Loan shall bear interest at the rate of six percent (6%) per annum and shall be repayable from the first proceeds under the Loan. If the Loan does not proceed, then the Bridge Loan, if made, will convert to a convertible note that shall continue to bear interest at six percent (6%) per annum and be repaid in one year from its date and be convertible into restricted shares of common stock of the Company at any time at a conversion rate equal to 85% of the average closing price per share of common stock of the Company for the five (5) days preceding the conversion date.

 

As part of the Loan, the Company shall issue to AIC an amount of its shares of common stock as shall equal thirty–five percent (35%) of all of the issued and outstanding shares of common stock of the Company calculated on a fully-diluted basis (the “AIC Shares”); provided, however, that the issuance of the AIC Shares shall not occur until one year from the date of the first funding of the Loan by AIC to the Company. In the event that the Loan or any portion thereof is not funded as scheduled, the Company shall issue only that portion of the AIC Shares to AIC that is calculated as the percentage of the amount of the Loan actually funded by AIC to the total Loan amount. All of the AIC Shares shall be restricted shares and AIC shall enter into a covenant not to engage in any short selling nor to sell more than certain specified numbers of its shares during each quarterly period.

 

There are other conditions to the Loan as follows: (1) AIC shall be given the right to designate up to two directors to the Company’s Board of Directors such appointments to be made in time with the funding of the Loan. (2) AIC and the Company shall enter into a Business Services Development Agreement under which AIC will assist and advise the Company in connection with development of its business under its business plan in effect from time to time. (3) The parties will negotiate and execute certain agreements to reflect all of these transactions including a loan agreement, a secured promissory note, a share issuance and shareholders agreement, a convertible bridge note, a business services development agreement, and such other documents as the parties may mutually agree.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

OVERVIEW

 

Initially in June 2011, we spent time validating our business models for the First Nations project and the My Golf Rewards program. The lack of capital to launch these programs has forced us to curtail our sales and marketing activities and to focus on identifying other opportunities in which we could compete for market share and generate revenue.

 

In 2011, we attempted to acquire Tarsin through the issuance of stock and cash, but due to our inability to obtain capital to complete the acquisition and provide working capital post close, we terminated the acquisition agreement in June 2012. On October 10, 2012, we entered into a licensing agreement with Tarsin for rights to the CAPSA technology. In connection therewith, we acquired exclusive rights to market, sell and service CAPSA in Canada, Mexico, as well as certain customers in the United States. The agreement is for a term of three (3) years, and is subject to a royalty of 12.5% of revenues derived from the CAPSA technology. The agreement specifies an annual license fee of $100,000 and a support fee based an annual turnover. We ultimately wish to expand in Latin America, China and Europe. The Company also retains the “Right of First Negotiation” to enter into markets in the US which do not overlap with the existing contractual relationships that Tarsin has with Stations Casino in Nevada.

 

The licensing agreement with Tarsin will become the keystone in our plans to rebrand ourselves as a leader in the mobile publishing and mobile gaming industry. All of our previous initiatives will be redesigned with the core focus of establishing our reputation for creative solutions in a mobile world. Tarsin is positioned to become a leading developer of mobile gaming on cross platform applications. The CAPSA platform facilitates our ability to develop mobile applications and can be leveraged into many different market verticals. We anticipate that in 2013 we will deliver to market a series of mobile applications in the gaming, entertainment, sports and mobile financial solutions industries.

 

We have been focused on initiating new agreements and commencing pilot projects intended to demonstrate the efficacy of the business model.  The lack of working capital funds has challenged this process and at the end of the fiscal year, we were forced to restructure our affairs.  The outcome of that process included the decision to reduce the number of business opportunities, the termination of all management contracts, and the arrangement with officers, employees, and suppliers to forgive certain indebtedness in September 2012.

 

We have incurred losses since commencing the above initiatives in June 2011 and will likely continue into 2013 until such time we can generate revenues sufficient to meet our cash flows. We have significant liabilities which we acquired through the acquisition of MEXI. We intend to work through reducing or eliminating the remaining liabilities, and to continue to raise additional working capital to meet the demands of Tarsin’s new product offering.

 

On February 6, 2013, the Company entered into a binding term sheet commitment (the “Term Sheet”) for a $30,000,000 funding agreement with AIC Group Holdings Limited, a corporation organized under the laws of the British Virgin Islands (“AIC” or “Funder”). Other than the Term Sheet, there is no other relationship between the registrant and its affiliates and AIC. The financial results of 2011 and 2012 are reflective of an early stage company that has pilot projects only in place but no active programs.  Results for the current year have been impacted by the limited financial resources available.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

We had $54,001 in cash at December 31, 2012. Our working capital deficit amounted to approximately $4.4 million at December 31, 2012.

 

During the six-month period ended December 31, 2012, we used cash in our operating activities amounting to approximately $342,000. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $653,000 adjusted for stock compensation and other non-cash items of approximately $53,000 and operating assets and liabilities of approximately $256,000.

 

The Company used cash from investing activities of approximately $119,000 for license costs and purchase of investment.

 

The Company had positive cash from financing activities, primarily related to the issuance of approximately $534,000 in convertible promissory notes.

 

During the six-month period ended December 31, 2011, we used cash in our operating activities amounting to approximately $342,000. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $355,000 adjusted for stock compensation and other non-cash items of approximately $196,000 and operating assets and liabilities of approximately $209,000.

 

The Company did not have any investing activities.

 

The Company had positive cash from financing activities, primarily related to the issuance of approximately $268,000 in convertible promissory notes.

 

There are no significant commitments for the purchase of capital assets or intangible assets, or for operating leases.

 

Going Concern

 

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States assuming the Company will continue as a going-concern. We have incurred losses since inception and our ability to continue as a going-concern depends upon its ability to continue to raise adequate financing and develop profitable operations. We have a working capital deficit of approximately $4.4 million at December 31, 2012. We are actively targeting sources of additional financing, which would assure continuation of the Company’s operations. The current market conditions and volatility increase the uncertainty of the Company’s ability to continue as a going concern given the need to both curtail expenditures and to raise additional funds. The Company is and has experienced negative operating cash flows and needs to invest in continuing pilot projects and operating partnerships which cannot be met from existing cash balances. The Company will continue to search for new funds and for new collaborative partners for the projects but anticipates that the current market conditions may impact the ability to source such funds. 

 

On February 6, 2013, the Company entered into a binding term sheet commitment (the “Term Sheet”) for a $30,000,000 funding agreement with AIC Group Holdings Limited, a corporation organized under the laws of the British Virgin Islands (“AIC” or “Funder”). Other than the Term Sheet, there is no other relationship between the registrant and its affiliates and AIC. There can be no assurance that we will be able to consummate the funding from AIC, in which case the Company may be unable to meet its obligations. Should the Company be unable to realize on its assets and discharge its liabilities in the normal course of business, we may be forced to sell or assign rights to our technologies. Our consolidated financial statements do not include adjustments to amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations.

 

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RESULTS OF OPERATIONS

 

Three months ended December 31, 2012 versus three months ended December 31, 2011

 

Selling, General, and Administrative Expenses

 

Selling, general, and administrative expenses primarily consist of consultant fees for professional services in connection with maintaining our status as a public company, salaries and wages for our employees, including stock based compensation of approximately $261,000 and $299,000 for the three months ended December 31, 2012 and 2011.

 

The decrease in our selling, general, and administrative expenses during the three-month period ended December 31, 2012 when compared with the similar prior period is primarily attributable to decreased operations and the absence of acquisition activity that was present during the 2011 period.

 

Interest Expense

 

Interest consists of interest payable pursuant to stated rate on interest bearing indebtedness. Interest expense has increased in the most recent period due to increased debt burden.

  

Six months ended December 31, 2012 versus six months ended December 31, 2011

 

Selling, General, and Administrative Expenses

 

Selling, general, and administrative expenses primarily consist of consultant fees for professional services in connection with maintaining our status as a public company, salaries and wages for our employees, including stock based compensation of approximately $458,000 and $527,000 for the six months ended December 31, 2012 and 2011.

 

The decrease in our selling, general, and administrative expenses during the six-month period ended December 31, 2012 when compared with the similar prior period is primarily attributable to decreased operations and the absence of acquisition activity that was present during the 2011 period.

 

Interest Expense

 

Interest consists of interest payable pursuant to stated rate on interest bearing indebtedness. Interest expense has increased in the most recent period due to increased debt burden.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (“Exchange Act”) and are not required to provide the information under this item.

 

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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.

 

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, 2008. The Company has prepared management's report as required.

 

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 4A. 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 December 31, 2012. 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.

 

Attestation Report of Independent Registered Public Accounting Firm

 

An attestation report of our registered public accounting firm regarding internal control over financial reporting is not required as a result of the enactment of the Dodd-Frank Act of 2010.

 

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.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings. None.

 

 

Item 1A. Risk Factors. Not required because we are a “smaller reporting company.”

  

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the three months ended December 31, 2012, the Company had no capital stock transactions.


Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

See list below.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CONSORTEUM HOLDINGS, INC.
     
Dated: February 19, 2013    
     
  By:   /s/Craig A. Fielding
 

Craig A. Fielding

Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer, Principal Financial

Officer and Principal Accounting Officer)

  

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Dated: February 19, 2013

 

Name    Position    Date 
         
/s/Craig A. Fielding   Chief Executive Officer, Chief   February 14, 2013
Craig A. Fielding  

Financial Officer, Chairman of the Board of Directors (Principal Executive Officer, Principal Financial Officer) 

   
         
/s/Patrick Shuster   Director   February 19, 2013
Patrick Shuster        

 

 

 

 

 

 

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EXHIBIT LIST

 

Exhibit No.

 

Description

     
10.1   Term Sheet Agreement for $30 million equity financing
     

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.

     
31.2   Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
     
32.1   Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

 

 

32.2   Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.
     
101.INS   XBRL Instance document
101.SCH   XBRL Schema
101.CAL   XBRL Calculation Linkbase
101.DEF    XBRL Definition Linkbase
101.LAB    XBRL Label Linkbase
101.PRE    XBRL Presentation Linkbase

 

 

 

 

 

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