Notes to Unaudited Condensed Consolidated
Financial Statements
December 31, 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 six month periods
ended December 31, 2017 and 2016, respectively, the Company had total operating expenses of $964,338 and $592,587, and experienced
a net loss of $(2,296,960) and $(1,631,749), respectively. As of December 31, 2017, the Company had an accumulated deficit of $(30,346,161)
and total liabilities of $23,329,254, including loans payable of $1,730,407 which includes accrued interest of $780,313 and convertible
promissory loans of $13,323,414 which includes accrued interest of $6,483,435.
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.
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 December 31, 2017, the
Company had a working capital deficit (current liabilities in excess of current assets) of $23,305,508. 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 $518,800
during the six months ended December 31, 2017, including advances from a shareholder of approximately $55,800. Subsequent to such
date, the Company has raised additional capital totaling approximately $130,000. 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.
On December 2, 2017, the Equity Purchase Agreement (the “EPA”)
the Company entered into with an investment group (the “investor”) on September 22, 2017, became effective. The EPA
permits the Company to “put” up to a maximum of $5,000,000 of its common stock to the investor, while the actual amount
we receive is dependent upon the closing price of our common stock at the time of our “put” requests. If the put were
to occur on the date of this filing, the maximum we would have available to us would be $1,050,000, based on a closing price of
$0.0021 per share of our common stock on the Pink Sheets. On January 4, 2018, the Company filed a Form S-1 Registration Statement
with the Securities and Exchange Commission seeking to register up to 500,000,000 shares of its common stock, par value $0.001,
which represent the “put” shares the Company will have the opportunity to put to the investor pursuant to the EPA.
The Company filed an amended Form S-1/A on January 31, 2018, and February 15, 2018, based on comments it received from the SEC.
As of the date of this filing the Company has not received a response from the SEC regarding its acceptance of the S-1/A. Accordingly,
funds are not yet available under the terms of the EPA, and may not ever become available, as the declaration of effectiveness
of the registration statement is entirely outside the control of the Company.
Additionally, the Company continues to evaluate the potential
of restructuring some of its debt and securing capital through private placements of our equity securities to satisfy existing
obligations and provide for sufficient working capital to meet the Company’s future obligations. There are no guarantees
that the Company will be able to accomplish 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
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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 filed with the Securities and Exchange Commission on November 8, 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 six-month
period ended December 31, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30,
2018.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Holdings and all entities in which Holdings has a controlling interest. Holdings controls and consolidates 359 Mobile,
Ltd., an entity incorporated in the United Kingdom. The noncontrolling interest on the Company’s balance sheet represents
the minority shareholder’s minority equity interest in 359 Mobile, Ltd. See Note 7. 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 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 and 651,896,825 potentially
issuable shares from convertible debt from the calculation for the six months ended December 31, 2017.
The Company's accrued expenses are as follows:
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December 31,
2017
|
|
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June 30,
2017
|
|
Salaries, wages and benefits – officers
|
|
$
|
2,203,399
|
|
|
$
|
1,934,586
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|
Salaries, wages, and benefits – non-officers
|
|
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46,100
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|
|
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46,100
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Payroll taxes and related penalties and interest
|
|
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1,030,897
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|
|
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1,003,619
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Professional services
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|
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976,736
|
|
|
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864,100
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Other
|
|
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139,393
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|
|
|
138,176
|
|
|
|
|
|
|
|
|
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Total Accrued Expenses
|
|
$
|
4,396,525
|
|
|
$
|
3,986,581
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|
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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December 31,
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June 30,
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|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
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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 $778,959 and $704,851 at December 31, 2017 and June 30, 2017, respectively.
|
|
$
|
1,654,054
|
|
|
$
|
1,563,602
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|
|
|
|
|
|
|
|
|
|
Loans payable, bearing interest at rates ranging from 10% to 12% per annum. These loans are all unsecured. Accrued interest of $1,354 and $0 at December 31, 2017 and June 30, 2017, respectively.
|
|
|
76,354
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
1,730,408
|
|
|
$
|
1,563,602
|
|
Less: Current portion
|
|
|
(1,730,408
|
)
|
|
|
(1,563,602
|
)
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Loans payable, non-current
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|
$
|
–
|
|
|
|
–
|
|
Convertible Promissory Notes are as follows:
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December 31,
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|
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June 30,
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|
|
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2017
|
|
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2017
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|
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 December 31, 2017 and June 30, 2017 of $537,752 and $506,336, respectively. These notes are all unsecured and in default.
|
|
$
|
1,578,404
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|
|
$
|
1,546,988
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|
|
|
|
|
|
|
|
|
|
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 $314,146 and $288,857 at December 31, 2017 and June 30, 2017, respectively. These notes are all unsecured and in default.
|
|
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827,737
|
|
|
|
801,078
|
|
|
|
|
|
|
|
|
|
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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 $2,456,534 and $2,045,173 at December 31, 2017 and June 30, 2017, respectively. These notes are all unsecured and in default. See Note 6 for additional information on Series B Preferred stock issued to this note holder.
|
|
|
3,883,057
|
|
|
|
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 $3,173,592 and $2,381,467 at December 31, 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. See Note 6 for additional information on Series B Preferred stock issued to this note holder.
|
|
|
6,987,666
|
|
|
|
6,295,539
|
|
|
|
|
|
|
|
|
|
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Convertible promissory note bearing interest at a rate of 24% per annum,
compounding monthly. The note is convertible into shares of common stock at a conversion rate equal to the lessor
of (a) $0.0035 or (b) seventy five percent (75%) of the closing bid price of the Company's common stock on the Closing Date
of November 29, 2017. Accrued interest of $1,411 and $0 at December 31, 2017 and June 30, 2017, respectively. All principal
and accrued interest is due and payable on December 13, 2018.
|
|
|
66,411
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
|
13,343,275
|
|
|
|
11,727,303
|
|
Less debt discount
|
|
|
(19,861
|
)
|
|
|
–
|
|
Convertible promissory notes, net
|
|
$
|
13,323,414
|
|
|
$
|
11,727,303
|
|
Loans Payable
During the six month period ended December 31, 2017, the Company
issued a $50,000 note payable to an entity in exchange for entering into an Equity Purchase Agreement (See Note 6). The note bears
interest at a rate of 10% per annum, is due on February 28, 2018 and is unsecured and non-convertible. Additionally, during the
same period the Company issued a $25,000 note payable to an individual in exchange for legal services provided with regard to the
preparation of a Form S-1 Registration Statement. The note bears interest at a rate of 12% per annum, is due on the day the Company
receives any proceeds from the sale of any shares of common stock that were registered pursuant to such registration statement
that was filed with the Securities and Exchange Commission on January 4, 2018, and amended and re-filed on January 31, 2018 and
February 15, 2018 (See Note 7).
Convertible Promissory Notes
During the six month period ended December 31, 2017, the Company
issued convertible notes totaling $388,000 to an existing shareholder in exchange for cash advances to the Company.
On November 28, 2017, an existing note holder assigned a $100,000
portion of the principal balance of one of its Convertible Promissory Notes (the “new note”) to an unrelated party
(the “new holder”). The new holder took the $100,000 new note at the same interest and repayment terms as the original
note. On November 30, 2017, the new holder presented to the Company a Notice of Conversion for the conversion of $35,000 of the
new note into shares of common stock per the Equity Purchase Agreement (the “EPA”) entered into with the Company on
September 22, 2017 and effective December 2, 2017 (see Note 6). On December 1, 2017, the Company authorized the transfer agent
to issue to the new holder 22,920,635 common shares of the Company which is in exchange for the retirement of the $35,000 of debt.
The Company recognized interest expense of approximately $1,322,600
and $1,039,000 during the six months ended December 31, 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 $55,800 and $114,200 during
the six months ended December 31, 2017 and 2016, and were repaid approximately $47,800 and $14,800 during the same time periods,
respectively. As of December 31, 2017, the net balance due to stockholders for advances amounted to approximately $2.687
million and is included in due to stockholders.
On December 18, 2017, the Company completed an acquisition of
a 55% interest in a company incorporated in the United Kingdom for total consideration of £55, or approximately $74 US. Approximately
$2,300 in total assets were acquired, all of which was cash and $23,000 of total liabilities were assumed, all of which are short
term obligations to related parties including $3,300 to the minority shareholder and $19,700 to other Company wholly owned subsidiaries.
Because the transaction was for net debt acquired and from a related party, the offset will be recorded to additional paid in capital
rather than goodwill.
The company, 359 Mobile, Ltd (“359 UK”), was owned
by a related party, the CEO of the Company, Craig Fielding. Mr. Fielding retains a 45% noncontrolling interest in 359 UK.
Pro forma results of operations for this acquisition have not
been presented because they are not material to the consolidated results of operations, either individually or in the aggregate.
Preferred Stock
As of December 31, 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 December 31, 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.
On August 12, 2017, the Company issued 2,000,000 shares of Series
B Preferred stock to a convertible note holder for his continuing financial support. As previously noted, Series B Preferred stock
is convertible into equal shares of common stock. The Company estimates, as of the date of issuance, the 2 million shares of Series
B Preferred stock had a market value of $1,800.
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.
Effective December 2, 2017, the Company and an unrelated third
party investor group entered into an “Equity Purchase Agreement” to provide the Company with potential stock based
financing. The Equity Purchase Agreement provides for the investor group to purchase up to $5 million of the Company’s common
stock, with the actual amount required to be purchased by the investor dependent upon the closing price of the Company’s
common stock on the date that equity advances are requested. The Company may draw on the facility from time to time, as and when
it determines appropriate in accordance with the terms and conditions of the Equity Purchase Agreement. Pursuant to the Equity
Purchase Agreement the Company is obligated to register with the SEC shares of its common stock sufficient to accommodate the purchase
by the investor. On January 31, 2018 and February 15, 2018, the Company filed amendments to its S-1 registration statement to register
a maximum of 500,000,000 shares of common stock for use under the Equity Purchase Agreement. At the closing price of our common
stock at the filing date for this Form 10-Q, the maximum draw available under the Equity Purchase Agreement was $1,500,000. None
of the advances under the Equity Purchase Agreement are available until such time as the United States Securities and Exchange
Commission declares the S-1 registration statement effective, which has not occurred at the time of filing of this Form 10-Q, and
which is entirely outside the control of the Company.
Warrants
All 680,000 warrants outstanding as of June 30, 2017, expired
unexercised as of July 31, 2017.
Between January 1, 2018 and February 19, 2018 the Company received
no advances from the CEO of the Company.
Between January 1, 2018 and February 19, 2018 the Company raised
funding in the amount of $130,000 attributable to cash advances from an existing noteholder.
On January 4, 2018 the Company filed an S-1 Registration Statement
with the SEC seeking to register up to 500 million shares of its common stock as part of an Equity Purchase Agreement the Company
entered into December 2, 2017, with a third party investor group. In response to comments the Company received from the SEC it
filed amended registration statements on January 31, 2018 and February 15, 2018, on Form S-1/A. As of the date of this filing the
registration statement is not yet effective and is beyond the Company’s control.