ITEM 1.
FINANCIAL STATEMENTS
INDEX
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|
Unaudited Consolidated Balance Sheets
|
2
|
|
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Unaudited Consolidated Statements of Operations
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3
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|
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Unaudited Consolidated Statements of Cash Flows
|
4
|
|
|
Notes to Unaudited Consolidated Financial Statements
|
5
|
LOT78, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
March 31,
|
|
September 30,
|
|
|
2014
|
|
2013
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58,868
|
|
|
$
|
274,312
|
|
Accounts receivable
|
|
|
345,858
|
|
|
|
132,422
|
|
Prepaid expenses and other current assets
|
|
|
8,786
|
|
|
|
63,735
|
|
Inventory, net
|
|
|
123,076
|
|
|
|
61,460
|
|
Total current assets
|
|
|
536,588
|
|
|
|
531,929
|
|
Property and equipment, net
|
|
|
2,561
|
|
|
|
3,614
|
|
Patents, net
|
|
|
21,172
|
|
|
|
22,457
|
|
Total assets
|
|
$
|
560,321
|
|
|
$
|
558,000
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
391,251
|
|
|
$
|
280,535
|
|
Accounts payable – related party
|
|
|
50,493
|
|
|
|
26,850
|
|
Factoring credit facility
|
|
|
198,807
|
|
|
|
—
|
|
Debt due to third parties
|
|
|
354,368
|
|
|
|
137,156
|
|
Debt due to related parties
|
|
|
33,274
|
|
|
|
32,272
|
|
Derivative liabilities
|
|
|
149,990
|
|
|
|
434,464
|
|
Convertible debt due to shareholders
|
|
|
89,194
|
|
|
|
124,610
|
|
Due to shareholders
|
|
|
332,740
|
|
|
|
322,594
|
|
Total current liabilities
|
|
|
1,600,117
|
|
|
|
1,358,481
|
|
Long term debt due to shareholders
|
|
|
323,556
|
|
|
|
313,813
|
|
Convertible debt, net of discount of $437,365 and $437,500
|
|
|
12,635
|
|
|
|
12,500
|
|
Total long term liabilities
|
|
|
336,191
|
|
|
|
326,313
|
|
Total liabilities
|
|
$
|
1,936,308
|
|
|
|
1,684,794
|
|
|
|
|
|
|
|
|
|
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Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value per share, 10,000,000 shares authorized, none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.001 par value per share, 350,000,000 shares authorized, 237,570,283 and 237,403,616 shares issued and outstanding
|
|
|
237,571
|
|
|
|
237,404
|
|
Additional paid-in capital
|
|
|
877,673
|
|
|
|
865,340
|
|
Accumulated other comprehensive income (loss)
|
|
|
8,558
|
|
|
|
42,134
|
|
Accumulated deficit
|
|
|
(2,499,789
|
)
|
|
|
(2,271,672
|
)
|
Total stockholders’ deficit
|
|
|
(1,375,987
|
)
|
|
|
(1,126,794
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
560,321
|
|
|
|
558,000
|
|
The accompanying notes are an integral part
of the consolidated unaudited financial statements
LOT78, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE LOSS
(unaudited)
|
|
Three
Months
Ended
March 31, 2014
|
|
Three
Months
Ended
March 31, 2013
|
|
Six
Months
Ended
March 31,
2014
|
|
Six
Months
Ended
March 31, 2013
|
Revenue, net
|
|
$
|
704,244
|
|
|
$
|
150,759
|
|
|
|
759,974
|
|
|
|
209,454
|
|
Cost of sales
|
|
|
443,496
|
|
|
|
101,774
|
|
|
|
512,905
|
|
|
|
177,157
|
|
Gross Profit
|
|
|
260,748
|
|
|
|
48,985
|
|
|
|
247,069
|
|
|
|
32,297
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
448,819
|
|
|
$
|
265,216
|
|
|
|
722,395
|
|
|
|
389,566
|
|
Depreciation and amortization
|
|
|
1,700
|
|
|
|
1,075
|
|
|
|
3,231
|
|
|
|
2,109
|
|
Total expenses
|
|
|
450,519
|
|
|
|
266,291
|
|
|
|
725,626
|
|
|
|
391,675
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(22,716
|
)
|
|
|
(9,972
|
)
|
|
|
(34,034
|
)
|
|
|
(20,373
|
)
|
Gain on debt forgiveness
|
|
|
|
|
|
|
56,421
|
|
|
|
|
|
|
|
56,421
|
|
Gain on derivative liabilities
|
|
|
42,224
|
|
|
|
|
|
|
|
284,474
|
|
|
|
|
|
Total other income (expense)
|
|
|
19,508
|
|
|
|
46,449
|
|
|
|
250,440
|
|
|
|
36,048
|
|
Net loss
|
|
$
|
(170,263
|
)
|
|
$
|
(170,857
|
)
|
|
|
(228,117
|
)
|
|
|
(323,330
|
)
|
Foreign currency translation adjustments
|
|
|
(8,459
|
)
|
|
|
87,458
|
|
|
|
(33,576
|
)
|
|
|
87,401
|
|
Comprehensive income (loss)
|
|
|
(178,722
|
)
|
|
|
(83,339
|
)
|
|
|
(261,693
|
)
|
|
|
(235,929
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Weighted average shares of common stock outstanding – basic
|
|
|
237,477,892
|
|
|
|
57,053,138
|
|
|
|
237,477,892
|
|
|
|
57,053,138
|
|
The accompanying notes are an integral part
of the consolidated unaudited financial statements
LOT78, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Six months
Ended
|
|
Six months
Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2014
|
|
2013
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(228,117
|
)
|
|
$
|
(323,330
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,147
|
|
|
|
228
|
|
Amortization
|
|
|
2,084
|
|
|
|
1,881
|
|
Gain on debt forgiveness
|
|
|
|
|
|
|
(56,421
|
)
|
Gain on derivative liabilities
|
|
|
(284,474
|
)
|
|
|
—
|
|
Debt discount amortization
|
|
|
135
|
|
|
|
—
|
|
Stock based compensation
|
|
|
12,500
|
|
|
|
—
|
|
Change in operating assets/liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(205,899
|
)
|
|
|
90,834
|
|
Prepaid expenses and other current assets
|
|
|
1,626
|
|
|
|
44,468
|
|
Inventory
|
|
|
(4,359
|
)
|
|
|
(8,957
|
)
|
Accounts payable and accrued expenses
|
|
|
105,136
|
|
|
|
73,600
|
|
Net cash provided by (used in) operating activities
|
|
|
(600,221
|
)
|
|
|
(177,697
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Cash acquired in reverse merger
|
|
|
|
|
|
|
28,964
|
|
Net cash provided by investing activities
|
|
|
|
|
|
|
28,964
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
209,4
59
|
|
|
|
260,230
|
|
Repayment of convertible debt to shareholders
|
|
|
(41,018
|
)
|
|
|
(59,589
|
)
|
Change in revolving
facility
|
|
|
195,545
|
|
|
|
(5
1,218
|
)
|
Net cash flows provided by financing activities:
|
|
|
363,986
|
|
|
|
149,423
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency on cash and cash equivalents
|
|
|
20,791
|
|
|
|
(550
|
)
|
Net increase (decrease) in cash
|
|
$
|
(215,444
|
)
|
|
$
|
140
|
|
Cash- beginning of period
|
|
|
274,312
|
|
|
|
—
|
|
Cash- end of period
|
|
$
|
58,868
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
34,033
|
|
|
$
|
—
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Supplementary Non-Cash Information
|
|
|
|
|
|
|
|
|
Debt discount due to derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
The accompanying notes are an integral part
of the consolidated unaudited financial statements
Lot78,
Inc.
Notes
to
CONSOLIDATED
Financial Statements
Unaudited
1.
|
BASIS
OF
PRESENTATION
&
ORGANIZATION
|
Basis of presentation
The accompanying unaudited
interim financial statements of Lot78, Inc. (the “Company”) have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”),
and should be read in conjunction with the audited financial statements and notes thereto of the Company contained in Form 10-K
filed with the SEC on January 21, 2014.
In the opinion of
management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been reflected herein. The results of operations for
the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements
that would substantially duplicate the disclosures contained in the audited financial statements for the fiscal year ended September
30, 2013 as reported in the Company’s Form 10-K have been omitted.
Our business is subject to seasonal fluctuations.
Historically, sales of our products have been higher during the second and fourth quarters. As a result, our quarterly and annual
operating results and comparable sales may fluctuate significantly as a result of seasonality
.
Accordingly,
results for any one quarter or year are not necessarily indicative of results to be expected for any other quarter or for any year,
and comparable sales for any particular future period may decrease.
The Company’s financial statements are
prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow
it to continue as a going concern. The Company has an accumulated deficit since inception to March 31, 2014, of $2,499,789 which
raises substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue
as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable.
If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the
Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the
Company through debt and/or equity financing from third parties.
|
3.
|
FACTORING CREDIT FACILITY
|
The Company as reported on 01/06/14 has a Purchase and Resale and
a Recourse Factoring Agreement with Bibby Trade Services Ltd amounting to £600,000 ($998,220).
Under the terms of our factoring facility,
the Company may obtain advances of up to 80 percent of eligible accounts receivable, subject to a 1.8 percent per fixed fee and
a factors discount fee of 3.00% above the greater of LIBOR, the base rate quoted from time to time by Barclays Bank PLC (or its
successors). The remainder of the twenty percent is held in a restricted cash reserve account, which is released to the Company
upon payment of the receivable. Bibby has full recourse under the agreement to return any receivables for which funds have been
advanced. As a result, the Company does not reduce its accounts receivable until Bibby has collected on the invoices that have
been factored.
As at March 31, 2014 and September 30, 2013, amounts owed
under the Recourse Factoring Facility were $198,807 and NIL, respectively.
|
4.
|
DEBT – THIRD PARTIES AND RELATED PARTIES
|
At March 31, 2014 and September 30, 2013 debt consists of the following:
|
|
March 31, 2014
|
|
September 30, 2013
|
|
|
|
|
|
Loans - CI LLC
|
|
$
|
354,368
|
|
|
$
|
137,156
|
|
Loans – Related parties
|
|
|
33,274
|
|
|
|
32,272
|
|
Loans - David Hardcastle – Shareholder ($332,740 short term)
|
|
|
656,296
|
|
|
|
636,407
|
|
Total Debt to shareholders and related parties
|
|
$
|
1,043,938
|
|
|
$
|
805,835
|
|
During the six months ended March 31, 2014,
the Company received $209,459 from CI LLC as a short term loan.
Short term loans from CI LLC (“CIL”)
are unsecured and interest free.
Other differences in the loan values between
September 30, 2013 and March 31, 2014 are due to foreign exchange translations.
Long-term loans from David Hardcastle are unsecured
and are currently non-interest bearing. However, once the Company secures significant external financing, the long term loans begin
accruing interest at bank rate plus 2% per annum and will be payable in quarterly installments over a 3 year period.
|
5.
|
CONVERTIBLE DEBT, DERIVATIVE LIABILITIES & FAIR VALUE MEASUREMENTS
|
Convertible Debt – IIMG
Loans from Iceberg Investment Management Group
(“IIMG”) are unsecured and accrue interest at a rate of 2.5% per annum. During the six months ended March 31, 2014,
the Company repaid $41,018 to IIMG.
The balance payable
to IIMG as at March 31, 2014, is $89,194. The notes were due on February 28, 2014 and April 30, 2014, however, pursuant to communication
received from IIMG, it has been agreed that 10% of all future financing raised will be used to pay down the loans until all principal
and accrued interest has been paid in full, unless the Company within its new debt arrangements has clauses which restricts it
from paying down other debts.
At the option
of IIMG, If the loans remain unpaid by the maturity date, all amounts are convertible into common stock of the Company at 80% of
the Companys volume weighted average price (VWAP) for the 5 previous days prior to execution of the promissory
note.
As at March 31, 2014 $3,154.37 of the overall
debt had been matured.
The Company has not received any communication
from IIMG whether it wishes to activate the clause in converting this amount into common stock.
Convertible Debt – Embedded Derivatives
On August 30, 2013, the Company entered into
an Unsecured Senior Convertible Promissory Note (the “Note”) with Banque Benedict Hentsch & Cie SA (“Banque
Benedict”) for the principal sum of Three Hundred and Fifty Thousand Dollars ($350,000) plus simple interest thereon at the
rate of ten percent (10%) per annum. Banque Benedict has the option at any time to convert the Note in whole into shares of the
common stock of the Company at the conversion rate of $0.125 per share. Unless the Note is earlier converted, the total principal
and unpaid interest is due on September 1, 2016.
On September 9, 2013, the Company entered into
an Unsecured Senior Convertible Promissory Note (the “Note”) with Monument Assets & Resources Company Ltd (“Monument
Assets”) for the principal sum of One Hundred Thousand Dollars ($100,000) plus simple interest thereon at the rate of ten
percent (10%) per annum. Monument Assets has the option at any time to convert the Note in whole into shares of the common stock
of the Company at the conversion rate of $0.125 per share. Unless the Note is earlier converted, the total principal and unpaid
interest is due on September 1, 2016.
The above conversion notes contain a reset
provision whereby the conversion price on the notes can be reduced based on future equity transactions of the Company. As a result,
the conversion options were classified as derivative liabilities at their fair value on the date of issuance. The fair value of
the derivative liabilities exceeded the principal amount of the notes, resulting in a full debt discount of $450,000, $12,635 of
which has been amortized to interest expense from the date of the issuance to March 31, 2014.
As defined in FASB ASC 820, fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (exit price). The Company utilized the market data of similar entities in its industry or assumptions that
market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the
inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The
Company classifies fair value balances based on the observability of those inputs. FASB ASC 820 establishes a fair value hierarchy
that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level
3 measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 –
|
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
|
Level 2 -
|
Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date.
|
Level 3 –
|
Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
|
The following table sets forth by level within the fair value hierarchy
the Company’s financial assets and liabilities that were accounted for at fair value as at March 31, 2014.
Recurring Fair Value Measures
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities net September 30, 2013
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
434,464
|
|
|
$
|
434,464
|
|
Derivative liabilities net March 31, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
149,990
|
|
|
$
|
149,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in the derivative liabilities
during the period ended March 31, 2014:
Fair value as of October 1, 2013
|
|
$
|
434,464
|
|
Change in fair value
|
|
|
284,474
|
|
|
|
|
|
|
Ending balance as of March 31, 2014
|
|
$
|
149,990
|
|
The gain on derivative liabilities of $284,474
in the accompanying consolidated statement of operations consists of the change in fair value of $284,474 noted above.
The Company uses the
Black-Scholes option pricing model to value the derivative liability and subsequent re-measurements. Included in the
model are the following assumptions: stock price at valuation date of $0.044, exercise price of $0.125, dividend yield of zero,
years to maturity of 2.43, risk free rate of 0.09 – 0.8 percent, and annualized volatility of 273.53 – 425.93
percent.
|
6.
|
RELATED PARTY TRANSACTIONS
|
As of March 31, 2014, the Company owed an officer
$50,493 for accounting and consultancy fees.
During the six months ended March, 2014, the
Company issued 166,667 shares of common stock valued at $12,500 for services rendered.
|
8.
|
COMMITMENTS AND CONTINGENCIES
|
In November
2012, Anio Limited (now named Lot 78 UK Limited) entered into a Consulting and Services Agreement with Iceberg Investments
Management Group Limited, a British Virgin Islands corporation. This document includes a provision that Lot78 UK Ltd would pay
a success fee of USD$770,000 on the closing of any financing in the amount exceeding $3,000,000. The amount of the success
fee purportedly payable reduces if the financing is less than $3,000,000. For these purposes, Iceberg has confirmed that no success
fee would be payable if the financing is less than $1,450,000 and $500,000 whether by equity or loan raised from or introduced
by Banque Benedict Hentsch & CIE SA is excluded. If Iceberg is not successful in obtaining financing for the
Company within 18 months of a potential merger or transaction there are provisions that Lot78 UK Ltd provide a convertible promissory
note.
The Company is taking legal advice
on this document, the enforceability of its provisions and reserves its position as to whether such fees will be payable
under or pursuant to this document.
NONE
eND
OF NOTES TO FINANCIALS
ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
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FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking
statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results,
levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by
the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential,
proposed, or continue or the negative of those terms. These statements are only predictions. In evaluating these statements,
you should consider various factors which may cause our actual results to differ materially from any forward-looking statements.
Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from
those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking
statements for any reason.
Overview
Lot78, Inc. (the “Company”) designs,
markets, distributes, and sells apparel under the brand name "Lot78" to fashion-conscious consumers on four continents,
including North America, Europe, Asia, and South America. We seek to be a trend setting leader in the design, marketing, distribution
and sale of luxury street apparel. Our current collection is a full men’s and women’s contemporary ready-to-wear line
which includes leather jackets, t-shirts, sweats, knitwear, accessories, jeans, chinos, and wool coats. We operate in three distinct
but integrated segments: Wholesale, Consumer Direct and Core Services. Our Wholesale segment sells our products to industry-leading
high-end global department stores, specialty retailers and boutiques; our Consumer Direct segment consists of e-commerce sales
through our branded website located at www.lot78.com; and our Core Services segment provides product design, distribution, marketing
and other overhead resources to the other segments.
Executive Summary
Our results for the current quarter has seen
a record jump in revenues to $704,244 which has been due to taking on new customers for the Spring/Summer 14 season. Our distribution
has increased with Zalando and Beymen in Europe and with Harvey Nichols in UAE and UK together with general increases within our
core customers in the US and UK.
Our main revenues are generated in the second
and fourth quarters of the year which co-incide with the Spring/Summer and Fall/Winter seasons.
We are heavily reliant on re-orders and online
sales for revenues generated in the first and third quarters of our financial year and are in the process of looking to have pre
seasonal deliveries to our customers which if successful will generate greater revenues in our first and third quarters.
Plan of Operation
As of March 31, 2014, we had $58,868 of cash
on hand. We incurred operating expenses in the amount of $450,519 during the three months ended March 31, 2014. These operating
expenses were comprised of general and administrative expenses, professional fees, directors’ and consulting fees, and other
miscellaneous expenses.
Our current cash holdings will not satisfy
our liquidity requirements and we will require additional financing to pursue our planned business activities. We are in the process
of seeking equity and or debt financing to fund our operations over the next 12 months.
If we cannot generate sufficient revenues to
continue operations, we will suspend or cease our operations.
We do not expect the purchase or sale of any
significant equipment and have no current material commitments.
Management believes that if subsequent placements
are successful, we will generate sufficient sales revenue to cover our operating costs within the following twelve months thereof.
However, additional equity and or debt financing may not be available to us on acceptable terms or at all, and thus we could fail
to satisfy our future cash requirements.
Results of Operations for the Three and
Six Months Ended March 31, 2014 and 2013
Revenues
We earned revenues of $704,244 for the three
months ended March 31, 2014 compared to revenues of $150,759 for the three months March 31, 2013 an increase of 367%. For the six
month period ended March 31, 2014 we earned revenues of $759,974 compared to $209,454 for the corresponding period in 2013 an increase
of 263%. Increased revenues in the six month and three month period ended March 31, 2014 can be attributed to an increased customer
base as a result of taking on Archetype Showroom as an agent for our US market and Four Marketing UK and Four Marketing International
for our existing and new UK, European and Rest of the World market.
Our core customers revenue for the periods
have been steadily increasing across all markets together with new customers coming onto our books for the current quarter.
Cost of Goods Sold
Cost of goods sold for the three months ended
March 31, 2014 were $443,496 compared to $101,774 for the three months ended March 31, 2013. Cost of goods sold represented 63%
of sales for the three months ended March 31, 2014 as compared to 68% for the three months ended March 31, 2013. This decrease
in COGS as a percentage of sales for the three months ended March 31, 2014 can be attributed to better prices being negotiated
with our factories.
For the six months ended March 31, 2014, cost
of goods sold were $512,905 compared to $177,157 for the corresponding period in 2013. Cost of goods sold represented 67% of sales
for the six months ended March 31, 2014 as compared to 85% for the six months ended March 31, 2013. The decrease in COGS for the
six months ended 31 March 2014 as compared to the same corresponding period for 2013, can be attributed to write offs of obsolete
inventory and sales of overstock inventory at discounted prices during the quarter ended December 31, 2012. During the quarter
ended December 31, 2012, the Company sold many of the goods from prior seasons to a discount retailer for cost value or minimal
margins. In addition, the Company held a pre-Christmas 2012 discount sale, where prior season merchandise was sold at depressed
margins which has a negative impact on the gross margins achieved for that period.
Expenses
Expenses for the three months ended March 31,
2014, expenses were $450,519, compared to $266,291 for the three month ended March 31, 2013 an increase of 69%. This increase is
mainly attributable to increased professional fees related to the share exchange agreements, larger sample costs due to an increasing
expansive collection, the cost of employing a CFO, increased personnel due to the expansion of operations and commissions payable
to Four Marketing and Archetype Showrooms.
For the six months ended March 31, 2014 expenses
were $725,626, compared to $391,675 for the corresponding period in 2013 an increase of 85%. This increase can be attributed to
increased professional fees related to the share exchange agreement, larger sample costs due to an increasing expansive collection,
increased travel costs for Spring/Summer 2014 and Autumn/Winter 2014 sales, and increased personnel due to
the expansion of operations.
Liquidity and Financial Condition
Working Capital
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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At
March 31,
2014
|
|
|
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At
September 30,
2013
|
|
|
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Difference
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|
Current Assets
|
|
$
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536,588
|
|
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$
|
531,929
|
|
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$
|
4,659
|
|
Current Liabilities
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$
|
1,600,117
|
|
|
$
|
1,358,481
|
|
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$
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(241,636
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)
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Working Capital
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$
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(1,063,529
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)
|
|
$
|
(826,552
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)
|
|
$
|
(236,977
|
)
|
Cash Flows
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|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
March 31,
2014
|
|
|
|
Six Months Ended
March 31,
2013
|
|
Net Cash (Used) Provided by Operating Activities
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$
|
(600,221
|
)
|
|
$
|
(177,697
|
)
|
Net Cash (Used) Provided by Investing Activities
|
|
$
|
—
|
|
|
$
|
(28,964
|
)
|
Net Cash (Used) Provided by Financing Activities
|
|
$
|
363,986
|
|
|
$
|
149,423
|
|
Net Effect of Foreign Currency Translation
|
|
$
|
20,791
|
|
|
$
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(550
|
)
|
Net (Decrease) Increase in Cash During the Period
|
|
$
|
(215,444
|
)
|
|
$
|
140
|
|
For the period ended March 31, 2014, net cash
used in operating activities was $600,221 as result of changes in our working capital, a net loss of $228,117 and a non cash derivative
gain of $284,474.
For the period ended March 31, 2014, net cash
provided by financing activities was $363,986 as a result of proceeds from debt of $209,459, repayment of convertible debt of $41,018
and change in our factoring facility with our factoring company of $195,545.
We will require additional funds to fund our
budgeted expenses in the future. These funds may be raised through equity financing, debt financing, or other sources, which may
result in further dilution in the equity ownership of our shares. For the period ended March 31, 2014 we have managed to raise
$209,459 through debt financing. There is no assurance that we will be able to maintain operations at a level sufficient for an
investor to obtain a return on their investment in our common stock. Furthermore, we may continue to be unprofitable. We will need
to raise additional funds in the future in order to proceed with our budgeted expenses. Additionally, there is no assurance that
any party will advance additional funds to us in order to enable us to sustain our plan of operations or to repay our liabilities.
Liquidity and Capital Resources
Growth of our operations will be based on our
ability to internally finance from operating cash flows, and the ability to raise funds through equity and/or debt financing to
increase sales and production. Our primary sources of liquidity are: (i) cash from sales of our products; and (ii) financing activities.
Our cash balance as of March 31, 2014 is $58,868.
Our Company has funded some of its operations
through debt financing with related party transactions.
Inflation
The amounts presented in the financial statements
do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would
be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement
costs or by using other inflation adjustments.
Going Concern
For the three months ended March 31, 2014,
our Company has a comprehensive loss of $178,722 and an accumulated deficit of $2,499,789. Our Company intends to fund operations
through operational cash flow and equity/debt financing arrangements. These sources may be insufficient to fund its capital expenditures,
working capital and other cash requirements for the future. In response to these problems, management intends to raise additional
funds through public or private placement offerings. These factors, among others, raise substantial doubt about our Company’s
ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
As of March 31, 2014, we had no off balance
sheet transactions that have had, or are reasonably likely to have, a current or future effect on our financial condition, changes
in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our financial statements and accompanying notes
have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies
and estimates that we use to prepare for financial statements. A complete summary of these policies is included in the notes to
our financial statements. In general management’s estimates are based on historical experience, on information from third
party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual
results could differ from those estimates made by management.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting
pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise
disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might
have a material impact on its financial position or results of operations.