-Aug-2013

Quarterly Report

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements.

Company Overview

We are a consumer goods incubator in the business of creating, acquiring and marketing consumer packaged goods, primarily beverages and nutritional supplements.

We sell 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 to consumer packaged goods companies on product placement and distribution.

On February 26, 2012, we acquired all of the assets of Zizzaz, including energy and vitamin drink products under the name Zizzaz including Zizzaz Energy Mix, Zizzazz Extreme Formula, and Kidzazz Kids Vitamins. We sold the Zizzaz products in the past and have ceased the sales when we sold out all of the inventory of the Zizzaz products that we acquired from Zizzaz. We have no present plan to engage any manufacturing or further selling of such products.

Recent Developments

Financing Transactions

Modification to $200,000 Note dated February 6, 2012

On March 31, 2013, a holder of a Company’s note dated February 6, 2012 in a principal amount of $450,000 sold $200,000 of the principal of such note plus accrued interests and associated rights (the “Purchased Note”) to a third-party purchaser pursuant to a Securities Transfer Agreement (the “Securities Transfer Agreement”). The Company acknowledged and agreed to, certain representations and covenants in the Securities Transfer Agreement, among others, that the Purchased Note be amended to be convertible at an initial conversation price equal to fifty percent (50%) (the “Discount”) of the lowest closing bid price for the Company’s common stock, during the twenty (20) trading days immediately preceding a conversion date, as reported by Bloomberg (the “Lowest Closing Bid Price”); provided however, that if the Company’s common stock becomes chilled by Deposit Trust Corporation (DTC) at the time of the conversion notice, the Discount shall be forty five percent (45%). The initial conversion price shall be adjusted, if the closing bid price for the Company’s common stock on the Clearing Date (as defined in the Securities Transfer Agreement) (the “Clearing Date Closing Bid Price”) is lower than the Lowest Closing Bid Price, as such that the Lowest Closing Bid Price shall be replaced by the Clearing Date Closing Bid Price. The conversion price for the Purchased Note before the Securities Transfer Agreement was $0.00714 per share. The conversion price is subject to adjustment subject to adjustments upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate changes.

$55,000 Note in April 2013

On April 8, 2013, we issued a promissory note in the aggregate principal amount of $55,000 (the “April 2013 Financing Note”) and received the proceed. The April 2013 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 holder is entitled to convert any portion of the outstanding and unpaid amount at any time on or after the issuance date, at an initial conversation price equal to fifty percent (50%) (the “Discount”) of the lowest closing bid price for the Company’s Common Stock, during the twenty (20) trading days immediately preceding a conversion date, as reported by Bloomberg (the “Lowest Closing Bid Price”); provided however, that if the Company’s common stock becomes chilled by Deposit Trust Corporation (DTC) at the time of the conversion notice, the Discount shall be forty five percent (45%). The initial conversion price shall be adjusted, if the closing bid price for the Company’s common stock on the Clearing Date (as defined in the April 2013 Financing Note) (the “Clearing Date Closing Bid Price”) is lower than the Lowest Closing Bid Price, as such that the Lowest Closing Bid Price shall be replaced by the Clearing Date Closing Bid Price. The conversion price is subject to adjustment for stock splits or dividends paid on common stock and in shares of common stock. The maximum amount of the conversion price shall not exceed $0.007 per share, subject to adjustment as provided therein.

 


$30,000 Note in May 2013

On May 14, 2013 and May 20, 2013, we issued two promissory notes in the aggregate principal amount of $25,000 and $5,000, respectively (the “May 2013 Financing Note”) and received the proceed. The May 2013 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 May 2013 Financing Note has identical terms with respect to conversion price as April 2013 Note. The May 2013 Financing Note contains conversion beneficial ownership limitation to prevent the holder to become a beneficial owner of 4.99% of the number of shares of the common stock outstanding. However, the holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the beneficial ownership limitation, provided that the beneficial ownership limitation in no event exceeds 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion.

The foregoing description of the May 2013 Financing Note is qualified in their entirety by reference to the provisions of the form of April 2013 Financing Note filed as Exhibits 4.1 to this report, respectively, which are incorporated by reference herein.

$40,000 Note in July 2013

On July 12, 2013 we issued a promissory note in the aggregate principal amount of $40,000 (the “July 2013 Financing Note”). The July 2013 Financing Note has identical terms as the May 2013 Financing Note.

Notes Issued to Employees

From March to June of 2013, the Company issued promissory notes in an aggregate principal amount of $152,000 to three employees as compensation for the services provided by them to the Company (the “Employee Notes”). These Employee Notes had identical terms as the May 2013 Financing Note. In August, the Company and the three employees executed a wavier and amendment to each of the Employee Notes, pursuant to which, the three employees waived all and any of their rights to convert any portion of the outstanding and unpaid Conversion Amount (subject to certain limitations) into shares of the Company’s common stock, and the Employee Notes were amended to remove the conversion features effective from the date of such waiver and amendment.

Going Concern

As reflected in the accompanying financial statements, the Company has a net loss from operations and net cash used in operations of $794,655 and $251,898, respectively, for the nine months ended May 31, 2013 and an accumulated net loss during the development stage totaling $11,640,423. The Company currently is in the development stage and has only generated $604,968 in revenue since its inception.

Our current auditor and prior auditor have indicated in their reports on our financial statements for the fiscal years ended August 31, 2012 and August 31, 2011 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

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. Additional financing may not be available when needed or may not be available on terms acceptable to us. If adequate funds are not available, our business would be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.

 

Results of Operations

                                                       Three                                         March 30, 2010
                                  Three Months        Months        Nine Months      Nine Months       (inception)
                                      Ended            Ended           Ended            Ended            through
                                     May 31,          May 31          May 31,          May 31,           May 31,
                                      2013             2012             2013            2012              2013
Net sales                         $      98,008     $   107,483     $    377,781     $   110,507     $       604,968
Gross profit                      $      48,804     $   (15,684 )   $    128,641     $   (14,757 )   $       154,332
Operating expenses                $     444,834     $   175,604     $    923,296     $   309,822     $     2,451,113
Loss from operations              $    (396,030 )   $  (191,288 )   $   (794,655 )   $  (324,579 )   $    (2,296,781 )
Other income (expense)            $  (6,121,130 )   $  (166,967 )   $  5,017,725     $  (176,759 )   $    (9,343,642 )
Net income (loss)                 $  (6,517,160 )   $  (358,255 )   $  4,223,070     $  (501,338 )   $   (11,640,423 )
Income (loss) per common share
- basic and diluted               $       (0.11 )   $     (0.01 )   $       0.08     $     (0.00 )   $             -

 


For the three months ended May 31, 2013 and May 31, 2012

Revenue

We had sales during the three months ended May 31, 2013 and May 31, 2012 of $98,008 and $107,483, 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

Gross profit during the three months ended May 31, 2013 and May 31, 2012 was $48,804 and $(15,684), respectively. We are currently in a development stage and have generated minimal revenues. During the three months ended May 31, 2012, obsolete inventory in the amount of $22,687 was written off which contributed to our negative gross profit margin.

Operating Expenses

Operating expenses for the three months ended May 31, 2013 were $444,834, as compared to $175,604 for the three months ended May 31, 2012. The increase is primarily related to an increase in payroll and payroll related expenses of $201,000, an increase in stock based compensation of $40,900, an increase in legal and professional fees of $23,400, and an increase in insurance expense of $4,600. These increases were partially offset by a decrease in product promotion and travel related expenses of $17,000.

Income (Loss) from Operations

Income (loss) from operations for the three months ended May 31, 2013 was $(396,030), as compared to $(191,288) for the three months ended May 31, 2012. The increase in loss from operations was primarily attributable to the operating expenses as detailed above.

Other Income (Expenses)

Other Income (Expenses) for the three months ended May 31, 2013 was $(6,121,130), as compared to $(166,967)) for the three months ended May 31, 2012. The increase in other expenses was primarily attributable to a loss of $(5,815,907) in fair market value recorded of derivative liabilities relating to convertible notes issued during 2012 and 2013 and an increase in derivative expense of $118,846 relating to convertible notes issued 2013.

Net Income (Loss)

Net loss for the three months ended May 31, 2013 was $(6,517,160) or loss per share of $(0.11), as compared to a net loss of $(358,255) or loss per share of $(0.01), for the three months ended May 31, 2012. 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.

For the nine months ended May 31, 2013 and May 31, 2012

Revenue

We had sales during the nine months ended May 31, 2013 and May 31, 2012 of $377,781 and $110,507 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

Gross profit during the nine months ended May 31, 2013 and May 31, 2012 was $128,641 and $(14,757), respectively. We are currently in a development stage and have generated minimal revenues. During the nine months ended May 31, 2013 and 2012, the Company wrote-off obsolete inventory in the amount of $56,448 and 22,687, respectively which negatively impacted our gross profit for the periods.

Operating Expenses

Operating expenses for the nine months ended May 31, 2013 were $923,296, as compared to $309,822 for the nine months ended May 31, 2012.The increase is primarily related to an increase in payroll and payroll related expenses of $310,000, an increase in legal and professional fees in the amount of $97,000, an increase in stock based compensation of $134,000, an increase in rent and warehousing expenses of $7,700, an increase in insurance expense of $16,000 and an increase in product promotion and travel related expenses of $20,600.

 


Income (Loss) from Operations

Income (loss) from operations for the nine months ended March 31, 2013 was $(794,655), as compared to $(324,579) for the nine months ended May 31, 2012. The increase in loss from operations was primarily attributable to the operating expenses as detailed above.

Other Income (Expenses)

Other Income (Expenses) for the nine months ended May 31, 2013 was $5,017,725, as compared to $(176,759) for the nine months ended May 31, 2012. The increase in other income was primarily attributable to a gain of $5,680,422 in fair market value recorded of derivative liabilities relating to convertible notes issued during 2012 and 2013, offset by increases in interest recorded on convertible notes issued during 2012 and 2013, an increase in derivative expense and accretion of the debt discount recorded on the 2012 and 2013 convertible notes.

Net Income (Loss)

Net income for the nine months ended May 31, 2013 was $4,223,070 or income per share of $0.08, as compared to a net loss of $(501,338) or loss per share of $(0.00), for the nine months ended May 31, 2012. The increase in net income 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 May 31, 2013 and August 31, 2012.

                                                            May 31,        August 31,
                                                             2013             2012
                             Current Assets              $      72,045     $   102,594
                             Current Liabilities         $ (10,528,652 )   $  (341,181 )
                             Working Capital (Deficit)   $ (10,456,607 )   $  (238,587 )

For the Nine Months Ended May 31, 2013

At May 31, 2013 we had a working capital deficit of $(10,456,607), as compared to a working capital deficit of $(238,527), at August 31, 2012, an increase in our working capital deficit of $10,218,020. The increase in working capital deficit is primarily related to convertible notes maturing in the next 12 months along with related derivative liabilities classified as current liabilities at May 31, 2013 as opposed to classification as long term liabilities at August 31, 2012. The increase in working capital deficit also relates to increased liabilities incurred for legal and professional fees, payroll and related expenses, promotion related expenses and interest accrued on convertible notes issued during 2012 and 2013. 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 Nine Months Ended May 31, 2013 and May 31, 2012

Net Cash Used in Operating Activities

Net cash used in operating activities for the nine months ended May 31, 2013 and May 31, 2012 was $(251,898) and $(315,976), respectively. The net income (loss) for the nine months ended May 31, 2013 and May 31, 2012 was $4,223,070 and $(501,338), respectively. The decrease in net cash used in operating activities for the nine months ended May 31, 2013 as compared to May 31, 2012, was primarily for legal and professional fees, payroll and related expenses and promotional and travel related expenses being accrued and not paid due to minimal working capital.

 


Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended May 31, 2013 and May 31, 2012 was $2,364 and $0, respectively. During the nine months ended May 31, 2013 this consisted of $2,364 for the purchase of furniture, equipment and leasehold improvements.

Net Cash Provided by Financing Activities

Net cash provided through all financing activities for the nine months ended May 31, 2013 and May 31, 2012 was $242,961 and $345,605, respectively. During the nine months ended May 31, 2013 this consisted of $218,500 provided through the issuance of traditional and convertible notes and $41,701 in proceeds from related party loans to the company. During the nine months ended May 31, 2012 this consisted of $345,099 provided through the issuance of traditional and convertible notes and $20,506 in proceeds from related party loans to the company.

During the nine months ended May 31, 2013 principal payments on notes payable and repayments of related party loans were $7,240 and $10,000, respectively.

During the nine months ended May 31, 2012 repayments of related party loans were $20,000.

As of May 31, 2013, the Company’s cash position was approximately $4,000. We believe that our cash on hand along with anticipated revenues will not provide sufficient working capital to fund our operations through August 31, 2013. 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 ability of the Company to continue its operations is dependent on management’s plans to raise additional capital. We may seek to raise the fund by way of equity or debt offerings, or a combination thereof. We cannot assure you that we will be able to raise the capital as needed in the future on terms acceptable to us, 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

o 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

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 


Basis of presentation – unaudited interim financial information

The accompanying unaudited interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the year ended August 31, 2012 and notes thereto contained in the Company’s annual report on Form 10-K for the year ended August 31, 2012 as filed with the SEC on December 14, 2012.

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.

Intangibles

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.

Long-Lived Assets

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.

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 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 . . .

 
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