LiveOne, Inc. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2016

OR

For the transition period from __________________ to _______________________

Commission file number 333-167219

LOTON, CORP

(Exact name of registrant as specified in its charter) 

(310) 601-2500

(Registrant’s telephone number, including area code)

n/a

(Former address and telephone, if changed since last report)

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 is required to file such reports), and (2) has 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 filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

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 November 8, 2016, there were issued and outstanding 100,169,608 shares of the registrant’s common stock, par value $0.001 per share. 

LOTON, CORP

TABLE OF CONTENTS

PART I ― FINANCIAL INFORMATION

Item 1. Financial Statements.

Loton, Corp

Condensed Consolidated Balance Sheets 

See accompanying notes to the condensed consolidated financial statements.

Loton, Corp
Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Loton, Corp

Condensed Consolidated Statement of Stockholders’ Equity

For the Period Ended September 30, 2016

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Loton, Corp

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to the condensed consolidated financial statements. 

Loton, Corp

For the Three and Six Months Ended September 30, 2016 and 2015

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Organization, Operations and Basis of Presentation; Going Concern

Business and Operations

Loton, Corp (“we,” “us,” “our” or the “Company”) was incorporated under the laws of the State of Nevada on December 28, 2009. The Company’s mission is to aggregate live music and content driven by live music through mutually beneficial relationships with the world’s top talent, music companies, festivals and promoters and to provide fans with the opportunity to see their favorite festivals, concerts and experiences on any screen they choose across all video platforms and devices from mobile to home.

The Company also owns a 50% interest in Obar Camden Holdings Ltd. ("Obar Camden" or "OCHL"), a private limited company registered in England and Wales that engages in the operations of a nightclub and live music venue “KOKO” in Camden, London, England.

Basis of Presentation

The interim condensed consolidated financial statements included herein reflect all material adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) which, in the opinion of management, are ordinary and necessary for a fair presentation of results for the interim periods.  Certain information and footnote disclosures required under the accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated balance sheet information as of March 31, 2016 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on July 19, 2016 (the “2016 Annual Report”). These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 31, 2016 and notes thereto included in the 2016 Annual Report.

The results of operations for the three and six months ended September 30, 2016 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period.

The Company’s condensed consolidated financial statements for the three and six months ended September 30, 2015 presented herein have been restated to present the Company’s investment in OCHL on the equity basis of accounting and to correct for other prior errors. Please see Note 3 – Restatement of Prior Period Financial Statements for additional details.

Forward Stock Split

In September 2016, the Company’s Board of Directors declared a 2-for-1 forward stock split of the Company’s common stock in the form of a dividend. As of September 28, 2016, the shares of the Company’s common stock began trading on the OTC Pink at the new split-adjusted price. The stock split entitled each of the Company’s stockholders as of September 22, 2016, the record date, to receive one additional share of common stock for each one share owned. Additional shares issued as a result of the stock split were distributed on September 27, 2016, the payment date. The Company’s stockholders did not need to exchange existing stock certificates and received a new certificate reflecting the newly issued shares. All shares and pre-share amounts have been restated as of the earlier periods presented to reflect the stock split.

Revenue Policy

The Company is primarily engaged in the emerging live and digital music space, including delivery of live music events and live music streaming, through LiveXLive, Corp., its operating subsidiary. The Company recognizes revenue from its live events and show productions when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the show or live event has been completed and occurred and there are no future production obligations, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.  

Going Concern

The Company’s consolidated financial statements have been prepared assuming that the Company will continue as a going concern, and which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in its consolidated financial statements, the Company had a working capital deficit of $4,447,721 at September 30, 2016, and incurred a net loss of $3,550,119, and utilized net cash of $1,957,841 in operating activities for the six month-period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In addition, the Company’s independent public accounting firm in its audit report to the financial statements included in the 2016 Annual Report expressed substantial doubt about the Company’s ability to continue as a going concern. The Company’s consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern

Management estimates that the current funds on hand will be sufficient to continue operations through December 31, 2016. The Company’s ability to continue as a going concern is dependent on its ability to execute its strategy and on its ability to raise additional funds. The Company’s management is currently seeking additional funds, primarily through the issuance of equity and/or debt securities for cash to operate the Company’s business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for the Company’s stockholders, in case of equity and/or convertible debt financing.

Note 2 - Significant Accounting Policies and Practices

Use of Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s). Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to assumptions used in impairment testing of long term assets, accruals for potential liabilities and valuing equity instruments issued for services. Actual results could differ from those estimates.

Principles of Consolidation

The Company’s consolidated subsidiaries and/or entities are as follows:

The Company’s consolidated financial statements include all accounts of the Company and its consolidated subsidiaries and/or entities as of reporting period ending date(s) and for the reporting period(s) then ended. All inter-Company balances and transactions have been eliminated.

Fair Value of Financial Instruments

The Company follows the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and to measure the fair value of its financial instruments. The FASB Accounting Standards Codification establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of fair value hierarchy are described below:

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

The carrying amounts of the Company’s financial assets and liabilities, including cash, prepaid expenses, accounts payable, accrued expenses, and other current liabilities, approximate their fair values because of the short maturity of these instruments.

Investment in Unconsolidated Subsidiary Under the Equity Method

The Company accounts for investments in which the Company owns more than 20% of the investee using the equity method in accordance with ASC Topic 323, Investments—Equity Method and Joint Ventures. Under the equity method, an investor initially records an investment in the investee at cost, and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date of investment. The investment of an investor is also adjusted to reflect the investor’s share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary and which should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the equity method.

Stock-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by FASB where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

Income taxes

The Company follows the asset and liability method which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Operations in the period that includes the enactment date. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. The Company’s tax years 2011 to 2014 remain subject to examination by major tax jurisdictions. 

Pursuant to the Internal Revenue Code Section 382 (“Section 382”), certain ownership changes may subject the net operating losses’ (the “NOLs”) to annual limitations which could reduce or defer the NOL. Section 382 imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of its stock at the time of the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years. The imposition of this limitation on its ability to use the NOLs to offset future taxable income could cause the Company to pay U.S. federal income taxes earlier than if such limitation were not in effect and could cause such NOLs to expire unused, reducing or eliminating the benefit of such NOLs.

Loss Per Share

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the Company. In computing diluted loss per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.

At September 30, 2016 and 2015, the Company had 705,000 and 3,050,000 warrants outstanding, respectively, which were excluded from the loss per share calculation, as they were anti-dilutive.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In August, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statement presentation or disclosures.

Note 3 – Restatement of Prior Period Financial Statements

Our financial statements for the three and six months ended September 30, 2015 have been restated. On July 11, 2016, our Board of Directors determined that the transactions under the Agreement (as defined below) were erroneously accounted for as a reverse acquisition for accounting purposes and that OCHL was improperly included in consolidation as our subsidiary. OCHL should have been reflected as an investment accounted for under the equity method of accounting. This determination was based on an analysis by our management that we did not have sufficient control of OCHL at the date of the transaction in accordance with the current accounting rules. Therefore, our results for the three and six months ended September 30, 2015 previously reported in our Quarterly Report on Form 10-Q filed on November 23, 2015 are being restated herein to properly present the Merger (as defined below) and our investment in OCHL on the equity basis of accounting and correct the prior period for other errors.

Specifically, on April 28, 2014, we entered into an Agreement and Plan of Merger (the “Agreement”), by and among our Company, Loton Acquisition Sub I, Inc., a Delaware corporation and our wholly-owned subsidiary (“Acquisition Sub”), and KOKO (Camden) Holdings (US), Inc. (“KOKO Parent”), a Delaware corporation and wholly-owned subsidiary of JJAT Corp. (“JJAT”), a Delaware corporation wholly-owned by Robert Ellin, our Executive Chairman, President, a director and controlling stockholder), and his affiliates (the “Merger”). As a result of the Merger, KOKO Parent became our wholly-owned subsidiary, and our then primary business became that of KOKO Parent and its subsidiaries, KOKO (Camden) Limited, a private limited company registered in England and Wales (“KOKO UK”), which owns 50% of OCHL, which in turn wholly-owns its operating subsidiary OBAR Camden. Upon the closing of the Merger, pursuant to the terms of the Merger Agreement, KOKO Parent’s former sole shareholder, JJAT, received 58,000,000 shares of our common stock. Since both we and JJAT were controlled by Mr. Ellin at the time of the consummation of the Merger, this reverse merger transaction should have been accounted for as a transaction between entities under common control. Accordingly, this equity method investment should have been initially measured on our financial statements at its then JJAT’s historical basis of $4.2 million.

Loton, Corp

Condensed Consolidated Statements of Operations (Unaudited)

Notes:

Loton, Corp

Condensed Consolidated Statements of Operations (Unaudited)

Notes:

Loton, Corp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Notes:

Note 4 – Equity Investments in OCHL

On April 28, 2014, the Company acquired a 50% equity interest in OCHL, an entity that owns Obar Camden Limited (OCL), a music and entertainment company whose principal business is the operation of a live music venue and nightclub known as KOKO, located in Camden, London. KOKO provides live shows, club nights, corporate and other events at KOKO. The Company acquired its 50% interest through the issuance of 58,000,000 shares of its common stock to the seller, JJAT, an entity wholly owned by Mr. Ellin. Since both the Company and JJAT were controlled by Mr. Ellin at the time of this transaction, the transaction was accounted for as a transaction between related parties at the related parties’ original basis. Accordingly, the Company recorded the equity method investment at $4.2 million which is JJAT’s historical basis in OCHL.

As part of the transaction, the Company was to be reimbursed $494,750 by OCHL for legal and other acquisition costs incurred in relation to the acquisition of the 50% interest. As of September 30, 2016 and March 31, 2016, the outstanding advances due to the Company were $213,331 and $213,331, respectively. The note bears interest at 8% per annum and was due April 27, 2015. The note is currently in default.

The OCHL Shareholders’ Agreement

On February 12, 2014, (1) Mr. Bengough, and (2) KOKO UK, Mr. Ellin and Trinad Capital Master Fund (collectively, the “Ellin Parties”) and (3) OCHL entered into a Shareholders’ Agreement (the “OCHL Shareholders’ Agreement”) pursuant to which, among other terms, the parties agreed that each of Mr. Ellin and Mr. Bengough shall constitute the Board of Directors of OCHL and each shall be restricted from taking actions on behalf of OCHL without the written consent of the other individual, including, but not limited to, changes in the nature of the business, amendments to governing documents, restructuring or recapitalizations, issuances of stock, purchases of material assets, entry into material contracts, incurring or guaranteeing debt, removal of any director or restructure the board of OCHL. Because OCHL is the sole parent of OCL, the Company’s ability to manage OCHL and OCL is subject to the terms of the OCHL Shareholders’ Agreement and Mr. Bengough’s consent is required for most material actions to be taken by OCHL and OCL, so long as the OCHL Shareholders’ Agreement remains in effect. Each of Mr. Bengough and Mr. Ellin were entitled to serve on the board of OCHL so long as the OCHL Shareholders’ Agreement is in effect, and the board cannot take action without the consent of both board members. Pursuant to the OCHL Shareholders’ Agreement, any cash distributions by OCHL must be distributed pro rata to each of KOKO UK and Mr. Bengough. In addition, the OCHL Shareholders’ Agreement restricts the transfer of shares in OCHL or OCL by KOKO UK or Mr. Bengough and grants each a right of first refusal and the right to have the proposed shares valued by an independent accounting firm and sold to the other party at a price determined by valuation rather than the price necessarily offered by the prospective purchaser.

On April 24, 2014, the OCHL Shareholders’ Agreement was amended pursuant to the terms of the Variation to Shareholders Agreement (“Variation Agreement”) among Mr. Bengough, KOKO UK, the Ellin Parties, OCHL, OCL, JJAT and the Company pursuant to which, amongst other terms, (1) joined OCL, JJAT and the Company as parties to the OCHL Shareholders Agreement and (2) Mr. Bengough agreed to transfer all of his interests in OCHL in exchange for 58,000,000 shares of the Company’s common stock to be issued in a private placement transaction, which would constitute no less than 42.5% of the Company’s outstanding capital stock on a fully diluted basis (but before the Company’s future issuance of up to 6,400,000 shares of its common stock to its advisors, consultants and key employees as approved by the Company’s Board of Directors) and pursuant to the OCHL Shareholders’ Agreement, subject to Mr. Bengough’s receipt of satisfactory tax clearances under the tax laws of the United Kingdom. The Company agreed to indemnify Mr. Bengough from any adverse tax expenses and costs required to be paid by Mr. Bengough in connection with the transfer of his interests in OCHL. To date, the parties to the Variation Agreement have been unable to reach an agreement on mutually acceptable documentation to affect the share exchange described above. The Company and Mr. Bengough are presently continuing to co-own OCHL and OCL with Mr. Bengough leading OCL’s day-to-day business.

The Variation Agreement and the related OCHL Shareholders’ Agreement remain in full force and effect, subject to any court mandated changes or orders made with respect to the Petition and subject to the completion of the Settlement Transactions (see Note 10 – Commitments and Contingencies for a discussion of each). Pursuant to the Consent Order (see Note 10 – Commitments and Contingencies), Mr. Bengough and Richard Griston, a newly appointed independent director of OCHL, constitute the Board of Directors of OCHL and Mr. Bengough is restricted from taking actions on behalf of OCHL without the written consent of the Company.

As of September 30, 2016, the changes in investments in and advances to equity method investments are summarized as follows:

The carrying amounts of the major classes of assets and liabilities of OCHL as of September 30, 2016 and March 31, 2016 are as follows:

Net income for the three and six months ended September 30, 2016 and 2015 was as follows:

Note 5 – Property and Equipment

Property and equipment at September 30, 2016 and March 31, 2016 was as follows:

Depreciation expense was $11,971 and $1,803 for the six months ended September 30, 2016 and 2015, respectively, and $5,900 and $984 for the three months ended September 30, 2016 and 2015, respectively.

Note 6 – Related Party Notes Payable

As of September 30, 2016 and March 31, 2016, the Company had the following outstanding notes payable to Trinad Capital Master Fund (“Trinad Capital”), a fund wholly owned by Mr. Ellin, the Company’s Executive Chairman, President, director and majority stockholder, for both short and long term working capital requirements:

First Senior Note - Trinad Capital Master Fund

On December 31, 2014, the Company entered into a senior convertible promissory note (the “First Senior Note”) with Trinad Capital allowing for advances up to a maximum loan amount of $1,000,000, plus interest at the rate of 6% per annum on the unpaid principal amount of outstanding advances.

At the time the First Senior Note was made, Trinad Capital advanced $700,000 to the Company and had accrued $70,151 in unpaid interest. Pursuant to the terms of the Senior Note, all outstanding unpaid principal and accrued interest was originally due and payable on June 30, 2016 or such later date as Trinad Capital may agree to in writing unless, prior to such date, the First Senior Note has been repaid in full or Trinad Capital elects to convert all or any portion of the then-outstanding loan balance into common stock of the Company in connection with the Company consummating an equity financing in excess of $5,000,000 or greater as set forth in the terms of the First Senior Note. Subsequent to the making of the First Senior Note:

As of September 30, 2016 and March 31, 2016, $1,000,000 of principal was outstanding under the First Senior Note. Accrued interest of $170,637 and $140,555 is reflected on the balance sheet as accrued interest payable, related party as of September 30, 2016 and March 31, 2016, respectively,

Second Senior Note - Trinad Capital Master Fund

On April 8, 2015, the Company entered into a second senior promissory note (the “Second Senior Note”) with Trinad Capital in the amount of $195,500. The Second Senior Note bears interest at the rate of eight percent (8%) per annum and all outstanding unpaid principal and accrued interest is due and payable on June 30, 2016 or such later date as Trinad Capital may agree to in writing, unless prior to such date this note has been prepaid in full. During the year ended March 31, 2016, Trinad Capital made advances to the Company totaling $1,784,000. Subsequent to the making of the Second Senior Note:

The amount due to Trinad Capital under the Second Senior Note was $1,784,000 at March 31, 2016. During the six months ended September 30, 2016, Trinad Capital made additional advances to us under the Second Senior Note totaling $675,100. The Company also made repayments totaling $350,000 during six months ended September 30, 2016. As of September 30, 2016, $2,109,100 of principal was outstanding under the Second Senior Note. Accrued interest of $168,847 and $87,048 is reflected on the balance sheet as accrued interest payable, related party as of September 30, 2016 and March 31, 2016, respectively,

Note 7 – Other Note Payable

On December 31, 2014, the Company converted accounts payable into a Senior Promissory Note (the “Note”) in the aggregate principal amount of $242,498. The Note bears interest at 6% per annum and interest is payable on a quarterly basis commencing March 31, 2015 or the Company may elect that the amount of such interest be added to the principal sum outstanding under this Note. The payables arose in connection with professional services rendered by attorneys for the Company prior to and through December 31, 2014, and the Note had an original maturity date of December 31, 2015, which was extended to June 30, 2016 or such later date as the lender may agree to in writing. As of the date of this Quarterly Report on Form 10-Q (this “Quarterly Report”), the Note has not been extended and is currently in default. As of September 30, 2016 and March 31, 2016, $269,135 and $262,040 of principal, which includes $26,637 and $19,542 of accrued interest, respectively, were outstanding under the Note.

Note 8 – Unsecured Convertible Notes Payable

Unsecured Convertible notes payable at September 30, 2016 and March 31, 2016 were as follows:

(A) On January 19, 2016, the Company issued three 8% unsecured notes payable to investors (the “Lenders”) for an aggregate amount of $200,000. These notes will be due on January 19, 2018. If the Company raises a minimum of $2,500,000 (excluding the amount converting pursuant to the notes) in the aggregate in gross proceeds from an equity financing led by a reputable institutional investor in one or more closings prior to the maturity date, the Lenders will have the rights to convert all outstanding principal and interest into the same equity securities issued in such qualified equity financing at 75% of the issuance price of the securities in such financing. In addition, the Lenders received 400,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.005 per share. The aggregate relative fair value of the 400,000 warrants issued to the Lender was determined to be $99,915 using the Black-Scholes-Merton Option Pricing model with the following average assumptions: risk-free interest rate of 1.30%; dividend yield of 0%; volatility rate of 100%; and an expected life of four years (statutory term). The value of the warrants of $99,915 was considered as debt discount upon issuance and was being amortized as interest over the term of the notes or in full upon the conversion of the corresponding notes. During the year ended March 31, 2016, the Company amortized $9,818 of such discount to interest expense, and the unamortized discount as of March 31, 2016 was $89,727. During six months ended September 30, 2016, debt discount was fully amortized to interest expense.

On June 6, 2016, the Lenders converted $200,000 of principal and $5,918 of interest into 205,918 shares of the Company’s common stock at a conversion price of $1 per share. As the market price of the shares on the date of conversion approximated $1.25 per share, the Company recognized a beneficial conversion cost of $51,480.

In addition, the Lenders were issued 205,920 warrants to purchase shares of the Company’s common stock at an exercise price of $0.005 per share as inducement for this conversion. The aggregate fair value of the 205,920 warrants issued to the Lenders was $256,411 using the Black-Scholes-Merton Option Pricing model with the following average assumptions: risk-free interest rate of 1.20%; dividend yield of 0%; volatility rate of 100%; and an expected life of three years (statutory term). The value of the warrants of $256,411 was considered as additional interest expense upon their issuance. The warrants were exercised immediately into 205,920 shares of the Company’s common stock with net proceeds of $1,030 to the Company.

(B) On August 19, 2016, the Company issued a 6% unsecured note payable to a certain investor for total principal amount of $55,000. This note will be due on September 30, 2018. If the Company raises a minimum of $5,000,000 (excluding the amount converting pursuant to the note) in the aggregate in gross proceeds from an equity financing led by a reputable institutional investor in one or more closings prior to the maturity date, the investor will have the rights to convert all outstanding principal and interest into the same equity securities issued in such qualified equity financing at 75% of the issuance price of the securities in such financing. In addition, the investor received 55,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.005 per share. The aggregate relative fair value of the 55,000 warrants issued to the investor was determined to be $30,503 using the Black-Scholes-Merton Option Pricing model with the following average assumptions: risk-free interest rate of 0.88%; dividend yield of 0%; volatility rate of 100%; and an expected life of three years (statutory term). The value of the warrants of $30,503 was considered as debt discount upon issuance and was being amortized as interest over the term of the notes or in full upon the conversion of the corresponding notes. During six months ended September 30, 2016, the Company amortized $1,755 of such discount to interest expense, and the unamortized discount as of September 30, 2016 was $28,748.

(C) On September 14, 2016, the Company issued a 6% unsecured note payable to a certain investor for total principal amount of $150,000. This note will be due on September 13, 2018. If the Company raises a minimum of $5,000,000 (excluding the amount converting pursuant to the note) in the aggregate in gross proceeds from an equity financing led by a reputable institutional investor in one or more closings prior to the maturity date, the investor will have the rights to convert all outstanding principal and interest into the same equity securities issued in such qualified equity financing at 75% of the issuance price of the securities in such financing. In addition, the investor received 150,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.005 per share. The aggregate relative fair value of the 150,000 warrants issued to the investor was determined to be $83,189 using the Black-Scholes-Merton Option Pricing model with the following average assumptions: risk-free interest rate of 0.88%; dividend yield of 0%; volatility rate of 100%; and an expected life of three years (statutory term). The value of the warrants of $83,189 was considered as debt discount upon issuance and was being amortized as interest over the term of the notes or in full upon the conversion of the corresponding notes. During six months ended September 30, 2016, the Company amortized $1,823 of such discount to interest expense, and the unamortized discount as of September 30, 2016 was $81,366. 

Note 9 – Related Party Transactions

Management Services from Trinad Management LLC

Pursuant to a Management Agreement (the “Management Agreement”) with Trinad Management LLC (“Trinad LLC”) entered into on September 23, 2011, Trinad LLC agreed to provide certain management services to the Company through September 22, 2014, including, without limitation, the sourcing, structuring and negotiation of potential business acquisitions and customer contracts for the Company.  Under the Management Agreement, the Company compensated Trinad LLC for its services by (i) paying a fee equal to $2,080,000, with $90,000 payable in advance of each consecutive 3-month calendar period during the term of the Management Agreement and with $1,000,000 due at the end of the 3-year term, and (ii) issuing a warrant to purchase 2,250,000 shares of the Company’s common stock at an exercise price of $0.075 per share (the “Warrant”). The Warrant may be exercised in whole or in part by Trinad LLC at any time for a period of 10 years. On August 25, 2016, these warrants were exercised on a cashless basis at an exercise price of $0.075 per share, resulting in the issuance 2,115,000 shares of the Company’s common stock.

During the year ended March 31, 2015, the Company accrued $180,000 related to the remaining portion due under the Management Agreement. The total amount of $1,000,000 due to Trinad LLC is reflected as a liability on the accompanying September 30, 2016 and March 31, 2016 balance sheets. Trinad LLC continues to provide services to the Company at a fee of $30,000 per month on a month-to-month basis. For the six months ended September 30, 2016 and 2015, the Company incurred $180,000 of such costs. As of September 30, 2016, the Company had prepaid $90,000 of such fees which have been reflected as a prepaid asset, related party on the accompanying September 30, 2016 balance sheet.

As of September 30, 2016 and March 31, 2016, amounts due to related parties were $301,745 and $117,124, respectively, payable to Mr. Ellin, our Executive Chairman, President, director and majority stockholder. These amounts were provided for working capital as needed and are unsecured, non-interest bearing advances with no formal terms of repayment.

Rent

During the quarter ended September 30, 2016 and the fiscal year ended March 31, 2016, we subleased office space from Trinad LLC for no cost to us. Management estimates such amounts to be immaterial. We anticipate continuing to sublease such space at no cost to us for the foreseeable future. We believe that such property is in good condition and is suitable for the conduct of our business.

Note 10 – Commitments and Contingencies

Promotional Rights

The Company acquires promotional rights from time to time that may contain obligations for future payments.  During the period ended September 30, 2016, the Company incurred $350,000 in payment obligations for the acquisition of certain promotional rights.  As of September 30, 2016, the Company may be liable for additional future payments from these promotions based upon a percentage of net revenue collected.

Legal Proceedings

On May 20, 2016, Mr. Oliver Bengough filed a Petition for Relief (the “Petition”) in the High Court of Justice, Chancery Division (the “Court”) against OCHL, OCL, KOKO UK and Mr. Ellin (collectively, the “Respondents”). In connection with the Petition, effective as of May 20, 2016, Mint Group terminated the Management Services Agreement with OCL pursuant to which Mint Group served as a contracted service provider to KOKO, a nightclub and live music venue “KOKO” in Camden, London owned by KOKO UK. Mr. Bengough claimed certain breaches of duty by Mr. Ellin in connection with the corporate operations of the Respondents, as well as a “deterioration” of the relationship between the parties. Mr. Bengough further claimed that his interests have been unfairly prejudiced by the conduct of the Respondents and the breakdown of trust and confidence between himself and Mr. Ellin. In connection with such termination, the Company demanded the resignation of Mr. Bengough (a significant stockholder of Mint Group) from the board of OCHL due to what the Company strongly believed to be performance and management concerns on behalf of Mint Group and its non-payment of certain funds. OCHL was formed by OCL’s stockholders for the sole purpose of acquiring all of the registered and contributed capital of OCL, is a 50%-owned subsidiary of the Company and is the parent of OCL.

Among other things, Mr. Bengough was seeking an order by the Court for the sale by KOKO UK of its shares in OCHL to the Petitioner at a fair market value to be determined by the Court or an independent third party valuation with a discount to reflect the losses claimed to be suffered by Mr. Bengough. Mr. Bengough was further seeking, if required, an order terminating Mr. Ellin’s directorship of OCHL and OCL, permission to bring a derivative action against Mr. Ellin alleging breaches of certain duties set forth in the Petition, for the Court to set aside the Senior Note and Junior Note (as each defined below) or alternatively such part of those notes which the Petitioner alleges are expenses for which Respondents OCL and OCHL should not be liable and for the Court to declare that OCL and OCHL have no liability for such expenses to us, JJAT or any other person connected with Mr. Ellin. As part of the initial hearing, the Court granted Mr. Bengough’s request for interim relief to allow Mr. Bengough to continue running OCL’s business as it was conducted prior to the filing of the Petition, subject to Mr. Ellin’s approval of any expenditures exceeding $15,000 in amount (the “Interim Injunction”). This interim relief was granted pending a final decision on the Interim Injunction.

As part of the Merger consummated on April 28, 2014, OCHL and OCL became additional promisors under two promissory notes, a promissory note, dated as of April 28, 2014 (the “Senior Note”), issued in favor of JJAT, and a promissory note, dated as of April 28, 2014 (the “Junior Note”), issued in our favor. Pursuant to the Senior Note, OCHL and OCL are jointly liable to the Company for the principal amount of $1,376,124 and interest at 8% per annum. Pursuant to the Junior Note, OCHL and OCL are jointly liable to the Company for a principal amount of $494,749 and interest at 8% per annum. In the event the Court denies Mr. Bengough’s relief summarized above, a request was made by the Petitioner for an order by the Court for the “winding up” of OCL and OCHL based upon deadlock of its board and members.

The Respondents retained UK counsel in this matter and categorically deny all allegations in the Petition and intend to aggressively defend this action, to refute the allegations set forth therein and to file a substantive counter-complaint in answer to the Petition.

Subsequently, in connection with the Interim Injunction, the Petitioner and the Respondents entered into a Consent Order, as approved by the Court on July 22, 2016 (the “Consent Order”), pursuant to which, among other things, (i) Mr. Ellin resigned as a director of OCHL and OCL and Mr. Griston was appointed as a new independent non-executive director on the boards of directors of the two companies, and (ii) the parties agreed to certain terms allowing them to either settle the disputes or proceed with a sale of the business to either party.

On September 22, 2016, Mr. Bengough entered into a Settlement Agreement (the “Settlement Agreement”) with the Respondents and Global Loan Agency Services Limited, as escrow agent (the “Escrow Agent”), relating to the Petition. Pursuant to the Settlement Agreement, at the Closing (as defined below) the parties agreed, among other things, to (i) the terms of settlement in relation to all facts, matters and allegations raised by the Petition against the Respondents, including disputed liability under the Junior Note, (ii) sell 48,878 ordinary shares and the 2,750 deferred ordinary shares in OCHL owned by KoKo UK to Mr. Bengough on the terms provided in the Settlement Agreement, (iii) resolve certain ancillary matters arising from the past business dealings between Messrs. Ellin and Bengough, and (iv) to consummate the transactions contemplated thereunder and under certain related transaction documents (as defined below) (collectively, the “Settlement Transactions”).

As part of the Settlement Transactions, Messrs. Ellin and Bengough entered into an engagement agreement with BTG Financial Consulting LLP BTG (“BTG”) pursuant to which BTG will carry out an independent expert valuation of the value of the ordinary shares in OCHL on the terms set forth in the draft engagement letter appearing as an annex to the Settlement Agreement (the “Valuation”). Upon the conclusion of the Valuation, among other things, (i) Mr. Bengough shall pay to the Company 50% of the value of the ordinary and deferred ordinary shares in OCHL less £37,000 (the “Purchase Price”) and as a result, acquire the Company’s 50% interest in OCHL, (ii) the Settlement Transactions shall be consummated, (iii) the Company shall discharge the Junior Note, without any further payment by Mr. Bengough or any other entity to Mr. Ellin, KoKo UK or the Company, and (iv) each party agreed, on behalf of itself and on behalf of its Related Parties (as defined in the Settlement Agreement) not to sue, commence, voluntarily aid in any way, prosecute or cause to be commenced or prosecuted against the other party or its Related Parties in any action, suit or other proceedings concerning the Released Claims (as defined in the Settlement Agreement), in UK or any other jurisdiction. Successful completion of the transactions referred to in clauses (i) through (iv) is collectively defined as the “Closing”.

To secure the payment of the Purchase Price, Mr. Bengough (a) executed a Deed of Charge over his shares in OCHL in favor of KoKo UK, and (b) deposited with the Escrow Agent (collectively, the “Escrowed Items”) (i) the sum of £1,272,265 and (ii) certificates representing 48,878 ordinary shares and the 2,750 deferred ordinary shares in OCHL held by Mr. Bengough and certain related documents. In the event that Mr. Bengough does not make the full payment of the Purchase Price to KoKo UK and/or Mr. Ellin within the time provided in the Settlement Agreement (as discussed more fully below), the Escrow Agent shall release the Escrowed Items to KoKo UK, Mr. Ellin and/or the Company.

No later than the seventh business day after the date on which BTG provides its final Valuation report to Messrs. Ellin and Bengough and the Escrow Agent (the “Payment Cut-Off Date”), Mr. Bengough shall ensure that KoKo UK is in receipt of cleared funds for the full amount of the Purchase Price. If the Purchase Price is less than £1,272,265, an amount equal to the Purchase Price will be paid to KoKo UK by the Escrow Agent out of the funds deposited with the Escrow Agent, subject to and in accordance with the terms of the escrow agreement entered into by the parties (the “Escrow Agreement”). If the Purchase Price is equal to or more than £1,272,265, the full amount of £1,272,265 will be paid by the Escrow Agent to KoKo UK and Mr. Bengough shall, by the Payment Cut-Off Date, pay an amount equal to the difference between the Purchase Price and £1,272,265 to the Escrow Agent’s account, with such sum then to be paid by the Escrow Agent to an account specified by Mr. Ellin, subject to and in accordance with the terms of the Escrow Agreement.

Note 11 – Equity Incentive Plan

On August 29, 2016, the Company’s Board of Directors and stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”), which reserves a total of 22,800,000 shares of the Company’s common stock for issuance under the 2016 Plan. Incentive awards authorized under the 2016 Plan include, but are not limited to, incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. If an incentive award granted under the 2016 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with the exercise of an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2016 Plan.

As of the date of this Quarterly Report, no awards or any shares of Common Stock have been issued under the 2016 Plan.

Note 12 – Stockholders’ Equity

Sale of Common Stock or Equity Units

During the six months ended September 30, 2016, the Company entered into securities purchase agreements with certain accredited investors, pursuant to which the Company sold an aggregate of 500,000 units at a purchase price of $2.50 per share for $1,250,000 in cash proceeds. Each unit consisted of one share of the Company’s common stock and one warrant to purchase a share of the Company’s common stock, exercisable for a period of three years from the date of original issuance at an exercise price of $0.005 per share.

Issuance of Common Stock for Services

During the six months ended September 30, 2016, the Company issued 543,040 shares of its common stock valued at $450,800 to various consultants. The Company valued these shares at prices from $0.50 to $1.25 per share, the most recent price of the sale of its common stock near the date of grant.

Warrants

On June 2, 2016, the Company issued warrants to acquire 205,920 shares of the Company’s common stock valued at $256,411 as an inducement to convert a convertible note. These warrants, along with 400,000 warrants issued to the note holder upon issuance of the note, were exercised during the period at an exercise price of $0.005 per share, resulting in net proceeds to the Company of $3,030.

In April, 2016, the Company issued warrants to Trinad Capital, a related party, to acquire 3,352,754 shares of the Company’s common stock valued at $1,661,114 at an exercise price of $0.005 to extend the maturity dates of certain notes. These warrants were exercised during the period at an exercise price of $0.005 per share, resulting in net proceeds to the Company of $16,764.

On August 19, 2016, the Company issued warrants along with convertible note, to acquire 55,000 shares of Company’s common stock valued at $30,503 at an exercise price of $0.005.

On September 14, 2016, the Company issued warrants along with a convertible note to acquire 150,000 shares of Company’s common stock valued at $83,189 at an exercise price of $0.005.

The table below summarizes the Company’s warrant activities:

Increase of Authorized Common Stock and Creation of Preferred Stock

On August 29, 2016, the Company’s Board of Directors and stockholders approved for the Company to file a Certificate of Amendment to its Articles of Incorporation (the “Certificate”) with the Secretary of State of the State of Nevada, which increased the Company’s authorized capital stock. The Certificate was filed and became effective on September 1, 2016. The Certificate increased the aggregate number of shares of capital stock which the Company has the authority to issue to 501,000,000 shares, consisting of 500,000,000 shares of common stock and 1,000,000 shares of the Company’s preferred stock, $0.001 par value per share (the “preferred stock”).