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EX-31.2 - CERTIFICATION - Consorteum Holdings, Inc.consorteum_10q-3102.htm
EX-32 - CERTIFICATION - Consorteum Holdings, Inc.consorteum_10q-032.htm
EX-31.1 - CERTIFICATION - Consorteum Holdings, Inc.consorteum_10q-3101.htm

 

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, 2015

 

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 Registrant as Specified in its Charter)

 

Nevada   45-2671583
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

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

(Address of Principal Executive Offices)(Zip Code)

 

(888) 603-5161

(Registrant’s Telephone Number, including Area Code)
 

N/A

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [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(check one):

 

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 15, 2015, the Company had 466,150,864 shares of common stock issued and outstanding.

 

Transitional Small Business Disclosure Format (check one): Yes [_] No [X]

 

 

 
 

 

FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q including our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (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).

 

Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include the Company’s limited operating history; its limited financial resources; the success of our fundraising efforts; our ability to meet our obligations, continue as a going concern or realize on our assets, if necessary to meet liabilities; international, national and local general economic and market conditions; demographic changes; our ability to achieve, sustain, manage or forecast growth; our failure to correctly anticipate market trends; our ability to successfully make and integrate acquisitions; raw material costs and availability; risks related to new product development and introduction including our Universal Mobile Interface (UMI); competition including the activities of competitors and the presence of new or additional competition; the failure to gain and/or loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology and obtain and/or maintain key licensing arrangements, including the CAPSA license, joint ventures and partnerships; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

 

Although the forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects. Reference is made to our discussion of Risk Factors in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 on file with the SEC.

 

All 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.

 

 

 
 

 

CONSORTEUM HOLDINGS, INC.

 

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

 

 

TABLE OF CONTENTS

 

   
PART I – FINANCIAL INFORMATION Page
ITEM 1 – FINANCIAL STATEMENTS 3
Condensed Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014 3
Condensed Consolidated Statements of Operations and Comprehensive (Income) Loss (Unaudited) 4
Condensed Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 4 – CONTROLS AND PROCEDURES 15
   
PART II – OTHER INFORMATION  
ITEM 1 – LEGAL PROCEEDINGS 17
ITEM 1A – RISK FACTORS 17
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4 – MINE SAFETY DISCLOSURE 17
ITEM 5 – OTHER INFORMATION 17
ITEM 6 – EXHIBITS 17

 

 

2
 

 

PART I –FINANCIAL INFORMATION

 

CONSORTEUM HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

  March 31, 2015   June 30, 2014 
  (unaudited)     
ASSETS          
Current Assets:          
Cash  $62   $53,993 
Current assets   62    53,993 
Property and equipment, net   10,621    17,886 
Total assets  $10,683   $71,879 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Liabilities and Shareholders' Deficit:          
Bank overdraft  $1,137   $1,137 
Accounts payable   877,374    822,789 
Accrued expenses   663,135    503,739 
Accrued expenses - officers   674,871    446,649 
Accrued expenses - payroll taxes and related penalties and interest   621,664    330,848 
Loan payable, including accrued interest   4,627,942    4,170,081 
Convertible promissory notes, including interest   4,118,785    3,584,303 
Due to stockholders   2,248,936    1,228,326 
Total current liabilities   13,833,844    11,087,872 
           
Stockholders' Deficit:          
Preferred stock, $0.001 par value, 100,000,000 shares authorized          
Preferred stock A, $0.001 par value, 5,000,000 shares designated: 5,000,000 shares issued and outstanding as of March 31, 2015 and June 30, 2014, respectively   5,000    5,000 
Preferred stock B, $0.001 par value, 15,000,000 shares designated: 4,000,000 shares issued and outstanding as March 31, 2015 and June 30, 2014, respectively   4,000    4,000 
Preferred stock C, $0.001 par value, 40,000,000 shares designated: zero shares issued and outstanding as of March 31, 2015 and June 30, 2014, respectively        
Common stock, $0.001 par value, 500,000,000 shares authorized: 466,150,864 shares issued and outstanding as of March 31, 2015 and June 30, 2014, respectively   466,151    466,151 
Collateralized shares issued   (137,500)   (137,500)
Shares committed to be issued   35,000    35,000 
Additional paid-in capital   6,456,563    6,449,271 
Accumulated other comprehensive loss   222,449    (139,864)
Accumulated deficit   (20,874,824)   (17,698,051)
Total stockholders' deficit   (13,823,161)   (11,015,993)
Total liabilities and stockholders' deficit  $10,683   $71,879 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3
 

CONSORTEUM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   Three months ended
March 31,
   Nine Months Ended
March 31,
 
   2015   2014   2015   2014 
                 
Revenues:  $   $   $   $ 
                     
Operating expenses:                    
Selling, General and administration expenses   614,527    571,481    2,008,917    2,003,250 
Total operating expenses   614,527    571,481    2,008,917    2,003,250 
                     
Operating loss   (614,527)   (571,481)   (2,008,917)   (2,003,250)
                     
Other income and (expense):                    
Gain on settlement of debt               119,086 
Interest expense   (577,018)   (213,595)   (1,167,856)   (796,817)
Total other expense, net   (577,018)   (213,595)   (1,167,856)   (677,731)
                     
Net loss   (1,191,545)   (785,076)   (3,176,773)   (2,680,981)
                     
Foreign currency translation adjustment   183,275    99,406    362,313    100,196 
                     
Comprehensive loss  $(1,008,270)  $(685,670)  $(2,814,460)  $(2,580,785)
                     
Basic and diluted loss per common share  $(0.00)  $(0.00)  $(0.00)  $(0.00)
                     
Basic and diluted weighted average common shares outstanding   466,150,864    466,150,864    466,150,864    452,264,003 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4
 

 

CONSORTEUM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the
nine months
ended
March 31, 2015
   For the
nine months
ended
March 31, 2014
 
Cash flows from operating activities:          
Net loss  $(3,176,773)   (2,680,981)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   6,509    8,198 
Gain on forgiveness or restructuring of debt       (119,086)
Amortization of debt discount       35,000 
Stock-based compensation   7,292    78,925 
Changes in operating assets and liabilities:          
Accounts payable   110,393    149,464 
Accrued liabilities   794,587    353,306 
Accrued interest   1,165,617    761,653 
Net cash used in operating activities   (1,092,375)   (1,413,521)
           
Cash flows used in investing activities:          
Deposits       (1,000)
Capital expenditures       (21,655)
Note receivable       (841)
Net cash used in investing activities       (23,496)
           
Cash flows from financing activities:          
Proceeds from loans       395,000 
Proceeds from stockholders' advances   1,111,849    835,932 
Repayment of stockholders' advances   (61,867)   (56,178)
Proceeds from issuance of common stock       75,000 
Proceeds from the issuance of convertible promissory notes       250,000 
Net cash provided by financing activities   1,049,982    

1,499,754

 
           
Effect of exchange rate on cash   (11,538)   13,920 
Net (decrease) increase in cash   (53,931)   76,657 
Cash, beginning of year   53,993    489 
Cash, end of year  $62   $77,149 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $   $ 
Cash paid for income taxes  $   $ 
           
Non-cash investing and financing activities:          
Fair value of beneficial conversion feature on convertible promissory notes  $   $35,000 
Fair value of shares issued for convertible debt and accrued interest  $   $528,500 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5
 

 

CONSORTEUM HOLDINGS, INC.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.         Organization, Business and Going Concern

 

Consorteum Holdings, Inc. ("Holdings" or 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.

 

Holdingshas spent the last three years developing relationships and licensing agreements that will enable us to participate in the emerging market of mobile gaming. We intend to build our company with the capabilities to deliver rich mobile content to end users who will use their smart phones in radical new ways. In July 2013 the Company made a decision to recast its business as a provider of digital content across mobile devices. In conjunction therewith, the Company formed two new Nevada subsidiaries: Bad Rabbit Inc. and ThreeFiftyNine Inc. (359) and hired a senior level software development team that had previously designed the world’s first regulatory compliant mobile platform for delivery of gaming content originally known as CAPSA, which met the rigorous standards of the Nevada Gaming Board. CAPSA represents the first generation software delivery platform for mobile devices. Moving forward, ThreeFiftyNine aims primarily at securely delivering rich mobile content across mobile devices as well as delivering diverse payment and other transactional platforms that are rapidly converging due to advances in smart phone mobile technology. ThreeFiftyNine intends to be a highly differentiated business in the digital space, focusing on cloud infrastructure design, development and deployment, as well as in digital transaction management.

 

The development team that we hired had spent the past five years and millions of dollars in non-recurring engineering costs to complete the development of the platform. At the heart is the capability to deliver any digital content across any cellular network to any mobile device or smart phone. This key differentiator makes it possible for us to approach many different markets that are in the business of providing mobile connectivity and mobile content.

 

In October 2012, we secured a license to market and license the CAPSA technology from Tarsin Inc. (“Tarsin”). The licensing agreement provided 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. The Tarsin license provided us with capabilities in the mobile handset market which we could use to ensure cross functionality of mobile applications across a wide variety of handsets. Subsequently, Tarsin Inc. filed a voluntary petition for bankruptcy protection in the U.S. Bankruptcy Court, Northern District of California. The Company was a creditor in this Case No. 13-53607. In resolving the bankruptcy case, NYG Holdings LLC (“NYG”) acquired the original intellectual property from Tarsin Inc., which included the first generation CAPSA platform. On June 12, 2014, the Company entered into an agreement to enter into a multi-year license agreement for the CAPSA platform with NYG. This license, which is effective October 20, 2014, grants latitude to the Company to make modifications and further enhancements to the platform, which will be marketed as the Universal Mobile Interface (“UMI”). We intend to initially introduce the UMI platform into the market utilizing branded partnership relationships in the mobile sports betting and casino gaming verticals. The multi-year license agreement is for five years and is thereafter renewable annually. The Company is responsible to pay royalties fees of 10% of net revenues plus $100,000 annually. However, the first 18 months of the agreement will be royalty free and the first three years of annual payments waived.

 

The UMI, which our team is developing, will be a second generation platform and will represent a key advantage for our Company as we enter into the mobile gaming market as the UMI allows content providers the ability to develop content once, while the UMI platform identifies the mobile device and delivers the proper display format for that mobile device. Without a universal platform, content providers must reprogram their mobile application each time they update or add to their content; or the mobile device operating system is updated. We intend to initially introduce the UMI platform into the market utilizing branded partnership relationships in the mobile sports betting and casino gaming verticals.

 

6
 

 

Going Concern and Management Plan

 

The Company's 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 has suffered losses from operations. As of March 31, 2015, the Company had a working capital deficit (current liabilities in excess of current assets) of approximately $13.8 million. The Company's working capital deficit and recent losses raise substantial doubt as to its ability to continue as a going concern.

 

The Company has secured net working capital of approximately $1,050,000 during the nine months ended March 31, 2015. Subsequent to such date, the Company has raised additional capital totaling approximately $197,000; such proceeds were used for working capital of the business. The Company requires additional equity or debt financing to meet its 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 overdue and is secured by all assets of the Company. The Company is attempting to restructure some of the debt and secure cash from an executed capital raise agreement and additional financing partners to satisfy its existing obligations and provide for sufficient working capital to meet the Company’s future obligations but there are no guarantees that the Company will be able to do any of these things.

 

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.

 

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. Set forth below are the Company's significant accounting policies:

 

Basis of Presentation

The foregoing unaudited condensed 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, 2014. 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 as required by Regulation S-X, Rule 10-01. Operating results for the nine-month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015.

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Consorteum Holdings, Inc., Consorteum Inc., Bad Rabbit, Inc. and ThreeFiftyNine, Inc.; ThreeFiftyNine, Inc. had very few activities during the year. 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 to the estimated the utilization of future income tax assets, potential penalties on certain wages, and 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.

 

7
 

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 are 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 20,000,000 options and 3,172,184 warrants from the calculation for the nine months ended March 31, 2015 and 2014, 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.

 

Recent accounting pronouncements 

In May 2014, the FASB issued new accounting guidance regarding revenue recognition under GAAP. This new guidance will supersede nearly all existing revenue recognition guidance, and is effective for public entities for annual and interim periods beginning after December 31, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of this new guidance on the Company’s consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements—Going Concern”, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. Management is still in the process of assessing the impact of ASU 2014-15 on the Company’s consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

3.          Accrued Expenses

 

The Company's accrued expenses are as follows:

 

   March 31,
2015
   June 30,
2014
 
Salaries, wages and benefits –officers  $674,871   $446,649 
Salaries, wages, and benefits – non-officers   52,177    46,612 
Payroll taxes and related penalties and interest   621,664    330,848 
Professional services   559,002    400,151 
Other   51,956    56,976 
           
Total accrued expenses  $1,959,670   $1,281,236 

 

The Company has been delinquent in reporting and remitting wages paid subject to withholding of Federal and state income taxes. The Company may be subject to penalties and interest if such taxes are not properly reported and remitted in a timely manner. The Company has estimated such penalties and interest as indicated above.

 

8
 

As of March 31, 2015, the Company owed Mr. Osborne, a key consultant, $100,000 for services rendered. Mr. Osborne and the Company have agreed to the settlement of this debt in exchange for the issuance of 10,000,000 shares of the Company’s common stock. The transaction was approved by the Board in June 2014, however, the shares have yet to be issued.

 

4.         Loans Payable and Convertible Promissory Notes

 

Loans payable are as follows:

 

   March 31,   June 30, 
   2015   2014 
           
Loans payable, bearing interest at rates between 0% and 18% per annum with default interest up to 24% per annum. Interest payable monthly. These loans are past due, unsecured and payable on demand. Accrued interest of $1,872,778 and $1,335,769 at March 31, 2015 and June 30, 2014, respectively. Certain of these notes totaling $320,000 and $1,490,000 incurred flat fees of 15% upon issuance during fiscal 2014 and 2013, respectively.  $4,627,942   $4,170,081 
Less: Current portion   (4,627,942)   (4,170,081)
Loans payable, non-current  $   $ 

 

Convertible Promissory Notes are as follows:

 

   March 31,   June  30, 
   2015   2014 
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 at March 31, 2015 and June 30, 2014 of $436,118 and $317,253, respectively. These notes were convertible upon the merger that occurred in July 2011.  $1,404,729   $1,357,905 
           
Convertible promissory notes, bearing interest between 5% and 18% per annum, which matured between October 2010 and March 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 each at a rate ranging from $0.008 to $0.05 or at 35% discount of market. Accrued interest of $150,822 and $115,130 March 31, 2015 and June 30, 2014, respectively. The notes are substantially in default at June 30, 2012.   580,658    559,216 
           
 
Convertible promissory notes, bearing interest at 5% per annum, maturing October 2012 to May 2013. Interest payable monthly. The note is 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 40,764 and $39,769 at March 31, 2015 and June 30, 2014, respectively.
   115,264    114,269 
           
Convertible promissory notes, bearing interest at 8-12% per annum plus 2% default interest per month as applicable, maturing August 2012 to December 2013. Interest payable monthly. These notes are convertible at any time at the option of the holder, into shares of common stock at a rate of $0.02-$0.03 each. Accrued interest of $860,383 and $395,162 at March 31, 2015 and June 30, 2014, respectively.   2,018,134    1,552,913 
           
Convertible promissory notes  $4,118,785   $3,584,303 

 

9
 

Loans Payable

 

The Company issued 40,000,000 shares of its common stock to satisfy obligations under certain loans payable aggregating approximately $528,500 during fiscal 2014. There were no such issuances in fiscal 2015. 

 

During fiscal 2013, the Company received approximately $2,000,000 in cash proceeds from an existing note holder with the intent to establish an all encompassed promissory note for the primary lender and provide for additional advances to the Company. On July 17, 2013, the Company memorialized the loans made by the primary lender to provide for repayments in an aggregate amount of approximately $3,557,000, of which $2,957,000 was outstanding as of June 30, 2013. As of June 30, 2014, this primary lender principle loan balance was approximately $4,287,000.

 

These repayment amounts include interest of either 15% or 10% over the term of the note and a default rate of 2% per month. Certain of these notes incur compounding interest. Of the total amount $250,000 is convertible into 1 million shares of Series B Preferred stock as noted above. A portion of these repayments also include fixed fee charges in the amount of $135,000 payable upon issuance of the loan, of which $85,000 was payable at June 30, 2013. As of this date, the Company has been unable to satisfy the repayment obligation.

 

Included in the note payable memorialized on July 17, 2014 was $250,000 in additional monies advanced during fiscal 2014. The same shareholder advanced an additional $70,000 through separate notes during fiscal 2014 with the same terms as the notes above. Maturity dates on these additional notes ranged from October to November 2013.

 

As of March 31, 2015, the Company owes this individual approximately $3,003,065 pursuant to convertible notes and notes payable, along with approximately $2,283,000 accrued interest thereon.

 

Convertible Promissory Notes

 

During the year ended June 30, 2014, the Company issued a convertible note to an existing shareholder in the amount of $250,000. The convertible note incurred a flat 10% interest and was due August 30, 2013 at which time a default interest was applied of 2% per month. The convertible note is convertible into 1 million shares of Series B preferred stock. To date, no amounts have been repaid on this note and it is in technical default.

 

The Company recognized interest expense of approximately $577,000, $214,000, $1,168,000 and $797,000 during the three and nine months ended March 31, 2015 and 2014, respectively, in connection with all loans, convertible promissory notes, and financing costs.

 

5.         Related Party Transactions

 

The amounts due to stockholders include non-interest bearing, unsecured advances with no fixed terms of repayment and the note entered into May 30, 2012 as described below. Stockholders advanced the Company approximately $1,112,000 and $836,000 during the nine months ended March 31, 2015 and 2014, and were repaid approximately $62,000 and $56,000 during the same time periods, respectively, inclusive of the convertible note below.  As of March 31, 2015, the net balance due to stockholders for advances amounted to approximately $2,248,936 and is included in due to stockholders.

 

Included in Media Exchange Group Convertible Notes above, is approximately $152,000 in notes that are due to our COO.

10
 

 

6.          Commitments and Contingencies

 

Threatened Litigation

The Company is not aware of any threatened litigation at this time.

 

Employment Agreements

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:

 

Base salary of $240,000
Reimbursed office expense of $5,000 per month;
Unspecified pension and compensation retirement plan; and
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.

 

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

 

Base salary of $240,000
Reimbursed office expense of $5,000 per month.
Unspecified pension and compensation retirement plan; and
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.

 

Other Matters 

 

As of the 2014 fiscal year end, the Company was a creditor in two related bankruptcy cases in the U.S. Bankruptcy Court, Northern District of California (“Court”). The Company filed proofs of claim and submitted an administrative expense claim for critical support services rendered to debtors in both In re Game2Mobile, Case No. 13-52062 and In re Tarsin, Inc. Case No. 13-53607. On or about June 10, 2014, the Court approved the debtors’ motion to sell substantially all of their assets to NYG Holdings, LLC (“NYG”) and a related motion to approve a compromise of controversy with Tarsin (Europe) LTD., the largest unsecured creditor in these bankruptcy cases. As related to the sale, the Company negotiated a settlement with NYG whereby, among other things, NYG would grant the Company a new license for the CAPSA platform and the Company would withdraw its claims in the bankruptcy cases upon receipt of the license with NYG.

 

On June 12, 2014, the Company entered into an agreement to enter into a multi-year license agreement for the CAPSA platform with NYG. This license, which is effective October 20, 2014, grants latitude to the Company to make modifications and further enhancements to the platform, which will be marketed as the Universal Mobile Interface. We intend to initially introduce the UMI platform into the market utilizing branded partnership relationships in the mobile sports betting and casino gaming verticals. The multi-year license agreement is for five years and is thereafter renewable annually. The Company is responsible to pay royalties fees of 10% of net revenues plus $100,000 annually. However, the first 18 months of the agreement will be royalty free and the first three years of annual payments waived.

 

7.          Stockholders’ Deficit

 

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 187,000,000 shares of common stock under convertible notes, warrants and stock options became due as of June 30, 2015, the Company would not have sufficient authorized common shares to fulfill such obligations. However, the Company’s 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. The Company intends to increase our authorized common shares in the near future.

 

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Preferred Stock

 

As of March 31, 2015, the Company has 100,000,000 preferred shares authorized, having a par value of $.001 per share.

 

Of the preferred shares authorized, 5,000,000 have been designated as Series A preferred shares and 15,000,000 have been designated as Series B preferred shares. 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 consist of voting rights equal to one vote per share held, conversion rights equal to Series A and liquidation preference as described below.

 

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.

 

Common Stock

 

The Company is proposing an increase in the authorized number of shares of common stock available for future issuance in order to have shares available for a variety of corporate purposes including the conversion to common stock of outstanding convertible notes. The Company’s Articles of Incorporation authorize it to issue up to 500,000,000 shares of common stock, par value $.001 per share. The Company does not propose to increase our authorized preferred stock, which will remain unchanged. In August 2013, the Company filed a PREFORM 14C with the SEC to increase the authorized shares of its common stock to 750 million. The Company will be finalizing and filing that document in the near future and then notifying shareholders as required and changing our Articles of Incorporation to reflect the additional shares. Once this process is complete the Company will have sufficient common shares to convert existing note holders.

 

Warrants

 

There were no warrants issued to purchase common stock during the nine months ended March 31, 2015. As of March 31, 2015, there were warrants exercisable for 3,172,184 shares of common stock.

 

Options

 

On September 1, 2011, the Company granted 20,000,000 stock options to directors and officers of the Company, pursuant to the stock option plan established by the Company. One fourth of the options vested immediately, with one quarter vesting on each anniversary thereafter. The options are exercisable at $0.007 per share and have a ten-year contractual life. The grant date fair value of these options was determined to be $140,000 at the date of grant.

 

At March 31, 2015, there is no remaining unrecognized expense associated with the issuance of these stock options, which will be recognized during fiscal 2015.

 

Stock option expense related to these options was approximately $7,292 and $13,125 during the nine months ended March 31, 2015 and 2014. Stock option expense for all stock options during the nine months ended March 31, 2015 and 2014 was approximately $7,292 and $78,925, respectively.

 

As of March 31, 2015, 20,000,000 options were outstanding with 20,000,000 exercisable.

  

 

8.          Subsequent Events

 

From April 1, 2015 until May 12, 2015 the Company received an advance from the CEO of the Company in the amount of $197,000.

 

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

 

OVERVIEW

  

Consorteum Holdings, Inc. ("Holdings" or 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.

 

Holdings has spent the last three years developing relationships and licensing agreements that will enable us to participate in the emerging market of mobile gaming. We intend to build our company with the capabilities to deliver rich mobile content to end users who will use their smart phones in radical new ways. In July 2013 the Company made a decision to recast its business as a provider of digital content across mobile devices. In conjunction therewith, the Company formed two new Nevada subsidiaries: Bad Rabbit Inc. and ThreeFiftyNine Inc. (359) and hired a senior level software development team that had previously designed the world’s first regulatory compliant mobile platform for delivery of gaming content originally known as CAPSA, which met the rigorous standards of the Nevada Gaming Board. CAPSA represents the first generation software delivery platform for mobile devices. Moving forward, ThreeFiftyNine aims primarily at securely delivering rich mobile content across mobile devices as well as delivering diverse payment and other transactional platforms that are rapidly converging due to advances in smart phone mobile technology. ThreeFiftyNine intends to be a highly differentiated business in the digital space, focusing on cloud infrastructure design, development and deployment, as well as in digital transaction management.

 

The development team that we hired had spent the past five years and millions of dollars in non-recurring engineering costs to complete the development of the platform. At the heart is the capability to deliver any digital content across any cellular network to any mobile device or smart phone. This key differentiator makes it possible for us to approach many different markets that are in the business of providing mobile connectivity and mobile content.

 

 In October 2012, we secured a license to market and license the CAPSA technology from Tarsin Inc. (“Tarsin”). The licensing agreement provided 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. The Tarsin license provided us with capabilities in the mobile handset market which we could use to ensure cross functionality of mobile applications across a wide variety of handsets. Subsequently, Tarsin Inc. filed a voluntary petition for bankruptcy protection in the U.S. Bankruptcy Court, Northern District of California. The Company was a creditor in this Case No. 13-53607. In resolving the bankruptcy case, NYG Holdings LLC (“NYG”) acquired the original intellectual property from Tarsin Inc., which included the first generation CAPSA platform. On June 12, 2014, the Company entered into an agreement to enter into a multi-year license agreement for the CAPSA platform with NYG. This license, which is effective October 20, 2014, grants latitude to the Company to make modifications and further enhancements to the platform, which will be marketed as the Universal Mobile Interface (“UMI”). We intend to initially introduce the UMI platform into the market utilizing branded partnership relationships in the mobile sports betting and casino gaming verticals. The multi-year license agreement is for five years and is thereafter renewable annually. The Company is responsible to pay royalties fees of 10% of net revenues plus $100,000 annually. However, the first 18 months of the agreement will be royalty free and the first three years of annual payments waived.

 

The UMI, which our team is developing, will be a second generation platform and will represent a key advantage for our Company as we enter into the mobile gaming market as the UMI allows content providers the ability to develop content once, while the UMI platform identifies the mobile device and delivers the proper display format for that mobile device. Without a universal platform, content providers must reprogram their mobile application each time they update or add to their content; or the mobile device operating system is updated. We intend to initially introduce the UMI platform into the market utilizing branded partnership relationships in the mobile sports betting and casino gaming verticals.

 

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We have continued to incur losses for the periods presented. We expect to incur losses until the Company can generate revenues sufficient to cover its operating costs. The Company will need to continue to raise additional working capital to develop its business initiatives until they turn profitable.

 

We have significant liabilities which we acquired through the acquisition of MEXI and through the development of our business and the raising of working capital through loans and notes. We intend to work through reducing or eliminating our liabilities, and to continue to raise additional working capital to meet the demands of the Company’s new product offerings.

 

The Company’s funding commitments have not yet materialized and there can be no assurance that we will raise any of the financing we need. The financial results for the quarters presented are reflective of an early stage company that has pilot projects only in place but no active programs. Results for the periods presented have been impacted by the limited financial resources available.

 

See “Forward Looking Statements” on the first page of this Report.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We had $62 in cash at March 31, 2015.  Our working capital deficit amounted to approximately $13.8 million at March 31, 2015.

 

During the nine-month period ended March 31, 2015, we used cash in our operating activities amounting to approximately $1,092,000. Our cash used in operating activities was comprised of our net loss from continuing operations of approximately $3,177,000 adjusted accrued interest of approximately $1,166,000 and other accounts payable and accrued liabilities of approximately $905,000.

 

The Company did not use nor were provided cash from investing activities.

 

The Company had positive cash of approximately $1,050,000 from financing activities, all of which related to net proceeds from stockholder advances.

 

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

 

Going Concern

 

 We have suffered losses since inception, and at March 31, 2015, we have a working capital deficit of approximately $13.8 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

We have secured net working capital of approximately $1,050,000 during the nine months ended March 31, 2015. 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.

 

There can be no assurance that we will be able to continue to raise funds 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. 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.

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Results of Operations

 

Selling, General, and Administrative Expenses

 

Selling, general, and administrative expenses primarily consist of salaries and wages for our employees, including stock based compensation, along with professional fees and service fees in connection with maintaining our status as a public company.

 

The increase in our selling, general, and administrative expenses during the nine-month period ended March 31, 2015 when compared with the prior period is primarily attributable to an increase in services of approximately $60,000

 

Interest Expense

 

Interest consists of interest payable at stated rates on interest bearing indebtedness.

 

The increase in interest expense during the nine month period ended March 31, 2015 when compared with the prior period is primarily due to compounding of interest on unpaid balances related to the notes outstanding to the company’s principal debt holder.

 

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, as amended (the “Exchange Act”) and are not required to provide the information under this item.

 

Item 4. Controls and Procedures.

 

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act ) 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.

 

Evaluation of Disclosure Controls and Procedures.

As of March 31, 2015, the end of the period covered by this report, we conducted, under the supervision and with the participation of our management, including our Chief Executive and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act ) in ensuring that information required to be disclosed by us in our reports is recorded, processed, summarized and reported within the required time periods. Based on the foregoing, the Chief Executive and Chief Financial Officer concluded that because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of March 31, 2015.

 

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, 2015. We identified the following material weaknesses in our internal control over financial reporting:

 

  o While there were internal controls and procedures in place that relate to financial reporting and the prevention and detection of material misstatements, these controls did not meet the required documentation and effectiveness requirements and therefore, management could not certify that these controls were correctly implemented. As a result, it was management’s opinion that the lack of documentation warranted a material weakness in the financial reporting process.

 

  o There is lack of segregation of duties in financial reporting, as one consultant performs our financial reporting and all accounting functions. This weakness is due to our lack of working capital to hire additional staff during the period covered by this report.

 

 

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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.

 

 See Note 7 – Other Matters.

 

Item 1A. Risk Factors.

 

See the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014.

 

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

 

During the nine months ended March 31, 2015, the Company had no capital stock transactions.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosure

 

Not Applicable

 

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: May 15, 2015 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.

 

 

 

 

Name    Position    Date 
         
/s/Craig A. Fielding   Chief Executive Officer and Chief   May 15, 2015
Craig A. Fielding  

Financial Officer

(Principal Executive Officer,

Principal Financial Officer and Principal Accounting Officer) 

   
         
/s/Patrick Shuster   Director   May 15, 2015
Patrick Shuster        

 

 

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EXHIBIT LIST

 

Exhibit No.

 

Description
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 Certification of Chief Executive Officer and Chief Financial Officer 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 Document
101.CAL* XBRL Calculation Linkbase Document
101.DEF* XBRL Definition Linkbase Document
101.LAB* XBRL Label Linkbase Document
101.PRE* XBRL Presentation Linkbase Document

 

* Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Quarterly Report on Form 10-Q.

 

 

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