Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2017
1.
|
Nature
of Operation and Going Concern
|
Nature of Operations
Consorteum Holdings, Inc. (“Holdings” or the “Company”),
formerly known as Implex Corporation, was incorporated in the State of Nevada on November 7, 2005. Holdings was incorporated as
a transaction management company focusing on transaction processing solutions and products for the payment processing and financial
transaction markets. Holdings has since transformed itself into a software development company and mobile publishing company focused
on the development and delivery of digital content to mobile devices, including, delivery of mobile content, mobile payments solutions
and products through a mix of on-deck partnerships, license agreements, and joint venture arrangements.
Holdings has spent the last several years developing relationships
that will enable us to participate in the emerging market of mobile gaming and FinTech. Through the efforts of our development
team, and utilizing open source software, we have the capability to deliver rich mobile content to end users who will use their
smart phones in radically new ways. Our Universal Mobile Interface (“UMI”)™ has the capability to open up opportunities
in multiple business verticals, such as providing solutions in FinTech, data analytics, secure payment processing, compliancy lead
transaction management and various digital social event sectors.
Today’s current mobile application and transaction solutions
are limited - whether it be in how users can interact, or the number of devices it can actually support. As companies look to mobile
strategies, the picture gets extremely cloudy in how to develop a rich mobile offering that can resonate within the mass market.
Our UMI is able to take the “how” out of planning and execution, encompassing all the components that allow for a rich
mobile experience to be delivered to a handset.
FinTech describes an emerging financial sector in the 21
st
century. The term “financial technology” can apply to any innovation in how people transact business. Since the Internet
revolution and the mobile Internet revolution, however, financial technology has grown explosively, and FinTech, which originally
referred to computer technology applied to the back office of banks or trading firms, now describes a broad variety of technological
interventions into personal and commercial transactions.
Holdings has yet to produce any revenue. For the three month
periods ended September 30, 2017 and 2016, respectively, the Company had total operating expenses of $419,182 and $308,866, and
experienced a net loss of $(1,055,051) and $(815,324), respectively. As of September 30, 2017, the Company had an accumulated deficit
of $(29,104,252) and total liabilities of $22,142,525, including loans payable of $1,631,921 which includes accrued interest of
$848,246 and convertible promissory loans of $12,535,800 which includes accrued interest of $5,898,071.
During 2014 and 2015, the Company experienced operational downsizing
due to capital constraints but maintained the core management team. The Company faced severe capital constraints and was unable
to access additional capital to continue operations beyond June 2015 and, as a result, the Company (i) laid off its development
team and ceased paying managers and advisors, (ii) suspended rent and related payments for its facilities, (iii) was unable to
satisfy significant payables due to third parties, including its independent auditors, for work performed for the Company and to
retain the necessary advisors to prepare and complete the financial reports required by the Exchange Act and the rules and regulations
of the SEC. The Company has engaged in virtually no business activities since June 2015.
In 2015, all software development operational efforts to date
were transferred to 359 Mobile Inc. (“359”), a wholly owned subsidiary, to enable 359 at a future date to develop and
deploy end-to-end solutions for both cloud and hosted based offerings in the mobile gaming, FinTech and data analytics markets
and associated verticals. As noted above, the Company has recently created a new and unique platform, which it intends to market
as the Universal Mobile Interface™. At the heart is the capability to support fully regulatory regionally compliant financial
and social transactions via Web and Mobile. This key differentiator enables us to approach many different markets that are in the
business of providing mobile connectivity, secure transactional processing and social connectivity. 359 will provide solutions
developed based on the Company’s history and experience in payment processing, secure transactions management and end-to-end
mobile vertical market offerings. The UMI platform will initially be introduced into the market utilizing branded partnership relationships
in the FinTech, data analytics, secure payment processing, compliancy lead transaction management, and digital social events sectors.
The first deployment of the UMI will be in mobile gaming in the UK in 2018. Concurrent with that effort, the Company will continue
to evaluate the feasibility of additional territory deployments based upon market analysis and regulatory issues. Additionally,
the Company will evaluate opportunities to market its current technologies in other industries. Going forward we expect our
revenues to be derived from transactions processed using our UMI software platform technology in various countries outside the
US starting with the United Kingdom as we explore other international distribution opportunities. We will also explore any US opportunities
that are feasible.
Going Concern and Management Plan
The Company's condensed consolidated financial
statements are presented on a going concern basis, which contemplates the realization of assets and discharge of liabilities in
the normal course of business. The Company has suffered losses from operations. As of September 30, 2017, the Company had a working
capital deficit (current liabilities in excess of current assets) of approximately $22.1 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 secured working capital of approximately $198,000
during the three months ended September 30, 2017. Subsequent to such date, the Company has raised additional capital totaling approximately
$55,000. 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. The Company is attempting to restructure some of its debt and secure capital through private placements of our
equity securities, an equity line of credit or a rights offering 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 condensed consolidated financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern.
2.
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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 condensed 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 condensed 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, 2017. In the opinion of management, the unaudited interim condensed consolidated financial statements furnished
herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for all
the interim periods presented. Operating results for the three-month period ended September 30, 2017 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2018.
Principles of Consolidation
The consolidated financial statements include the accounts of
Consorteum Holdings, Inc., Consorteum Inc., Bad Rabbit, Inc., 359 Mobile Inc. and ThreeFiftyNine, Inc.. All significant intercompany
balances and transactions are eliminated on consolidation.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant areas
requiring the use of estimates relate to the estimated 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.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit
at banking institutions as well as all highly liquid short-term investments with original maturities of 90 days or less.
Reclassifications
Certain amounts in the prior period financial
statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported
consolidated net income (loss).
Earnings or loss per common 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, 680,000 warrants and
598,187,328 potentially issuable shares from convertible debt from the calculation for the three months ended September 30, 2017.
All 680,000 warrants expired in July 2017.
The Company's accrued expenses are as follows:
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
Salaries, wages and benefits –officers
|
|
$
|
2,091,513
|
|
|
$
|
1,934,586
|
|
Salaries, wages, and benefits – non-officers
|
|
|
46,100
|
|
|
|
46,100
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|
Payroll taxes and related penalties and interest
|
|
|
1,006,695
|
|
|
|
1,003,619
|
|
Professional services
|
|
|
943,131
|
|
|
|
864,100
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|
Other
|
|
|
144,449
|
|
|
|
138,176
|
|
|
|
|
|
|
|
|
|
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Total Accrued Expenses
|
|
$
|
4,231,888
|
|
|
$
|
3,986,581
|
|
The Company has been delinquent in reporting and remitting wages
paid subject to withholding of Federal and state income taxes. The Company is 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.
4.
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Loans Payable and Convertible Promissory Notes
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Loans payable are as follows:
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September 30,
|
|
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June 30,
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|
|
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2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
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 $752,140 and $704,900 at September 30, 2017 and June 30, 2017, respectively.
|
|
$
|
1,631,921
|
|
|
$
|
1,563,602
|
|
Less: Current portion
|
|
|
(1,631,921
|
)
|
|
|
(1,563,602
|
)
|
Loans payable, non-current
|
|
$
|
–
|
|
|
$
|
–
|
|
Convertible Promissory Notes are as follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
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 September 30, 2017 and June 30, 2017 of $522,000 and $506,300, respectively. These notes are all unsecured and in default.
|
|
$
|
1,562,642
|
|
|
$
|
1,546,988
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes bearing interest between 5% and 18% per annum. All the notes are convertible into shares of common stock at conversion rates ranging from $0.008 to $0.05. Accrued interest of $302,400 and $288,900 at September 30, 2017 and June 30, 2017, respectively. These notes are all unsecured and in default.
|
|
|
816,203
|
|
|
|
801,078
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes each bearing interest at a rate of 24% per annum, compounding monthly. All the notes but one are convertible into shares of common stock at a conversion rate of $0.02 per share. One note is convertible into two million shares of Series B Preferred stock. Accrued interest of $2,239,500 and $2,045,173 at September30, 2017 and June 30, 2017, respectively. These notes are all unsecured and in default.
|
|
|
3,476,024
|
|
|
|
3,083,698
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes each bearing interest at a rate of 24% per annum, compounding monthly. The notes are convertible into shares of common stock at a conversion rate of $0.02 per share. Accrued interest of $2,766,805 and $2,381,500 at September 30, 2017 and June 30, 2017, respectively. These notes were refinanced with the lender effective June 30, 2015 and bear the terms noted previously. All came due on June 29, 2016. As of June 30, 2016, the notes were in default.
|
|
|
6,680,931
|
|
|
|
6,295,539
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
$
|
12,535,800
|
|
|
$
|
11,727,303
|
|
The Company recognized interest expense of approximately $636,000
and $506,000 during the three months ended September 30, 2017 and 2016, respectively, in connection with all loans, convertible
promissory notes, and financing costs.
5.
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Related Party Transactions
|
The amounts due to stockholders include non-interest bearing,
unsecured advances with no fixed terms of repayment. Stockholders advanced the Company approximately $240 and $50,200 during the
three months ended September 30, 2017 and 2016, and were repaid approximately $16,000 and $10,400 during the same time periods,
respectively. As of September 30, 2017, the net balance due to stockholders for advances amounted to approximately $2.66
million and is included in due to stockholders.
Preferred Stock
As of September 30, 2017, 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, 15,000,000 have been designated as Series B preferred shares, and 40,000,000 have been designated
as Series C 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 a 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 a liquidation preference as described below. The Series C shares are entitled to one vote per share held, will pay no dividend,
are each convertible into four (4) shares of common stock, and have a liquidation preference junior to the Series A and B Preferred
Stock. No Series C shares had been issued as of September 30, 2017.
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 and Series C 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. Series C preferred stock is next in liquidation preference after the Series B preferred stock, and is
computed consistently with the formula above for the Series A preferred stock.
Common Stock
The Company recently increased its 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 previously authorized
it to issue up to 500,000,000 shares of common stock, par value $.001 per share. In October 2017, the Company increased the authorized
shares of its common stock to 2 billion.
Between October 1, 2017 and November 16, 2017 the Company received
advances from the CEO of the Company in the aggregate amount of $15,000.
Between October 1, 2017 and November 16, 2017 the Company raised
funding in the amount of $40,000 attributable to advances from an existing noteholder.