We are a consumer goods incubator in the business of creating, acquiring and marketing consumer packaged goods, primarily beverages and nutraceuticals.
We sell beverages and nutraceutical products with our own Zizzaz brand and third-party manufactured beverages and nutraceutical products to retail stores including brand name stores such as 7-Eleven, Circle K, Valero, Walgreens, Arco AM/PM, Shell, and we also distribute beverages and nutraceutical products through distribution companies and brokers and wholesalers. We also provide consulting services on product placement and distribution.
We own energy and vitamin drink products under the name Zizzaz including Zizzaz Energy Mix, Zizzazz Extreme Formula, and Kidzazz Kids Vitamins.
We are in the development stage. We has a net loss and net cash used in operations of $15,851,293 and $376,345, respectively, for the year ended August 31, 2012 and an accumulated net loss during the development stage totaling $15,863,493. We have only generated $227,187 in revenue since its inception. These conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to develop additional sources of capital and ultimately achieve profitable operations.
$40,000 Note Offering in September 2012
On June 27, 2012 we issued promissory notes in the aggregate principal amount of $40,000 (the “September Financing Note”). The September Financing Note has a two-year term and compounds annually and accrues at 10% per annum from the issue date through the maturity date. The holders are entitled to convert any portion of the outstanding and unpaid amount at any time on or after the issuance date, at $0.20 per share, subject to adjustments upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate changes.
$50,000 Note in October 2012
On October 23, 2012 we issued a promissory note in the aggregate principal amount of $50,000 (the “October Financing Note”). The October Financing Note has identical terms as September Financing Note.
$30,000 Note Offering in December 2012
On December 4, 2012 we issued promissory notes in the aggregate principal amount of $30,000 (the “December Financing Note”). As of this report, we received proceeds of $15,000. The December Financing Note has identical terms as September Financing Note.
The foregoing description of the September Financing Note is qualified in their entirety by reference to the provisions of the form of September Financing Note filed as Exhibits 4.4 to this Report, respectively, which are incorporated by reference herein.
Results of Operations March 30, 2010 (inception) Year Ended Year Ended through August 31, August 31, August 31, 2012 2011 2012 Net sales $ 227,187 $ - $ 227,187 Gross profit $ 25,691 $ - $ 25,691 Operating expenses $ 1,515,617 $ 11,450 $ 1,527,817 Loss from operations $ (1,489,926 ) $ (11,450 ) $ (1,502,126 ) Other income (expense) $ (14,361,367 ) $ - $ (14,361,367 ) Net loss $ (15,851,293 ) $ (11,450 ) $ (15,863,493 ) Loss per common share - basic and diluted $ (0.16 ) $ (0.00 ) $ -
The Company was originally formed to develop internet based software that will automate project management workflow allowing project managers, supervisors, coordinators, vendors and customers to view in real time the progress and specific scheduling of a multistage project. Under this business model, we did not generate any revenue and our operations were limited primarily to capital formation, organization, and development of our business plan.
Change in Business Model
In February 2012 we ceased to engage in the internet based software industry and acquired the business of Zizzaz, LLC to engage in the business of creating, acquiring and marketing consumer packaged goods, primarily beverages and nutraceuticals. The Company also provides consulting services in which we advise clients on product placement and distribution.
We had sales during the year ended August 31, 2012 and August 31, 2011 of $227,187 and $0 respectively. At this time, we are domestically marketing our new products and consulting services and are in the infancy stage of the revenue generating cycle
Gross profit during the year ended August 31, 2012 and August 31, 2011 was $25,691 and $0, respectively. We are currently in a development stage and have generated minimal revenues. During the year ended August 31, 2012, the Company wrote-off obsolete inventory in the amount of $22,687 which negatively impacted our gross profit for the year.
Operating expenses for the year ended August 31, 2012 were $1,515,617, as compared to $11,450 for the year ended August 31, 2011.The increase is primarily related to an increase in legal and professional fees in the amount of $375,000, Impairment of long-lived assets of $993,547, rent and warehousing expenses of $23,000 and product promotion and travel related expenses of $100,000.
Loss from Operations
Loss from operations for the year ended August 31, 2012 was $(1,489,926), as compared to $(11,450) for the year ended August 31, 2011. The increase in loss from operations was primarily attributable to the operating expenses as detailed above.
Other Income (Expenses)
Other Income (Expenses) for the year ended August 31, 2012 was $(14,361,367), as compared to $0 for the year ended August 31, 2011. The increase in other expense was primarily attributable to a loss in fair market value recorded of derivative liabilities relating to convertible notes issued during 2012, interest recorded on convertible notes issued during 2012 and accretion of the debt discount recorded on the 2012 convertible notes.
Net Loss for the year ended August 31, 2012 was $(15,851,293) or loss per share of $(0.16), as compared to a net loss of $(11,450) or loss per share of $(0.00), for the year ended August 31, 2011. The increase in net loss was primarily attributable to the operating expenses and other income (expenses) as detailed above.
Inflation did not have a material impact on the Company’s operations for the period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at August 31, 2012 and August 31, 2011.
August 31, 2012 August 31, 2011 Current Assets $ 102,594 $ - Current Liabilities $ (341,181 ) $ (500 ) Working Capital (Deficit) $ (238,587 ) $ (500 )
At August 31, 2012 we had a working capital deficit of $(238,587), as compared to a working capital deficit of $(500), at August 31, 2011, an increase in our working capital deficit of $238,087. The increase in working capital deficit is primarily related to increased liabilities incurred for legal and professional fees, promotion related expenses and interest accrued on convertible notes issued during 2012. At this time, we are in the infancy stage of the revenue generating cycle and are relying on debt and/or equity financings to fund operations.
For the Year Ended August 31, 2012 and August 31, 2011
Net Cash Used in Operating Activities
Net cash used in operating activities for the year ended August 31, 2012 and August 31, 2011 was $(376,345) and $(11,450), respectively. The net loss for the year ended August 31, 2012 and August 31, 2011 was $(15,851,293) and $(11,450), respectively. The increase in cash used in operating activities for the year ended August 31, 2012 as compared to August 31, 2011, was primarily for legal and professional fees and promotional and travel related expenses.
Net Cash Provided by Financing Activities
Net cash provided through all financing activities for the year ended August 31, 2012 and August 31, 2011, was $391,726 and 7,200, respectively. During the year ended August 31, 2012 this consisted of $395,099 provided through the issuance of traditional and convertible notes and $20,506 in proceeds from related party loans to the company. During the year ended August 31, 2011 this consisted of $6,700 provided through the issuance of common stock and $500 in proceeds from related party loans to the company.
During the year ended August 31, 2012 principal payments on notes payable were $3,575 and related party loans in the amount of $20,300 were repaid.
As of August 31, 2012, the Company’s cash position was approximately $15,000. The Company anticipates that its cash position is not sufficient to fund current operations through August 31, 2013. The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes.
The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. We have been funding our operations through the raising of capital through the issuance of debt.
Our primary uses of cash have been for marketing and professional fees. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
? The cost of being a public company.
We are not aware of any known trends or any known demands, commitments or events that will result in our liquidity increasing or decreasing in any material way. We are not aware of any matters that would have an impact on future operations.
Our liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly.
Critical Accounting Policies, Estimates and Assumptions
Basis of presentation
The financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. If we were not to continue as a going concern, we would likely not be able to realize on our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the financial statements. There can be no assurances that we will be successful in generating additional cash from equity or other sources to be used for operations. The financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
Development Stage Company
The Company’s financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include equity and debt based financing and further implementation of the business plan, including research and development.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Risks and Uncertainties
The Company’s operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable, net of the allowance for doubtful accounts.
Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) valuation method.
Intangibles are comprised of goodwill, trade names and customer lists. In accordance with ASC 350, intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. The Company amortizes it’s intangibles with finite useful lives over their respective useful lives.
Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets, for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, generally, management then prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated using the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions.
Debt Issue Costs and Debt Discount
These items are amortized over the life of the debt to interest expense. If a conversion, extinguishment or repayment of the underlying debt occurs, a proportionate share of these amounts is immediately expensed.
Fair Value of Financial Instruments
The Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:
Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 3 Pricing inputs that are generally unobservable inputs and not corroborated by market data.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values because of the short maturity of these instruments.
We have determined that it is not practical to estimate the fair value of our notes payable because of their unique nature and the costs that would be incurred to obtain an independent valuation. We do not have comparable outstanding debt on which to base an estimated current borrowing rate or other discount rate for purposes of estimating the fair value of the notes payable and we have not been able to develop a valuation model that can be applied consistently in a cost efficient manner. These factors all contribute to the impracticability of estimating the fair value of the notes payable.
The Company’s Level 3 financial liabilities consist of the derivative conversion features issued in February and June 2012 for which there is no current market for this security such that the determination of fair value requires significant judgment or estimation. The Company valued the conversion features using a binomial model. These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.
Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative liability.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:
The Company adopted the disclosure requirements of ASU 2011-04, Fair Value Measurements, during the year ended August 31, 2012. The unobservable level 3 inputs used by the Company was the expected volatility assumption used in the option pricing model and the fair value of the Company’s stock price. Expected volatility is based on the historical stock price volatility of comparable companies’ common stock, as our stock does not have sufficient historical trading activity. The fair value assumption of the company’s common stock utilized in the calculation is derived from the company’s current trading price on the bulletin board, adjusted to reflect the effect of potential dilution.
Changes in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable inputs used in the fair value measurements is the expected volatility assumption and fair value of the Company’s common stock price. A significant increase (decrease) in the expected volatility and/or fair value of the Company’s common stock price assumptions could potentially result in a higher (lower) fair value measurement.
Discount on Debt
The Company allocated the proceeds received from convertible debt instruments between the underlying debt instruments and has recorded the conversion feature as a liability in accordance with FASB Accounting Standard Codification 815-15 (ASC 815-15). The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision have been recorded at their fair value within the terms of ASC 815-15 as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The value of the embedded derivative liability was bifurcated from the debt host contract and recorded as a derivative liability, which resulted in a reduction of the initial carrying amount (as unamortized discount) of the notes. The conversion liability is marked to market each reporting period with the resulting gains or losses shown in the statements of operations.
The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
Research and Development
Research and development is expensed as incurred.
Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments is recorded as general and administrative expense.
Income taxes are provided in accordance with ASC No. 740, Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
We classify our revenue as either Product revenue or Service revenue.
Product revenue – Our product revenue includes revenue associated with the sale of consumer packaged goods, primarily beverages and nutraceuticals.
Service revenue – Service revenue is derived from product development revenue and consulting revenue relating to sales and logistics. Revenue associated with product development is recognized ratably over the contract period, which typically ranges from a minimum of one month to a maximum of less than a year. Consulting revenues are recognized ratably over the service periods.
Deferred revenue consists of amounts billed to, or payments received from, customers for Services that have not met the criteria for revenue recognition.
We evaluate and recognize revenue when all four of the following criteria are . . .