U.S. SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2016

 

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: 000-49648

 

NIGHTCULTURE, INC.

 (Exact Name of Registrant as Specified in Its Charter)

 

Nevada

73-1554122

(State of Incorporation)

(IRS Employer Identification No.)

6400 Richmond Avenue, Houston, TX

77057

(Address of Principal Executive Offices)

(Zip Code)

 

(832) 535-9070 

(Registrant's Telephone Number)

 

Indicate by check mark whether the Registrant (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 Registrant 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 (§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 file, non-accelerated filer, or a smaller reporting company.

 

Large Accelerated Filer

¨

Non-accelerated Filer

¨

Accelerated Filer

¨

Smaller reporting company

x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of May 16, 2016, the Registrant had 99,999,990 shares of common stock issued and outstanding .

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statement

Unaudited Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

3

Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

4

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

5

Notes to Unaudited Consolidated Financial Statements

6

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

14

Item 4.

Controls and Procedures

14

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

15

Item 1A.

Risk Factors

15

Item 2.

Unregistered Sales of Equity and Use of Proceeds

15

Item 3.

Default upon Senior Securities

15

Item 4.

Mine Safety Information

15

Item 5.

Other Information

15

Item 6.

Exhibits

16

SIGNATURES

 

17

 

 
2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENT

 

NIGHTCULTURE, INC.  

CONSOLIDATED BALANCE SHEETS  

(Unaudited)

 

 

 

March 31,

2016

 

 

December 31,

2015

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash

 

$ 133,679

 

 

$ 13,865

 

Receivables

 

 

57,659

 

 

 

35,409

 

Inventory

 

 

6,000

 

 

 

2,640

 

Other current assets

 

 

4,408

 

 

 

3,258

 

Total current assets

 

 

201,746

 

 

 

55,172

 

 

 

 

 

 

 

 

 

 

Fixed assets, net of accumulated depreciation of $169,605 and $140,223, respectively

 

 

381,152

 

 

 

401,522

 

Intangible assets, net of accumulated amortization of $150,680 and $140,856, respectively

 

 

245,656

 

 

 

255,480

 

 

 

 

 

 

 

 

 

 

Total assets

 

$ 828,554

 

 

$ 712,174

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expense

 

$ 2,038,444

 

 

$ 2,209,578

 

Accrued Interest

 

 

6,650

 

 

 

--

 

Deferred income

 

 

942

 

 

 

942

 

Accrued salary - related parties

 

 

170,685

 

 

 

170,685

 

Advances - related parties

 

 

--

 

 

 

1,190

 

Derivative liabilities

 

 

981,330

 

 

 

1,005,429

 

Notes payable

 

 

426,826

 

 

 

269,333

 

Short term lease obligation

 

 

31,731

 

 

 

31,731

 

Convertible debt

 

 

531,387

 

 

 

531,387

 

Total current liabilities

 

 

4,187,995

 

 

 

4,220,275

 

Long term liabilities:

 

 

 

 

 

 

 

 

Long term lease obligation

 

 

40,414

 

 

 

47,258

 

Total liabilities

 

 

4,228,409

 

 

 

4,267,533

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 issued and outstanding

 

 

--

 

 

 

--

 

Common stock, $0.001 par value; 500,000,000 shares authorized; 99,999,990 issued and outstanding

 

 

100,000

 

 

 

100,000

 

Additional paid-in capital

 

 

6,024,573

 

 

 

6,024,573

 

Accumulated deficit

 

 

(9,524,428 )

 

 

(9,679,932 )

Total stockholders' deficit

 

 

(3,399,855 )

 

 

(3,555,359 )

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' deficit

 

$ 828,554

 

 

$ 712,174

 

 

  The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 
3
 

 

NIGHTCULTURE, INC.  

CONSOLIDATED STATEMENTS OF OPERATIONS  

(Unaudited)

Three Months Ended
March 31,

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

Revenue

 

$ 1,464,999

 

 

$ 1,170,084

 

Direct costs

 

 

778,779

 

 

 

686,331

 

Gross profit

 

 

686,220

 

 

 

483,753

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39,206

 

 

 

27,444

 

General and administrative expenses

 

 

494,144

 

 

 

561,441

 

Total operating expenses

 

 

533,350

 

 

 

588,885

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

152,870

 

 

 

(105,132 )

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(21,465 )

 

 

(53,680 )

Gain on change in fair value of derivative liabilities

 

 

24,099

 

 

 

955,266

 

Total other income

 

 

2,634

 

 

 

901,586

 

 

 

 

 

 

 

 

 

 

Net income

 

$ 155,504

 

 

$ 796,454

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share: Basic

 

$ 0.00

 

 

$ 0.01

 

Net (loss) income per share: Diluted

 

$ 0.00

 

 

$ (0.00 )

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

99,999,990

 

 

 

65,958,931

 

Diluted

 

 

384,032,647

 

 

 

103,120,033

 

 

  The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 
4
 

 

NI GHTCULTURE, INC.  

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$ 155,504

 

 

$ 796,454

 

Adjustments to reconcile net income to net cash used in

 

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39,206

 

 

 

27,444

 

Amortization of debt discounts

 

 

--

 

 

 

33,993

 

Gain on change in fair value of derivative liabilities

 

 

(24,099 )

 

 

(955,266 )

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(22,250 )

 

 

700

 

Inventory

 

 

(3,360 )

 

 

14,178

 

Accrued salaries to related parties

 

 

--

 

 

 

48,000

 

Deferred revenue

 

 

--

 

 

 

26,021

 

Other current assets

 

 

(1,150 )

 

 

--

 

Accounts payable and accrued expense

 

 

(164,484 )

 

 

(60,934 )

Net cash used in operating activities

 

 

(20,633 )

 

 

(69,410 )

 

 

 

 

 

 

 

 

 

Cash flows used in investing activities

 

 

 

 

 

 

 

 

Cash paid for fixed assets

 

 

(9,012 )

 

 

--

 

Net cash used in investing activities

 

 

(9,012 )

 

 

--

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Advances from related parties

 

 

--

 

 

 

50,000

 

Repayments of related party advances

 

 

(1,190 )

 

 

(2,381 )

Proceeds on notes payable

 

 

200,000

 

 

 

--

 

Repayments of notes payable

 

 

(42,507 )

 

 

--

 

Repayments of lease obligation

 

 

(6,844 )

 

 

(18,947 )

Net cash flows provided by financing activities

 

 

149,459

 

 

 

28,672

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

119,814

 

 

 

(40,738 )

Cash – beginning of period

 

 

13,865

 

 

 

64,293

 

Cash – end of period

 

$ 133,679

 

 

$ 23,555

 

 

 

 

 

 

 

 

 

 

SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Interest paid

 

$ 14,815

 

 

$ 14,421

 

Income taxes paid

 

 

--

 

 

 

--

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

 

 
5
 

 

NIGHTCULTURE, INC.  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

(Unaudited)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

NightCulture, Inc. (the "Company") is incorporated under the laws of the State of Nevada. The Company operates in the event promotion business.

 

The Company was originally incorporated as Texxon, Inc. on October 6, 1998, under the laws of the State of Oklahoma. From inception until 2011, the Company pursued various business plans under multiple names, made an acquisition pursuant to a share exchange and carried out multiple reverse stock splits. From March 2009 until July 31, 2011, the Company operated under the name XXX Acquisition Corp and conducted no operations other than seeking a business to acquire. Since completion of an exchange in July 2011, the Company has been engaged in the event promotion business. In August 2011, the Company changed its name to NightCulture, Inc. and carried out an 8-for-1 forward stock split. In May 2012, the Company acquired Stereo Live, a related event venue operator, as a wholly-owned subsidiary. In September 2012, the Company acquired the assets of Full Access, an event promotion operator in Dallas, Texas.

 

On January 30, 2016 the Company formed a wholly owned subsidiary Stereo Live Dallas, LLC. The Company was formed for the purpose of leasing a venue in Dallas, TX. The subsidiary is consolidated into the financials of the parent NightCulture, Inc.

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year end December 31, 2015 as reported on Form 10-K, have been omitted.

 

Basic and Diluted Earnings (Loss) per Share

 

The Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per share are computed by dividing income (loss) available to common stockholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The dilutive effect of the outstanding warrants for the three months ended March 31, 2016 and 2015 was 18,339,157 and 10,647,581 shares, respectively. The dilutive effect of the outstanding convertible for the three months ended March 31, 2016 and 2015 was 265,693,500 and 26,513,521 shares, respectively.

 

 
6
 

 

NOTE 2 – GOING CONCERN

 

As shown in the accompanying financial statements, the Company has negative working capital of $3,986,249 and an accumulated deficit of $9,524,428 as of March 31, 2016. The Company's ability to generate net income and positive cash flows is dependent on the ability to grow its operations as well as the ability to raise additional capital. Management is following strategic plans to accomplish these objectives, but success is not guaranteed. These factors raise substantial doubt about the Company's ability to continue as a going concern. The 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 outcome of this uncertainty.

 

NOTE 3 – DERIVATIVE INSTRUMENTS

 

During 2012 the Company issued instruments that require liability classification under ASC 815. These instruments are measured at fair value at the end of each reporting period.

 

As defined in FASB ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

Level 1 -

Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 -

Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 -

Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.

 

 
7
 

 

The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value as March 31, 2016 and December 31, 2015:

 

Recurring Fair Value Measures

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities as of March 31, 2016

 

 

--

 

 

 

--

 

 

$ 981,330

 

 

$ 981,330

 

Derivative liabilities as of December 31, 2015

 

 

--

 

 

 

--

 

 

$ 1,005,429

 

 

$ 1,005,429

 

 

The below table represents the change in the fair value of the derivative liabilities during the nine months ended March 31, 2016:

 

Fair value of derivatives, December 31, 2015

 

$ 1,005,429

 

Change in fair value of derivative liability

 

 

(24,099 )

Fair value of derivatives, March 31, 2016

 

$ 981,330

 

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

During the year ended December 31, 2015 the Company received a loan from a director of the Company of $50,000. The loan is payable over 42 weekly payments of $1,547.62 per week. The Company made payments of $1,190 towards the loan during the three months ended March 31, 2016. As of March 31, 2016 the loan was paid in full.

 

As of March 31, 2016 and December 31, 2015, the Company had accrued salaries owed to related parties of $170,685 and $170,685, respectively.

 

NOTE 5 – DEBT

 

Notes Payable

 

On September 1, 2015 the Company issued a note payable for $301,826 which matures on September 1, 2018. The note bears an interest rate of 5% per annum and is secured by the fixtures and equipment of the Company and guaranteed by the principals of the Company. Effective October 1 2015, the Company will make 36 monthly payments of $9,055.91, which includes principal and interest is payable to the note holder. The Company must maintain a debt coverage ratio of 1:25 to 1 on a trailing four quarter basis. The debt coverage ratio is defined as the net income of the Company less any gains or losses of derivatives divided by the principal and interest payments made or to be made during the period being measured. As of March 31, 2016, the Company is not in compliance with the debt coverage ratio requirement. When the note becomes in default, the interest rate will increase to the lesser of 18% per annum or the maximum rate permitted by law. During the three months ended March 31, 2016, the Company made $27,168 payment under the note, including $22,782 principal and $4,386 interest. As of March 31, 2016 the balance due on the note was $246,551, which was presented as short term notes payable on the face of balance sheets due to the Company's default on the debt coverage ratio.

 

On February 25, 2016 the Company's subsidiary, Stereo Live, opened a $200,000 Merchant loan with American Express. Under the terms of the loan Stereo Live paid an 8% loan fee and will repay the note at the rate of $18,000 per month for 12 months for total repayments of $216,000.The interest rate of the debt is 15% per year and the note is due by February, 24, 2017. During the three months ended March 31, 2016, the Company made $19,725 towards the principal. As of March 31, 2016 the outstanding balance due on the note was $180,275.

 

 
8
 

 

Convertible Debentures

 

On September 12, 2012 the Company issued $500,000 of convertible debentures maturing on September 11, 2015. The 2012 Debentures accrue interest at 5% per annum with a default rate of 12% per annum. The 2012 Debentures are convertible into common stock of the Company at 50% of the average closing price of the 20 day trading price ending prior to the date of conversion into the Company common stock. On December 28, 2015 the debenture was amended extending the maturity date to December 31, 2016. As of March 31, 2016 and December 31, 2015, the outstanding principal balance under this convertible debt was $531,287 and $531,287, respectively. See note 2 for derivative accounting.

 

Lease Obligations

 

On July 2, 2014, Stereo Live, a subsidiary of the Company, entered into credit line facility and three equipment leases. The terms of the credit facilities and leases are as follows:

 

 

·

An equipment lease of $32,799.75 payable over 48 months at $1,024.47 per month for total payment of $49,174.56 including the principal amount of $32,799.75 and interest of $16,374.81.

 

·

An equipment lease of $58,942 payable over 48 months at $1,780.05 per month for total payment of $85,442.40 including the principal amount of $58,942 and interest of $26,500.40;

 

·

An equipment lease of $32,250 payable over 44 months at $1,092.23 per month for total payments of $48,058.12 including the principal amount of $32,250 and interest of $15,808.12.

 

The Company had accounted for the above transaction under ASC 640 - 30 "Capital Leases". The Company has made payment of $6,844 toward the principal balance during the three months ended March 31, 2016. As of March 31, 2016 the balance due on the leases was $72,145, with $31,731 recorded as short term lease obligations and the balance of $40,414 recorded as long term lease obligations.

 

The note and the leases are personally guaranteed by principals of the Company.

 

 
9
 

 

NOTE 6 - COMMITMENTS AND CONTINGENCIES

 

On March 1, 2016 a subsidiary of the Company (Stereo Live) sign a five year lease for a 14,000 square foot venue at 2711 Storey Dallas, TX. Under the terms of the lease the monthly cost including rent, taxes and insurance is approximately $14,600 per month. The lease is guaranteed by the officers and director for the first two years of the lease. The Company has a one year option to purchase the building

 

NOTE 7 - WARRANTS

 

As of March 31, 2016, the Company had 25,000,000 warrants outstanding entitling the holder to purchase up to 25,000,000 shares of the Company common stock at 50% of the average closing price of the 20 day period ending one day prior to exercising the warrants. The warrant holder may exercise these warrants on or before December 31, 2016. See note 2 for derivative accounting.

 

The following table summarizes the warrant activity during the nine months ended March 31, 2016:

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Number of

 

 

 

 

 

 

 

 

 

Exercise

 

 

Contract

 

 

Warrants

 

 

Intrinsic

 

 

 

Warrants

 

 

Price

 

 

Life

 

 

Exercisable

 

 

Value

 

Outstanding and exercisable at December 31, 2015

 

 

25,000,000

 

 

$ 0.002

 

 

 

1.00

 

 

 

25,000,000

 

 

$ 57,500

 

Granted

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

Exercised

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

Forfeited or Cancelled

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

Outstanding and exercisable at March 31, 2016

 

 

25,000,000

 

 

 

0.005

 

 

 

0.75

 

 

 

25,000,000

 

 

$ 125,000

 

 

NOTE 8 – LITIGATION

 

On October 21, 2014 a civil case # 2014-56915 was entered in the District Court in Harris County, Texas against Stereo Live. The complaint claims an individual served liquor by the staff of Stereo Live was involved in accident causing damages to the plaintiff who is seeking damages between $200,000 and $1,000,000. At the date of the incident, Stereo Live had enforce an insurance policy coving this incident with aggregate coverage of $2,000,000 and individual coverage up to $1,000,000 for such occurrence. The insurance company is defending the suit under the terms of the policy so the Company has not incurred or accrued any liability as it believes it is fully covered under the insurance policy. On January 29, 2016 the case was settled with no cost to the Company.

 

 
10
 

 

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERTIONS

 

This report 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. The Company's actual results could differ materially from those set forth on the forward looking statements as a result of the risks set forth in our filings with the Securities and Exchange Commission, general economic conditions, and changes in the assumptions used in making such forward looking statements.

 

Unless indicated otherwise, or the context otherwise requires, references in this report to "NightCulture," the "Company," "we," "us" and "our" or similar terms are to NightCulture, Inc.

 

Overview

 

Our principal line of business is promoting and producing, and selling merchandise at, live concerts and festivals, primarily in the Electronic Dance Music (EDM) genre and, since May 2012, hosting entertainment events at our Stereo Live venue. Since 2009, we have promoted and/or produced in excess of 600 live concerts. To date, we have organized events principally in Houston, San Antonio, Austin, Oklahoma City and Dallas.

 

Our revenues are principally derived from ticket sales to events that we promote and produce for which we typically receive a negotiated percentage of the ticket revenues. We typically act as agent for acts and recognize only our net share of revenues from ticket sales. In situations where we act as principal in promoting an event and take on the risks and rewards of such event we will recognize the gross revenues from ticket sales. We may also derive additional revenues associated with events that we promote and produce, including negotiated portions of revenues from merchandising, concessions and promotional opportunities.

 

We also derive revenues from venue rentals, beverage sales and other related fees and charges derived from operation of our Stereo Live venue.

 

We produce two music festivals per year, Something Wicked, a Halloween themed music festival in Houston, TX with attendance over 40,000 in 2015 and Something Wonderful, a spring themed music festival in Dallas, TX with over 15,000 in attendance in 2016.   

 

Our principal costs of generating revenues are direct costs associated with promotion and production of events, including, but not limited to, venue costs, advertising, ticketing agency costs and costs of event support personnel. With our acquisition of Stereo Live, our principal costs also include costs of beverage sales, venue lease expense and venue operating personnel.

 

Results of Operations

 

Revenue

 

Revenues for the three months ended March 31, 2016 was $1,464,999, compared to $1,170,084 for the same period in 2015. The increase in revenues was attributable to an increase in the number of events produced during 2016.

 

 
11
 

 

Direct Costs

 

Direct costs were $778,779 for the three months ended March 31, 2016 compared to $686,331 for the same period in 2015. As a percentage of revenues, direct costs for the three periods ended March 31, 2016 was 53% compared to 59% for the same period in 2015. The change in direct cost as a percentage of sales was due to reduction of direct costs in 2016 as compared to revenue verses 2015.

 

General and Administrative Expenses

 

General and administrative expense for the three months ended March 31, 2016 was $494,144 compared to $561,441 for the same period in 2015. The decrease in general and administrative expense for the three months period was attributable to flexible staffing, decreased salaries for related parties, lower administration and other investments to support our planned growth initiatives. The principal general and administrative expenses for the three months period were as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Consulting and salaries

 

$ 172,069

 

 

$

195,185

 

Legal and accounting

 

 

17,750

 

 

 

28,480

 

Venue

 

 

251,215

 

 

 

251,947

 

Travel and entertainment

 

 

1,118

 

 

 

2,451

 

Office and other expenses

 

 

51,992

 

 

 

83,378

 

 

 

$ 494,144

 

 

$

561,441

 

 

Depreciation and Amortization

 

Depreciation and amortization expense incurred in the three month period ended March 31, 2016 was $39,206 compared to $27,444 for the same period in 2015. The increase in depreciation and amortization expense for the three months was attributable to added assets purchased and leased during 2015 which were depreciated over the three months in 2016 verses 2015.

 

Other Income

 

Other income consists principally of interest expense and gain on changes in the value of derivative liability associated with outstanding warrants and convertible debt. Other income totaled of $2,634 for the three month period ended March 31, 2016 verses other income of $901,586 for the three months period in 2015. The change was mainly attributable to the change in fair value of derivative liabilities.

 

Net Income

 

The Company incurred a net income of $155,504 for the three month period ended March 31, 2016 compared to net income of $796,454 for the three months period in 2015. The fluctuation of derivative liability was the major contribution to the variations in the net income between periods.

 

 
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Financial Condition

 

Cash, Cash Flows and Working Capital

 

At March 31, 2016, we had current assets of $201,746, current liabilities of $4,187,995 and a working capital deficit of $3,986,249 compared to current assets of $55,172 and current liabilities of $4,220,275 and a working capital deficit of $4,165,103 at December 31, 2015. Included in current liabilities and the working capital deficit for each period was our derivative liability which was $1,005,429 as of December 31, 2015 compared to $981,330 as of March 31, 2016, accounting for $24,099 of the decrease in current liabilities and working capital deficit.

 

Net cash used in operations for the three months ending March 31, 2016 was $20,633 compared to net cash used of $69,410 for the same periods in 2015. The decrease in cash used in operations was principally attributable to the increase in accounts payable and accrued expense, and gain in fair value of derivative liability.

 

Net cash used in investing activities for the period ending March 31, 2016 was $9,012 compared to zero for the same period in 2015. The increase was mainly due to the purchase of $9,012 in fixed asset during the three months ended March 31, 2016 while there were no investing activities for the same periods in 2015.

 

Net cash provided by financing activities during the three months ended March 31, 2016 was $149,459 compared to net cash provided of $28,672 for the same period in 2015. The financing activities included repayments of related party's advances of $1,190, repayment of debt for $49,351, offset by working capital loan of $200,000 during the three months ended March 31, 2016 compared to advances from related parties of $47,619 and repayment of loan payable and lease obligations of $18,947 for the same period in 2015.

 

Liquidity and Capital Resources

 

Our principal requirement for capital is to fund our operating deficits and growth initiatives and satisfy our contractual obligations and outstanding debt and payables.

 

We believe that we will be required to either improve profitability and operating cash flow or to borrow additional funds or otherwise secure additional financing, or both, to support our operations during the balance of 2016 and beyond. Except as described below regarding our equity line of credit, we do not presently have any commitments to provide financing, if needed, to support our operations.

 

Debt

 

On September 1, 2015 the Company issued a note payable for $301,826 which matures on September 1, 2018. The note bears an interest rate of 5% per annum and is secured by the fixtures and equipment of the Company and guaranteed by the principals of the Company. Effective October 1, 2015, the Company will make 36 monthly payments of $9,055.91, which includes principal and interest is payable to the note holder. The Company must maintain a debt coverage ratio of 1:25 to 1 on a trailing four quarter basis. The debt coverage ratio is defined as the net income of the Company less any gains or losses of derivatives divided by the principal and interest payments made or to be made during the period being measured. As of March 31, 2016, the Company is not in compliance with the debt coverage ratio requirement. When the note becomes in default, the interest rate will increase to the lesser of 18% per annum or the maximum rate permitted by law. During the three months ended March 31, 2016, the Company made $27,168 payment under the note, including $22,782 principal and $4,386 interest. As of March 31, 2016 the balance due on the note was $246,551, which was presented as short term notes payable on the face of balance sheets due to the Company's default on the debt coverage ratio.

 

On February 25, 2016 the Company's subsidiary, Stereo Live, opened a $200,000 Merchant loan with American Express. Under the terms of the loan Stereo Live paid an 8% loan fee and will repay the note at the rate of $18,000 per month for 12 months for total repayments of $216,000. The interest rate of the debt is 15% per year and the note is due by February, 24, 2017. During the three months ended March 31, 2016, the Company made $19,725 towards the principal. As of March 31, 2016 the outstanding balance due on the note was $180,275.

 

Convertible Debentures

 

On September 12, 2012 the Company issued $500,000 of convertible debentures maturing on September 11, 2015. The 2012 Debentures accrue interest at 5% per annum with a default rate of 12% per annum. The 2012 Debentures are convertible into common stock of the Company at 50% of the average closing price of the 20 day trading price ending prior to the date of conversion into the Company common stock. On December 28, 2015 the debenture was amended extending the maturity date to December 31, 2016. As of March 31, 2016 and December 31, 2015, the outstanding principal balance under this convertible debt was $531,287 and $531,287, respectively.

 

 
13
 

 

Lease Obligations

 

On July 2, 2014, Stereo Live, a subsidiary of the Company, entered into credit line facility and three equipment leases. The terms of the credit facilities and leases are as follows:

 

 

·

An equipment lease of $32,799.75 payable over 48 months at $1,024.47 per month for total payment of $49,174.56 including the principal amount of $32,799.75 and interest of $16,374.81.

 

·

An equipment lease of $58,942 payable over 48 months at $1,780.05 per month for total payment of $85,442.40 including the principal amount of $58,942 and interest of $26,500.40.

 

·

An equipment lease of $32,250 payable over 44 months at $1,092.23 per month for total payments of $48,058.12 including the principal amount of $32,250 and interest of $15,808.12.

 

The Company had accounted for the above transaction under ASC 640 - 30 "Capital Leases". The Company has made payment of $6,844 toward the principal balance during the three months ended March 31, 2016. As of March 31, 2016 the balance due on the leases was $72,145, with $31,731 recorded as short term lease obligations and the balance of $40,414 recorded as long term lease obligations.

 

The note and the leases are personally guaranteed by principals of the Company.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements or guarantees of third party obligations at March 31, 2016.

 

Inflation

 

We believe that inflation has not had a significant impact on our operations since inception.

 

ITEM 3: QUANTITATIVE AND QUALITAIVE DISCLOSURE ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4: CONTROLS AND PROCEDURES

 

Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of March 31, 2016 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2016. Such conclusion reflects the identification of material weakness as follows: (1) lack of accounting proficiency of our chief executive officer who is our sole officer and our principal accounting officer which has resulted in a reliance on part-time outside consultants to perform substantially all of our accounting functions, (2) a lack of adequate segregation of duties and necessary corporate accounting resources in our financial reporting process and accounting function, and (3) lack of control procedures that include multiple levels of review. Until we are able to remedy these material weaknesses, we have engaged third party consultants and accounting firm to assist with financial reporting.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
14
 

 

PART II – OTHER INFORMATION

 

ITEM 1: LEGAL PROCEEDINGS

 

ITEM 1A: RISK FACTORS

 

There have been no material changes to NightCulture' risk factors as previously disclosed in our most recent 10-K filing for the year ending December 31, 2015.

 

ITEM 2: SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .

 

None

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES.

 

None

 

ITEM 4: MINE SAFETY INFORMATION

 

None

 

ITEM 5: OTHER INFORMATION

 

None.

 

 
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ITEM 6: EXHIBITS

 

Exhibit No.

 

 

Description

 

 

 

 

31

 

 

Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32

 

 

Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 
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SIGNATURE

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

NIGHTCULTURE, INC.

 

       
Date: May 16, 2016 By: /s/ Michael Long

 

 

 

Michael Long

 

 

 

Chief Executive Officer

 

 

 

(Acting Principal Financial and Accounting Officer

and Duly Authorized Officer)

 

 

 

17