UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGACT OF 1934
For the fiscal year ended May 31, 2008
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OTHE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number 000-53176
NOVORI INC.
(Exact name of registrant as specified in its charter)
| Delaware | 47 - 0948014 |
| (State or Other Jurisdiction of Incorporation | (I.R.S. Employer Identification No.) |
| of Organization) | |
| | |
5550 152nd Street, Suite 206, Surrey, British Columbia, Canada | V3S 5J9 |
| (Address of principal executive offices) | (ZIP Code) |
(778) 571 0880
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section12(g) of the Act: Common Stock |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 shorter period that the registrant as required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant at November 30, 2007 (computed by reference to the latest price at which the common equity was sold on the last business day of the issuer’s second fiscal quarter; $0.49): $6,578,495
Number of common shares outstanding at October 7, 2008: 34,663,398
Number of preferred shares outstanding at October 7, 2008: 19,000,000
TABLE OF CONTENTS
Forward-looking Statements
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's 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 these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
As used in this annual report, the terms "we", "us", "our", and "Novori" mean Novori Inc., unless otherwise indicated.
All dollar amounts refer to US dollars unless otherwise indicated.
Overview
We are in the business of selling a selection of over 35,000 loose diamonds and over 500 different styles and settings of fine diamond jewelry through our website, www.novori.com. All of our jewelry is customizable to the customer’s tastes and preferences. The prices of our jewelry range from as low as $200 to over $10,000. Each piece of jewelry is hand crafted and professionally finished by our jewelers. We provide our customers with a safe online shopping experience that includes extensive product and purchasing information. If our customers are dissatisfied for any reason, they may exchange or fully refund their merchandise by returning the item(s) to us within 30 days.
We also allow customers to create their own engagement rings by choosing diamonds based on their shape, carat weight, cut, color, clarity, polish and certification and by selecting from a variety of settings. The customer controls the design of the ring using online tools and can mix and match diamonds and settings to create the perfect engagement ring.
We were incorporated on July 26, 2004 under the laws of the State of Delaware. We have one subsidiary, Novori Marketing Inc., which was incorporated as a British Columbia company on July 27, 2004 for the purpose of carrying on marketing activities in British Columbia, Canada.
Our principal offices and studio are located at 5550 152nd Street, Suite 206, Surrey, British Columbia, Canada. Our telephone number is (778) 571-0880. Our fiscal year end is May 31. Our common stock is quoted on the OTC Bulletin Board under the symbol “NOVO.OB.” In November 2007 we were added to Microcap Money Index of superior growth companies by Heritage First Capital & Equity Research Group.
Our total revenue increased $466,319 or 33% to $1,911,415 for the year ended May 31, 2008 compared to $1,445,096 for the same period in 2007. However, we still had a net loss of $197,527 for the year ended May 31, 2008.
Recent Developments
On June 12, 2007 our Board of Directors approved a resolution adopting a certification of designation for Series A Convertible Preferred Stock. The Certificate of Designation allows the holders to convert their Series A Convertible Preferred Stock into common stock at a rate of one share of Series A Convertible Preferred Stock for one share of common stock. The holders' cannot convert the Series A Convertible Preferred Stock back into common stock until after June 12, 2009.
On June 12, 2008, Mr. Steven Zale, who was appointed as our director on May 27, 2008, resigned his position. Currently the total number of directors sitting on our Board of Directors is two.
On July 8, 3008, we accepted a resignation of Mr. Nashrulla Jamani from the position of Senior Vice President of Investor Relations.
Our Suppliers
Our website includes products from 100 diamond suppliers and 8 jewelers, all of whom are located in the US. The diamond suppliers supply us with loose diamonds that are ordered by customers. For orders of jewelry, we obtain the diamonds from one of our 100 diamond suppliers and we send those diamonds to one of our 8 jewelers for completion of our product. The jewelers create the mountings, set and polish the jewelry and then send the jewelry directly to our customers on our behalf. At the moment, we do not have any written agreements with our jewelers or diamond suppliers but we have oral agreements with each of them and have determined that they will sell to us and that we are able to list their diamonds on our website. Most of them are small operations but a few of them are larger companies. We call our suppliers on an individual basis for each diamond. Ordering is always done over the phone and payment must be made before we receive the diamonds.
Customer Base
Our primary target market includes young men and couples shopping for diamond engagement rings and wedding bands. Because of the age group of this target market (25 to 45 years of age), we believe they are well suited and comfortable with shopping online for products and services.
Our revenues of $4,051,454 since our inception on July 26, 2004 to May 31, 2008 have been generated from retail sales to a variety of individual customers. We do not anticipate that our products will appeal to corporate buyers and we do not anticipate that we will become reliant on a few major customers in the future.
Marketing
We advertise primarily online, focusing our advertisements on the quality and hand-made characteristics of the products we sell. We anticipate that in the future we will purchase print ads to enhance our marketing effort. We are currently using search engine optimization marketing techniques which we believe generates the majority of interest from our customers.
To market our products, we use online pay-per-click channels and portal shopping sites. We have already begun to highly optimize our website so that it may be easily found on major search engines on the Internet. We have experienced increased website traffic since July 2007 due in part to www.novori.com hitting a top five spot on www.google.com for the search term “diamond wedding rings” among others.
Intellectual Property
We own the copyright and all of the contents of our website, www.novori.com.
Employees
We currently have one employee who is employed on a full time basis.
Additionally, we engage various consultants in the areas of management, legal and accounting.
Competition
The diamond and fine jewelry retail market is intensely competitive and highly fragmented. Our primary competition comes from online and offline retailers that offer potential customers similar products and the ability to customize jewelry. Current or potential competitors include:
| | · | independent jewelry stores; |
| | · | retail jewelry store chains, such as Tiffany & Co., Zales and Signet PLC’s Kay Jewelers; |
| | · | other online retailers that sell diamonds or jewelry, such as Amazon.com and Blue Nile; |
| | · | boutiques and websites operated by brand owners; |
| | · | department stores, such as Nordstrom and Neiman Marcus; |
| | · | catalog and television shopping retailers, such as Home Shopping Network; and |
| | · | online auction sites such as eBay; and |
| | · | discount superstores, mass retailers and wholesale clubs, such as Costco Wholesale. |
In addition to these competitors, we may face competition from suppliers of our products who may decide to sell directly to consumers, either through physical retail outlets or through an online store.
Many of our current and potential competitors have advantages over us, including longer operating histories, greater brand recognition, existing customer and supplier relationships and significantly greater financial, marketing and other resources. In addition, traditional store-based retailers offer consumers the ability to physically handle and examine products in a manner that is not possible over the Internet, as well as a more convenient means of returning and exchanging purchased products.
We believe that the principal competitive factors in our market are customer service and support, product selection, quality, price, reputation, reliability and trust, website features and functionality, convenience and delivery performance. We believe that by focusing on these factors we compete favorably in the market for diamonds and fine jewelry. To that we offer the following shopping experience to our customers:
Focus on Customer Service
| | - | Our staff is available to speak with customers before and after an order is placed to answer questions and assist with the shopping experience. After an order is placed on our website, a sales representative contacts the customer by telephone to confirm the order and discuss the jewelry design. |
| | - | We offer our customers a full refund or exchange within 30 days if they are dissatisfied with their purchase for any reason. |
Professionally Designed Website
| | - | Our website includes vivid product images and explanations of all aspects of purchasing a loose diamond or a piece of jewelry using easy to understand descriptions and diagrams. We believe this allows customers to make well informed purchasing decisions. |
| | - | We are constantly updating our website in terms of speed and ease of navigation, which we believe will enhance the overall shopping experience of our customers. |
Operating Efficiencies
- We believe that as an online diamond jewelry business, we have a strategic advantage over traditional jewelry stores in that we hold relatively little inventory so overhead costs required to run the business are kept low.
New Products and Services
Our website has been fully functional since February 2005. We continue to expand our online product offerings of styles and settings each month, based on offerings available through our suppliers. We have exclusive online distribution rights for a number of jewelry collections, including the Tulip™ and Sareen™ collections, which were additions to our website during the 2008 fiscal year.
On July 23, 2007, we launched the first phase of our new retail website. Substantial improvements include: updated styling, a new Novori logo, a revised diamond search application and more intuitive graphical product category list. We are working on the second phase of our website redesign that includes new user friendly tools. The second phase will focus on improved functionality offering consumers flexible ring design options and improved ease of use and navigation. We expect the new website to accelerate sales growth.
Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Because we sell diamonds through the Internet, we will be subject to rules and regulations around the world which affect business transacted on the Internet. Also, because we carry on business in Canada, it is subject to laws regarding employment, taxes and other regulatory issues for our Canadian operations.
The laws and regulations that govern our business change rapidly. The following are some of the evolving areas of law that are relevant to our business:
Content Regulation. Federal, state and foreign governments have adopted and proposed laws governing the content of material transmitted over the Internet. These include laws relating to obscenity, indecency, libel and defamation. For example, the Child Online Protection Act, or COPA, prohibits and imposes criminal penalties and civil liability on anyone communicating material harmful to minors through the Internet for commercial purposes, unless access to such material is blocked to minors under age 17. The Third U.S. Circuit Court of Appeals has upheld a preliminary injunction precluding enforcement of COPA. In November 2001, the U.S. Supreme Court heard an appeal but no decision has been issued yet. We could be liable if the injunction against COPA is lifted and if content delivered by us or placed on our web sites violates COPA. On March 6, 2003, the Third U.S. Circuit Court of Appeals issued a ruling that COPA restricts free speech because it is not narrowly focused is enough to only target pornography, and is therefore unconstitutional. The Department of Justice could appeal this ruling to the U.S. Supreme Court.
Privacy Law. The state of privacy law is unsettled, and rapidly changing. Current and proposed federal, state and foreign privacy regulations and other laws restricting the collection, use and disclosure of personal information could limit our ability to use the information in our databases to generate revenues. In late 1998, COPPA was enacted, mandating that measures be taken to safeguard minors under the age of 13. The FTC promulgated regulations implementing COPPA on October 21, 1999, which became effective on April 21, 2000. The principal COPPA requirement is that individually identifiable information about minors under the age of 13 not be collected, used or displayed without first obtaining informed parental consent that is verifiable in light of present technology.
The FTC final regulations create a “sliding scale” of permissible methods for obtaining such consent. Consent for internal use of the individually identifiable information of children under the age of 13 can be obtained through e-mail plus an additional safeguard, such as confirming consent with a delayed e-mail, telephone call, or letter. Obtaining verifiable consent from a child’s parent to share that child’s information with a third party or enable the child to publicly distribute the information by, for example, allowing unrestricted access to a chat room or message board is significantly more burdensome. While the temporary “sliding scale implementation was due to expire on April 21, 2002, on October 31, 2001, the FTC extended the implementation period through April 21, 2005.
The FTC has required that parental consent for such higher risk activities be verified by more secure methods than e-mail, such as a credit card in connection with a transaction, print-and-sign forms, toll-free numbers staffed by trained operators, or digital signatures. Complying with the new requirements is costly and will likely dissuade some of our customers. While we will attempt to be fully compliant with the FTC requirements, our efforts may not be entirely successful. In addition, at times we rely upon outside vendors to maintain data-collection software, and there can be no assurance that they will at all times comply with our instructions to comply with COPPA. If our methods of complying with COPPA are inadequate, we may face litigation with the FTC or individuals, which would adversely affect our business.
Moreover, we have posted a privacy policy pertaining to all users and visitors to our web site. By doing so, we will subject ourselves to the jurisdiction of the FTC. Should any of our business practices be found to differ from our privacy policy, we could be subject to sanctions and penalties from the FTC. It is also possible that users or visitors could try to recover damages in a civil action as well.
The European Union recently enacted its own privacy regulations that may result in limits on the collection and use of certain user information. The laws governing the Internet, however, remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business on the Internet. Furthermore, the Federal Trade Commission has recently investigated the disclosure of personal identifying information obtained from individuals by Internet companies. Evolving areas of law that are relevant to our business include privacy law, regulation on what websites contain, and sales and use tax. Because of this rapidly evolving and uncertain regulatory environment, we cannot predict how these laws and regulations might affect our business. In addition, these uncertainties make it difficult to ensure compliance with the laws and regulations governing the Internet. These laws and regulations could harm us by subjecting us to liability or forcing us to change how we do business.
Laws Governing Sending of Unsolicited Commercial E-mail. We typically intend to provide our customers and other visitors to our Web sites with an opportunity to “opt-in,” or agree to receive e-mailings from us. In 2003, the federal government implemented the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM) designed to limit unsolicited commercial e-mail commonly referred to as “spam.”
In addition, California and a number of other states regulate the sending of e-mails for commercial purposes to third parties where there is no preexisting business relationship. Further, several states give Internet service providers (“ISPs”) a private right of action against those who send large e-mailings across their servers in contravention of the ISP’s posted policy. There is no guarantee that we will always be fully compliant in all of our communications at all times. Our failure to comply with applicable laws regarding these types of e-mails could result in significant fines, actual or statutory damages, and injunctive actions.
Conformance to E-Commerce Statutory Requirements for Formation of Contracts. We intend to conduct e-commerce on our web sites, and through affiliated web sites. The applicable law on online formation of contracts has been unsettled and is evolving. On June 30, 2000, the federal government enacted the “E-Sign” statute, which in limited cases permits online formation of contracts. Similarly, on January 1, 2000, California adopted a standard version of the Uniform Electronic Transactions Act (“UETA”), which also permits electronic signatures and record-keeping for certain types of contracts. We attempt to comply with these laws, but there is no guarantee that we will be successful. Judicial interpretation of their application could result in customer contracts being set aside or modified. In that case, our e-commerce revenue could be materially adversely affected.
Sales Tax. The tax treatment of goods sold over the Internet is currently unsettled. A number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods through the Internet. Such proposals, if adopted, could substantially impair the growth of electronic commerce and could adversely affect our opportunity to derive financial benefit from electronic commerce. While the Internet Tax Freedom Act (ITFA) has placed a moratorium on new state and local taxes on Internet commerce, the tax moratorium expired on November 1, 2003 and has not been re-enacted. At least some state legislatures that will convene during early 2004 have indicated that they will move to expand their sales taxes to cover Internet commerce, if the ITFA is not reinstated. Imposing state sales taxes on Internet-based commerce would adversely affect our business.
Intellectual Property. Copyrighted material that we develop, as well as our product marks and domain names relating to Novori, and other proprietary rights are important to our business prospects. We seek to protect our common-law trademarks through federal registration, but these actions may be inadequate. In addition, we principally rely upon trademark, copyright, trade secret and contract law to protect our proprietary rights. We generally intend to enter into confidentiality agreements, “work-made-for-hire” contracts and intellectual property licenses with our employees, consultants and corporate partners, respectively, as part of our efforts to control access to and distribution of our products, content and other proprietary information.
Environmental Law. To the extent which environmental compliance may be necessary, we do not anticipate any significant compliance expense.
Our properties are as follows:
Our principal executive offices are located at 5550 152nd Street, Suite 206, Surrey, British Columbia, Canada. We lease office space of approximately 1,200 square feet under a 5 year lease agreement we entered into on May 25, 2007 with Realacorp Management Ltd., a non-related party. The lease is renewable at our option for a further 5 years. Our subsidiary, Novori Marketing, paid $23,447 to Realacorp Management as rent on our behalf for the year ended May 31, 2008. Website development work and customer sales and support currently take place at this office.
We have a US office located at 1313 East Maple Street, Suite 425 in Bellingham, Washington. Our rent is $40 per month, and our lease is on a month to month basis. This is a virtual office facility we use as a means of communication and convenience for our US customers.
As of May 31, 2008, we are not party to any material pending legal proceedings to which we or any of our subsidiaries are a party or of which any of our properties is the subject. Also, our management is not aware of any legal proceedings contemplated by any governmental authority against us.
None.
Market Information
Our common stock is not traded on any exchange. Our common stock is quoted on the OTC Bulletin Board, under the trading symbol “NOVO.OB”. The market for our stock is highly volatile. We cannot assure you that there will be a market in the future for our common stock. The OTC Bulletin Board securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTC Bulletin Board stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
The following table shows the high and low prices of our common shares on the OTC Bulletin Board for each quarter since our common stock began to trade on the OTC Bulletin Board on November 22, 2006. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
| Period | High | Low |
| February 29, 2008 – May 31, 2008 | 0.32 | 0.13 |
| November 30, 2007 – February 29, 2008 | 0.51 | 0.1785 |
| August 31, 2007 – November 30, 2007 | 0.69 | 0.215 |
| May 31, 2007 – August 31, 2007 | 2.08 | 0.43 |
During August 2008, the highest price of our common stock on the OTC Bulletin Board was $0.12 and the lowest price was $0.052.
Holders
As of October 7, 2008, there were approximately 33 holders of record of our common stock. In addition, we believe that a significant number of beneficial owners of our common stock hold their shares in street name.
Dividends
We do not expect to declare or pay any cash or further stock dividends on our common shares in the foreseeable future. Payment of any future dividends will depend upon future earnings, if any, our financial condition, and other factors as deemed relevant by our Board of Directors.
Equity Compensation Plans
The Company has no equity compensation plans.
On July 5, 2007 we issued 441,000 shares of our common stock to 689719 BC Ltd. based on the conversion of the outstanding principal and interest of $88,200 at $0.20 per share pursuant to a convertible note. This issuance was exempt from registration pursuant to Regulation S.
We completed the offerings of the common stock pursuant to Rule 903 of Regulation S of the Securities Act on the basis that the sale of the common stock was completed in an "offshore transaction", as defined in Rule 902(h) of Regulation S. We did not engage in any directed selling efforts, as defined in Regulation S, in the United States in connection with the sale of the units. Each investor was not a US person, as defined in Regulation S, and was not acquiring the shares for the account or benefit of a US person.
Each investor was given adequate access to sufficient information about us to make an informed investment decision. None of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved. No registration rights were granted to any of the purchasers.
On January 24, 2007, we entered into a standby equity agreement which allows us to receive up to $1,260,000 over a 24 month period in exchange for the sale of our common stock. We have issued securities in exchange for proceeds as described in the table below.
| Date of Issuance | Number of Shares Issued | Amount of Proceeds Received | Date or Period of Receipt of Proceeds |
| August 5, 2008 | 409,091 | $45,000 | March 1, 2008 – May 31, 2008 |
| April 14, 2008 | 892,583 | $135,000 | November 1, 2007 – February 29, 2008 |
| April 14, 2008 | 815,315 | $360,000 | March 1, 2007 – October 31, 2007 |
| Total | 2,116,989 | $540,000 | |
Our management decided to withdraw our registration statement that was filed on Form SB-2 on November 13, 2007 because of changes to Rule 144 of the Securities Act.
Not applicable.
The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-K. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
We expect that our sales will continue to grow over the next twelve months. We intend to continue making financial investments in marketing and website development and expect to incur losses over the next two years.
As of May 31, 2008, we had a working capital deficiency of $452,862 with total current assets of $56,286 and total current liabilities of $509,148. As at May 31, 2008 we had cash of $20,806 in our bank accounts. Our deficit was $1,439,222 as of May 31, 2007 and $1,636,749 as of May 31, 2008.
We used net cash of $426,768 in operating activities for the year ended May 31, 2008, compared to $285,726 in operations for the same period in 2007. We received net cash of $455,000 from financing activities for the year ended May 31, 2008, compared to $275,000 from financing activities for the same period in 2007. Of $455,000 in net cash received from financing activities, $50,000 from the issuance of a promissory note and $405,000 from the subscription of our common stock. We used cash of $1,893 in our investing activities during the year, whereas there we did not have any investing activities for the year ended May 31, 2007. The increase in cash was $9,513 for the year ended May 31, 2008.
0775270 BC Ltd. has the right to purchase up to $1,260,000 worth of our common stock based on the term of the purchase price under the standby equity distribution agreement. We issued an aggregate of 2,116,989 shares of our common stock in connection with $540,000 of advances received as of September 15, 2008.
We expect that our total expenses will increase over the next year as we increase our marketing and promotional activities and sales. We have not been able to reach the break-even point for the last two fiscal years and have had to rely on us for capital resources. We believe that increased sales from our product will add new capital resources over the coming year, but we believe that our sales will not provide sufficient capital resources to sustain our operations and fund product development over the next 12 months. Therefore, we expect to incur substantial losses over the next two years.
We estimate that our cash requirements over the next 12 months (beginning September 2008) will be approximately $640,000 as described in the following table:
| Description | Estimated Expenses ($) |
| Hire Customer Service and Web Support Staff | 35,000 |
| Marketing Consultant Fees | 50,000 |
| Marketing and Promotional Expenses | 60,000 |
| Inventory Costs | 50,000 |
| Consulting Fees (including legal and audit fees) | 150,000 |
| Website Development and Maintenance Costs | 45,000 |
| Other Administrative Expenses | 250,000 |
| Total | 640,000 |
If we are successful in increasing traffic to our website and in increasing revenues, we anticipate that we may incur additional expenses in the areas of customer service and web support. We anticipate that we may need approximately $50,000 per year beginning May 2009 to pay salaries to employees working in the areas of customer service and web support. We believe that we will incur additional costs for personnel. In order for us to attract and retain quality personnel, our management anticipates we may need to offer competitive salaries, issue common stock to consultants and employees and grant stock or options to future employees.
Of the $640,000 we need for the next 12 months, we had $20,806 in cash as of May 31, 2008. We intend to meet the balance of our cash requirements for the next 12 months of approximately $620,000 through a combination of equity and debt financing. Under the standby equity distribution agreement, we can receive a maximum of $720,000 over the next 12 months at our option. We may also sell our common stock through private placements or a registered public offering (either self-underwritten or through a broker-dealer). At this time we do not have any commitments from any broker-dealers to provide us with financing.
Promissory Notes and Convertible Notes
We obtained a loan of $80,000 in accordance with a 5% convertible promissory note, dated July 5, 2005. The loan can be drawn down any time before April 5, 2007. The interest rate accrued at 5% per annum. The principal amount of this note is convertible at the option of the lender, 689719 BC Ltd., into our common shares at a price of $0.40 per share. Interest payments are due annually and the full principal amount is due on July 5, 2007. We have the option of paying down the principal in part or in whole at any time prior to the due date. We have already drawn down the entire balance of this note. On April 4, 2007 we entered into an addendum with the lender and changed the conversion price from $0.40 per share to $0.20 per share. On July 5, 2007 689719 BC Ltd. converted the outstanding principal and interest into our common stock.
On May 1, 2006, we entered into a promissory note with 689719 BC Ltd. and received a loan of $10,000. Under this note, interest is accrued at 5% per annum and the principal and interest was due on July 5, 2007. On July 5, 2007, we entered into an addendum with 689719 BC Ltd. to extend the due date to July 5, 2008. At October 7, 2008, the full amount and all interest was outstanding.
On May 24, 2006, we entered into a promissory note with 689719 BC Ltd. whereby we are entitled to receive a loan of $7,000. Under this note, interest is accrued at 5% per annum and the principal and interest are due on May 24, 2008. We received the loan of $7,000 on December 20, 2006. At October 7, 2008, the full amount and all interest was outstanding.
On July 28, 2006, we entered into a promissory note with 0718806 BC Ltd. and received a loan of $30,000. Under this note, interest is accrued at 10% per annum and the principal and interest are due upon demand 90 days after advancement of funds. As of May 31, 2008 the principal amount has not been repaid and we accrued $507 in interest.
On December 20, 2006, we entered into a promissory note with 689719 BC Ltd. and received a loan of $3,000 on December 20, 2006. Under this note, interest is accrued at 5% per annum and the principal and unpaid interest are due on December 19, 2009.
On January 23, 2007 we entered into an 8% convertible promissory note due February 1, 2009 with Focus Capital, pursuant to which we received a loan of $100,000 at 8% annual interest. We may reduce the amount of the principal payable by paying down all or a portion of the principal back to Focus Capital at any time prior to February 1, 2009. At any time before February 1, 2009, Focus Capital has the right to convert all, or a portion of, the principal amount of the convertible note into our common stock at a conversion price which shall be the lesser of (a) $0.50 or (b) a 25% discount to the five-day volume weighted average stock price of our common stock as of the date of conversion.
On March 28, 2007 we entered into an addendum with Focus Capital and changed the conversion price to the lesser of (a) $0.25 per share or (b) a 25% discount to the five-day volume weighted average stock price as of the date of conversion. As at April 11, 2007 we have already drawn down the entire balance of this convertible note. We also agreed to register this convertible note on a registration statement with the SEC, covering the resale of all of our common stock underlying this convertible note.
Equity Distribution Agreement
On January 24, 2007 we entered into a standby equity agreement with 0775270 BC Ltd., pursuant to which 0775270 BC Ltd. agreed to purchase up to $1,260,000 of our common stock. The purchase price of common shares shall be equal to 60% of the volume weighted average stock price during the five consecutive trading days after the Notice Date. There will be a minimum of 28 days between each advance of funds and the corresponding delivery of free trading shares. We may request a maximum advance of $45,000 for the first 12 months and $60,000 thereafter by each notice. Also, we agreed to file with the SEC a registration statement with respect to the resale of all of our common stock underlying this agreement.
This agreement will terminate permanently in the event that (a) there is any stop order or suspension of the effectiveness of the registration statement for 50 days or (b) we fail materially to comply with any covenants under this agreement and such failure is not cured within 30 days after receipt of written notice from 0775270 BC Ltd. After twelve months from the date on which the SEC first declares effective a registration statement, registering the resale of our common shares underlying this agreement, this agreement may be terminated at any time by either party, upon a 30-day written notice to the other party. Unless terminated earlier, this agreement will terminate on January 24, 2009. As at May 31, 2008, we have received proceeds of $540,000 and issued 2,116,989 shares of our common stock pursuant to the agreement.
Results of Operations
Revenues
Our total revenues increased $466,319 or 33% to $1,911,415 for the year ended May 31, 2008 from $1,445,096 for the year ended May 31, 2007. The increase of 33% in revenues is due to increased consumer awareness of Novori and our website consistently ranking high on the search engines.
For the year ended May 31, 2008 costs of sales was $1,677,915 resulting in gross profit of $233,500 or 13%. For the year ended May 31, 2007, costs of sales was $1,261,524 resulting in gross profit of $183,572 or 15%. The fluctuations in our profit margins are due to a dramatic difference in profit margins from the sale of our different products and sharp competition. For example, we have the lowest profit margins from sales of our loose diamonds. Our business is also in an industry which is very price sensitive.
Net Loss
We incurred net loss of $197,527 for the year ended May 31, 2008, compared to net loss of $868,797 for the same period in 2007. The decrease of $671,270 in net loss was mainly due to the gain in fair value of conversion feature of our convertible note and the increase in our revenues.
We anticipate that we will incur increased sales and marketing costs, including hiring marketing consultants, broker fees and tradeshow attendance fees, as we implement our business growth strategies.
Expenses
Our total expenses increased $234,546 or 40% from $594,423 for the year ended May 31, 2007 to $828,969 for the year ended May 31, 2008, due mainly to our increased day-to-day operating activities.
Our general and administrative costs for the year ended May 31, 2008 were $420,878 compared to $351,508 for the year ended May 31, 2007. Our general and administrative expenses consist of bank charges, travel, meals and entertainment, rent, foreign exchange, office maintenance, communication expenses (cellular, internet, fax, and telephone), courier, postage costs and office supplies.
Our professional fees increased by $68,887 from $98,747 for the year ended May 31, 2007 to $167,634 for the year ended May 31, 2008. The significant increase in our professional fees is due to additional legal, auditing and accounting services necessitated by the increased level of our operations.
Our consulting fees for the year ended May 31, 2008 were $239,865, including $222,504 for management services provided by our senior officers broken down as follows:
$111,252 was paid to Harold Schaffrick for his services as our Chief Executive Officer and $111,252 paid to Mark Neild for acting as our Chief Financial Officer. In comparison, a total of $101,960 was paid to our senior officers for the year ended May 31, 2007 and $42,000 in donated services was recognized. The increase is consulting fees for the year ended May 31, 2008 was a result of higher compensation paid to our senior officers.
Going Concern
We have generated revenues but incurred significant operating losses from operations. Since we anticipate we will expand operational activities, we may continue to experience net negative cash flows from operations and will be required to obtain additional financing to fund operations through equity securities’ offerings and bank borrowings to the extent necessary to provide working capital. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow from stockholders or other outside sources to sustain operations and meet our obligations on a timely basis and ultimately to attain profitability. We have limited capital with which to pursue our business plan. There can be no assurance that our future operations will be significant and profitable, or that we will have sufficient resources to meet our objectives.
These factors raise concerns about our ability to continue as a going concern. Our auditors have issued a going concern opinion. This means that our auditors believe there is substantial doubt that we can continue as an on-going business for the next twelve months. The financial statements do not include any adjustments that might result from the uncertainty about our ability to continue our business. If we are unable to obtain additional financing from outside sources and eventually produce enough revenues, we may be forced to sell our assets, curtail or cease our operations.
Off-Balance Sheet Arrangements
As at May 31, 2008, we have no off-balance sheet transactions that have 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.
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.
Not Applicable.
Our fiscal year end is May 31.
Our consolidated financial statements for the year ended May 31, 2008, together with the Report of Independent Registered Public Accounting Firm thereon, are included in this Report commencing on page F-1.
Novori Inc.
(Formerly a Development Stage Company)
May 31, 2008
| | Index |
| Report of Independent Registered Public Accounting Firm | F-2 |
| Consolidated Balance Sheets | F-3 |
| Consolidated Statements of Operations | F-4 |
| Consolidated Statements of Cash Flows | F-5 |
| Consolidated Statement of Stockholders’ Deficit | F-6 |
| Notes to the Consolidated Financial Statements | F-7 |
Report of Independent Registered Public Accounting Firm
To the Stockholders
Novori Inc.
(Formerly a Development Stage Company)
We have audited the accompanying balance sheets of Novori Inc. (Formerly a Development Stage Company) as of May 31, 2008 and 2007, and the related statement of operations, cash flows and stockholders' deficit for the years then ended and accumulated for the period from July 26, 2004 (Date of Inception) to May 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Novori Inc. (Formerly a Development Stage Company) as of May 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended and accumulated for the period from July 26, 2004 (Date of Inception) to May 31, 2008 in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a working capital deficiency and has incurred operating losses since inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Manning Elliott LLP
CHARTERED ACCOUNTANTS
Vancouver, Canada
October 3, 2008
(The accompanying notes are an integral part of the consolidated financial statements)
Novori Inc.
(Formerly a Development Stage Company)
Consolidated Balance Sheets
(Expressed in US dollars)
| | May 31, 2008 $ | May 31, 2007 $ |
| ASSETS | | |
| Current Assets | | |
| Cash | 20,806 | 11,293 |
| Due from related party | – | 2,796 |
| Inventory, net (Note 3) | 31,291 | 26,358 |
| Prepaid expenses | 4,189 | 3,877 |
| Total Current Assets | 56,286 | 44,324 |
| Property and Equipment (Note 4) | 1,410 | 115 |
| Total Assets | 57,696 | 44,439 |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | |
| Current Liabilities | | |
| Accounts payable | 156,771 | 56,197 |
| Accrued liabilities (Note 5) | 67,523 | 52,775 |
| Due to a related party (Note 6(a)) | 6,953 | 10,000 |
| Due to shareholder (Note 6(b)) | 30,000 | 15,000 |
| Deferred revenue | 10,898 | – |
| Convertible note payable, less discount of $24,402 (Note 7(b)) | 75,598 | 80,000 |
| Derivative liability (Note 7(b)) | 64,405 | – |
| Promissory notes (Note 8) | 97,000 | 47,000 |
| Total Current Liabilities | 509,148 | 260,972 |
| Convertible Note Payable, less discount of $50,054 (Note 7(b)) | – | 49,946 |
| Derivative Liability (Note 7(b)) | – | 488,000 |
| Agreement Payable (Note 12(c)) | 24,062 | |
| Long-Term Promissory Notes (Note 8(d)) | 3,000 | 3,000 |
| Total Liabilities | 536,210 | 801,918 |
| Contingencies and Commitments (Notes 1, 11 and 12) | | |
| Stockholders’ Deficit | | |
Preferred Stock (Note 9), 20,000,000 shares authorized, with a par value of $0.0001; 19,000,000 issued and outstanding (May 31, 2007 – none) | 1,900 | – |
Common Stock, 100,000,000 shares authorized, with a par value of $0.0001; 34,663,398 shares issued and outstanding (May 31, 2007 – 51,514,500 shares) | 3,466 | 5,151 |
| Additional Paid-in Capital | 994,714 | 411,729 |
| Common Stock Subscribed (Note 11(b)) | 45,000 | 135,000 |
| Donated Capital | 139,736 | 139,736 |
| Accumulated Other Comprehensive Loss | (26,581) | (9,873) |
| Deficit | (1,636,749) | (1,439,222) |
| Total Stockholders’ Deficit | (478,514) | (757,479) |
| Total Liabilities and Stockholders’ Deficit | 57,696 | 44,439 |
(The accompanying notes are an integral part of the consolidated financial statements)
| (Formerly a Development Stage Company) |
| Consolidated Statements of Operations |
| (Expressed in US dollars) |
| | For the Year Ended | For the Year Ended |
| | May 31, 2008 | May 31, 2007 |
| | $ | $ |
| Revenue | 1,911,415 | 1,445,096 |
| Cost of sales | 1,677,915 | 1,261,524 |
| Gross Profit | 233,500 | 183,572 |
| Expenses | | |
| Amortization | 592 | 208 |
| Consulting fees (Note 6(c)) | 239,865 | 143,960 |
| General and administrative | 420,878 | 351,508 |
| Professional fees | 167,634 | 98,747 |
| Total Operating Expenses | 828,969 | 594,423 |
| Operating Loss | (595,469) | (410,851) |
| Other Income (Expense) | | |
| Accretion of discount on convertible notes (Note 7) | (25,652) | (7,089) |
| Loss accrual on contingent liability (Note 12(a)) | – | (20,000) |
| Gain (loss)on change in fair value of conversion feature (Note 7) | 423,594 | (430,857) |
| Net Loss | (197,527) | (868,797) |
| Other Comprehensive Loss | | |
Foreign currency translation adjustment | (16,708) | (7,211) |
| Comprehensive Loss | (214,235) | (876,008) |
| Net Loss Per Share – Basic and Diluted | (0.01) | (0.02) |
| Weighted Average Shares Outstanding | 34,690,000 | 51,515,000 |
(The accompanying notes are an integral part of the consolidated financial statements)
Novori Inc.
(Formerly a Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in US dollars)
| | For the Year Ended May 31,2008 $ | For the Year Ended May 31,2007 $ |
| Operating Activities | | |
| Net loss for the period | (197,527) | (868,797) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Accretion of discount on convertible notes | 25,652 | 7,089 |
| Amortization | 592 | 208 |
| Donated services and rent | – | 42,000 |
| Gain on change in fair value of conversion feature | (423,594) | 430,857 |
| Issuance of common stock for services | – | 60,750 |
| Provision for inventory obsolescence | 6,487 | – |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | – | 2,063 |
| Inventory | (11,420) | 2,059 |
| Prepaid expenses | – | 6,123 |
| Accounts payable and accrued liabilities | 92,144 | 57,026 |
| Agreement payable | 55,000 | |
| Due to related party | – | (2,795) |
| Due to shareholder | 15,000 | 15,000 |
| Deferred revenue | 10,898 | (37,309) |
| Net Cash Used In Operating Activities | (426,768) | (285,726) |
| Investing Activities | | |
| Purchase of property and equipment | (1,893) | – |
| Net Cash Used in Investing Activities | (1,893) | – |
| Financing Activities | | |
| Proceeds from issuance of convertible note | – | 100,000 |
| Proceeds from issuance of promissory note | 50,000 | 40,000 |
| Proceeds from common stock subscribed | 405,000 | 135,000 |
| Net Cash Flows Provided By Financing Activities | 455,000 | 275,000 |
| Effect of Exchange Rate Changes on Cash | (16,826) | (7,194) |
| Increase (Decrease) in Cash | 9,513 | (17,920) |
| Cash - Beginning of Period | 11,293 | 29,213 |
| Cash - End of Period | 20,806 | 11,293 |
| Supplemental Disclosures: | | |
Interest paid | – | – |
Income taxes paid | – | – |
(The accompanying notes are an integral part of the consolidated financial statements)
Novori Inc.
(Formerly a Development Stage Company)
Consolidated Statement of Stockholders’ Deficit
From May 31, 2006 to May 31, 2008
(Expressed in US dollars)
| | Common Stock | Preferred Stock | Additional | Common | | Accumulated Other | Deficit Accumulated During the | |
| | Number of Stock | Amount | Number of Stock | Amount | Paid-in Capital | Stock Subscribed | Donated Capital | Comprehensive Loss | Development Stage | Total |
| | # | $ | # | $ | $ | $ | $ | $ | $ | $ |
| Balance – May 31, 2006 | 51,514,500 | 5,151 | – | – | 411,729 | – | 97,736 | (2,662) | (570,425) | (58,471) |
| Common stock subscribed | – | – | – | – | – | 135,000 | – | – | – | 135,000 |
| Donated services and expenses | – | – | – | – | – | – | 42,000 | – | – | 42,000 |
| Foreign currency translation adjustment | – | – | – | – | – | – | – | (7,211) | – | (7,211) |
| Net loss for the year | – | – | – | – | – | – | – | – | (868,797) | (868,797) |
| Balance – May 31, 2007 | 51,514,500 | 5,151 | – | – | 411,729 | 135,000 | 139,736 | (9,873) | (1,439,222) | (757,479) |
| Conversion to Series A convertible preferred shares (Note 9) | (19,000,000) | (1,900) | 19,000,000 | 1,900 | – | – | – | – | – | – |
| Conversion of convertible note to common stock (Note 7(a)) | 441,000 | 44 | – | – | 88,156 | – | – | – | – | 88,200 |
| Common stock subscribed (Note 10(a)) | – | – | – | – | – | 45,000 405,000 | – – | – | – | 45,000 |
| Common stock issued for shares subscribed (Note 10(a)) | 1,707,898 | 171 | – | – | 494,829 | (135,000) | – | – | – | 360,000 |
| Foreign currency translation adjustment | – | – | – | – | – | – – | – – | (16,708) | – | (16,708) |
| Net loss for the year | – | – | – | – | – | – | – | – | (197,527) | (197,527) |
| Balance – May 31, 2008 | 34,663,398 | 3,466 | 19,000,000 | 1,900 | 994,714 | 45,000 | 139,736 | (26,581) | (1,636,749) | (478,514) |
On February 9, 2007, the Company completed a 2:1 forward stock split of the Company’s stock by way of a dividend of one share for each share of common stock outstanding and on March 29, 2007, the Company completed a 3:1 forward stock split of the Company’s stock by way of a dividend of two shares for each share of common stock outstanding. All share amounts have been retroactively adjusted for all periods presented.
(The accompanying notes are an integral part of the consolidated financial statements)
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
1. Nature of Operations and Continuance of Business
Novori Inc. (the “Company”) was incorporated in the State of Delaware, USA on July 26, 2004. Effective July 27, 2004, the Company incorporated a wholly-owned subsidiary, Novori Marketing Inc., in the Province of British Columbia, Canada. The Company’s principal business is the purchase and sale of diamonds over the Internet. The Company has produced significant revenue from its principal business and prior to June 1, 2007 was a development stage company as defined by Statement of Financial Accounting Standard (“SFAS”) No. 7 “Accounting and Reporting by Development Stage Enterprises”.
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. While the Company has generated revenue since inception, it has never paid any dividends and is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. As at May 31, 2008, the Company has a working capital deficit of $452,862 and has accumulated losses of $1,636,749 since inception. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company‘s common shares are currently trading on the Over the Counter Bulletin Board (OTCBB) under the trading symbol ‘NOVO.OB’.
2. Summary of Significant Accounting Policies
| | a) | Basis of Presentation and Fiscal Year |
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in U.S. dollars. These consolidated financial statements include the accounts of the Company and its wholly owned Canadian subsidiary, Novori Marketing Inc. All intercompany transactions and balances have been eliminated. The Company’s fiscal year-end is May 31.
The preparation of these consolidated financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to recoverability of long-lived assets, stock-based compensation, allowances for doubtful accounts, sales returns and allowances, inventory reserves, deferred income tax asset valuations, donated expenses and loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for the reporting and display of comprehensive income (loss) and its components in the consolidated financial statements. As at May 31, 2008 and 2007, the Company’s only component of comprehensive loss was foreign currency translation adjustments.
| | d) | Cash and Cash Equivalents |
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
2. Summary of Significant Accounting Policies (continued)
Inventory is determined on a first-in, first-out basis and is stated at the lower of cost or market. Market is determined based on the net realizable value, with appropriate consideration given to excessive levels, future demand and other factors. As at May 31, 2008, inventory consisted of diamonds and settings that were held with a supplier on refund (supplier products).
| | f) | Financial Instruments and Concentrations |
The fair values of financial instruments, which include, cash, accounts payable, accrued liabilities, amounts due from and to related parties, convertible notes, and promissory notes were estimated to approximate their carrying values due to the immediate or short-term maturity of these financial instruments. The Company’s operations are in Canada resulting in exposure to market risks from changes in foreign currency rates. The financial risk is the risk to the Company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk. Financial instruments that potentially subject the Company to credit risk consist principally of cash. Cash is deposited with a high quality financial institution.
| | g) | Foreign Currency Translation |
The Company’s reporting currency is the United States dollar. Foreign currency transactions are accounted for in accordance with SFAS No. 52 “Foreign Currency Translation” (“SFAS No. 52”). Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. The functional currency of the wholly-owned Canadian subsidiary is the Canadian dollar. The financial statements of the subsidiary are translated to United States dollars in accordance with SFAS No. 52 using period-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian dollars. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
Property and equipment consists of computer hardware and is recorded at cost. Computer hardware is being amortized on the straight-line basis over the estimated life of three years.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
2. Summary of Significant Accounting Policies (continued)
The Company's products typically carry a lifetime warranty against manufacturing defects. The Company establishes reserves for estimated product warranty costs at the time revenue is recognized based upon its historical warranty experience, and additionally for any known product warranty issues. To date, the Company has not experienced a significant amount of product warranty costs and has not recognized any warranty reserves.
| | k) | Basic and Diluted Net Income (Loss) per Share | |
The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share" (“SFAS 128”). SFAS 128 requires presentation of both basic and diluted earnings per share (EPS) on the face of the consolidated statement of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted SFAS No. 109 “Accounting for Income Taxes” as of its inception. Pursuant to SFAS No. 109, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these consolidated financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
The Company recognizes revenue from the online sale of diamond jewellery in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.” The Company accounts for revenue as a principal using the guidance in EITF 99-19, “Reporting Revenue Gross as a Principal vs. Net as an Agent”. Revenue consists of the sale of diamonds and diamond jewellery products and is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the product is shipped, and collectability is reasonably assured. The Company provides the customer with a 30 day right of return. The Company recognizes revenue at the time of sale in accordance with SFAS No. 48 “Revenue Recognition When Right of Return Exists”. Gross revenues and related cost of sales are reduced by the estimated amount of future returns based upon past historical experience. The Company sells to customers based on standard credit policies and regularly reviews accounts receivable for any bad debts. Allowances for doubtful accounts are based on an estimate of losses on customer receivable balances.
Advertising costs are charged to operations as incurred. For the year ended May 31, 2008, the Company recorded advertising costs of $165,114 (2007 - $224,783).
| | o) | Shipping and Handling Costs |
The Company pays for all shipping and handling costs within and outside of the United States, which is included in cost of sales. The Company currently ships to countries outside of the United States.
| | p) | Stock-based Compensation |
The Company records stock-based compensation in accordance with SFAS No. 123R “Share Based Payments”, which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options. In March 2005, the Securities and Exchange Commission issued SAB 107 relating to SFAS 123(R). The Company applied the provisions of SAB 107 in its adoption of SFAS 123(R). SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model as its method of determining fair value. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviours. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the statement of operations over the requisite service period.
All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The Company has not issued any stock options since its inception.
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
2. Summary of Significant Accounting Policies (continued)
| | q) | Recently Issued Accounting Pronouncements |
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – An interpretation of FASB Statement No. 60”. SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities. SFAS 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to FASB Statement No. 133”. SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company is currently evaluating the impact of SFAS No. 161 on its financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”. This statement replaces SFAS 141 and defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS 141R also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements Liabilities –an Amendment of ARB No. 51”. This statement amends ARB 51 to establish accounting and reporting standards for the Noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, “Fair Value Measurements”. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements.
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
2. Summary of Significant Accounting Policies (continued)
| | q) | Recently Issued Accounting Pronouncements (continued) |
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The objective of SFAS No. 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements.
| | r) | Recently Adopted Accounting Pronouncements |
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statements No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a two-step method of first evaluating whether a tax position has met a more likely than not recognition threshold and second, measuring that tax position to determine the amount of benefit to be recognized in the financial statements. FIN 48 provides guidance on the presentation of such positions within a classified statement of financial position as well as on derecognition, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this statement did not have a material effect on the Company's reported financial position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for periods ending after November 15, 2006. The adoption of SAB No. 108 did not have a material effect on the Company’s reported financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This statement requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The provisions of SFAS No. 158 are effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. The adoption of this statement did not have a material effect on the Company's reported financial position or results of operations.
3. Inventory
| | May 31, 2008 $ | May 31, 2007 $ |
| Supplier products | 37,778 | 26,358 |
| Provision for inventory obsolescence | (6,487) | – |
| | 31,291 | 26,358 |
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
4. Property and Equipment
| | Cost $ | Accumulated Amortization $ | May 31, 2008 Net Carrying Value $ | May 31, 2007 Net Carrying Value $ |
| Computer hardware | 2,520 | 1,110 | 1,410 | 115 |
5. Accrued Liabilities
| | May 31, 2008 $ | May 31, 2007 $ |
| Accrued interest | 18,984 | 12,255 |
| Allowance for sales returns | 4,359 | 5,641 |
| Professional fees | 13,242 | 14,879 |
| Contingent liability | 30,938 | 20,000 |
| | 67,523 | 52,775 |
6. Related Party Transactions
| | a) | At May 31, 2008, the Company owes $6,953 (May 31, 2007 - $10,000) to a company controlled by two directors of the Company. This amount is non-interest bearing, unsecured, and due on demand. |
| | b) | At May 31, 2008, the Company owes $30,000 (May 31, 2007 - $15,000) to a shareholder with significant influence for consulting fees with respect to the standby equity distribution agreement, as disclosed in Note 11(b). Under the terms of the agreement, the amounts are unsecured, non-interest bearing, and due on demand. |
| | c) | For the year ended May 31, 2008, two officers of the Company received $222,504 (2007 - $143,960) as compensation for consulting services provided to the Company. |
7. Convertible Notes
| | a) | On July 5, 2005, the Company received $80,000 and issued a convertible note maturing on July 5, 2007. Under the terms of the convertible note, interest is payable annually at 5% per annum, and the principal can be convertible into common shares of the Company at $0.40 per common share. |
Additionally, under the terms of the note, the creditor can call the unpaid principal and interest of the Note if (a) one or more judgements are entered against the Company which exceed, in the aggregate, $100,000 and the Company does not pay such judgements or arrange for their enforcement to be postponed no later than within thirty days after the judgements have been entered; and (b) if bankruptcy, receivership, or insolvency proceedings are started by, or against, the Company, or if the Company dissolves, liquidates or otherwise winds up its business; or if there is a change in control of the Company.
On April 4, 2007, the terms of the note were amended on the $80,000 convertible note to reduce the conversion price from $0.40 per share to $0.20 per share.
On July 5, 2007, the holders of the convertible note exercised their option to convert the note and accrued interest totalling $88,200 into 441,000 shares of common stock at a conversion price of $0.20 per share. Refer to Note 10(c).
| | b) | On January 23, 2007, the Company issued a $100,000 convertible note (the “Note”) maturing on February 1, 2009. Under the terms of the convertible note, interest is payable annually at 8% per annum, and the principal can be convertible into common shares of the Company at lesser of $0.50 per share or a 25% discount to the five day volume weighted average stock price of the Company’s common stock as of the date of conversion. |
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
7. Convertible Notes (continued)
On March 28, 2007, the Company modified the terms of the $100,000 convertible note to reduce the conversion price from the lesser of $0.50 per share or a 25% discount to the five day volume weighted average stock price of the Company’s common stock as of the date of conversion to the lesser of $0.25 per share or a 25% discount to the five days volume weighted average stock price of the Company’s common stock as of the date of conversion.
In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, the Company determined that the conversion feature of the Note met the criteria of an embedded derivative and therefore the conversion feature of the debt needed to be bifurcated and accounted for as a derivative. The debt does not meet the definition of “conventional convertible debt” because the number of shares which may be issued upon the conversion of the debt is not fixed. Therefore, the conversion feature, pursuant to EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, was accounted for as a derivative liability. The Company calculated the fair value of the conversion feature and recognized a discount of $57,143, being the difference between the face value and the fair value of the conversion feature.
Pursuant to EITF 00-19 the Company will adjust the carrying value of the conversion feature to its fair value at each reporting date. During the year ended May 31, 2008, the Company recognized a gain on the change in the fair value of the conversion feature of $423,594 (2007 – loss of $430,857) decreasing the carrying value of the derivative liability to $64,405 (2007 – $488,000).
For the year ended May 31, 2008, the Company accreted interest expense of $25,652 (2007 –- $7,089) increasing the carrying value of the note to $75,598 (2007 – $49,946). The Company will record further interest expense over the term of the Note of $24,402 resulting in the carrying value of the convertible debentures to be accreted to the face value of $100,000 at maturity. At May 31, 2008, accrued interest of $10,405 has been recorded.
8. Promissory Notes
| | a) | On May 1, 2006, the Company received $10,000 and issued a promissory note. Under the terms of the promissory note, interest is accrued at 5% per annum, is unsecured, and due on July 5, 2008. At May 31, 2008, accrued interest of $1,107 (2007 - $605) has been recorded. |
| | b) | On July 28, 2006, the Company received $30,000 and issued a promissory note. Under the terms of the promissory note, interest is accrued at 10% per annum and the principal and interest is due upon demand 90 days after advancement of funds. As at May 31, 2008, the amount has not been repaid and the Company has recorded $5,515 (2007 - $2,507) of accrued interest. |
| | c) | On December 20, 2006, the Company received $7,000 and issued a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 5% per annum, and is due on May 24, 2008. At May 31, 2008, the amount has not been repaid and the Company has recorded $507 (2007 - $156) of accrued interest. |
| | d) | On December 20, 2006, the Company received $3,000 and issued a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 5% per annum, and was due on December 19, 2009. At May 31, 2008, accrued interest of $217 (2007 - $67) has been recorded. |
| | e) | On March 7, 2008, the Company received $50,000 and issued a promissory note. Under the terms of the promissory note, the amount is unsecured, accrues interest at 12% per annum, and is due on April 11, 2009. At May 31, 2008, accrued interest of $1,233 has been recorded. |
9. Preferred Stock
| | a) | On June 12, 2007, the Board of Directors of the Company adopted a Certificate of Designation for Series A Convertible Preferred Stock which are convertible into common stock on a one for one basis at any time after June 12, 2009. |
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
9. Preferred Stock (continued)
| | b) | On June 12, 2007, the Company entered into shareholder agreements with the President and Chief Financial Officer (“CFO”) of the Company pursuant to which each converted 9,500,000 shares of common stock into 9,500,000 Series A Convertible Preferred Stock on a one for one basis. No other consideration was paid in accordance with these transactions. |
10. Common Stock
| | a) | During the year ended May 31, 2008, the Company received advances of $405,000 (May 31, 2007 - $135,000) for total advances of $540,000 pursuant to the equity distribution agreement described in Note 11(b). On April 14, 2008, the Company issued 1,707,898 shares of common stock in connection with $495,000 of advances received. At May 31, 2008, advances of $45,000 remained in common stock subscribed and the Company will issue 409,091 shares of common stock. |
| | b) | On June 12, 2007, the Company entered into shareholder agreements with the President and CFO of the Company pursuant to which each converted 9,500,000 shares of common stock into 9,500,000 Series A Convertible Preferred Stock on a one for one basis. No other consideration was paid in accordance with these transactions. |
| | c) | On July 5, 2007, the holders of the convertible note, as disclosed in Note 7(a), exercised their option to convert the note and accrued interest totalling $88,200, into 441,000 shares of common stock at a conversion price of $0.20 per share. |
11. Commitments
| | a) | On November 1, 2007, the Company entered into a new lease agreement with a company to provide office space to the Company for a five-year term plus a five year renewal option. Under the lease agreement, the Company is obligated to the following payments: |
| | | |
| | | |
| Fiscal Period | Annual Payment |
| 2009 | Cdn $29,952 |
| 2010 | Cdn $32,022 |
| 2011 | Cdn $33,057 |
| 2012 | Cdn $33,977 |
| 2013 | Cdn $14,344 |
During the year ended May 31, 2008, the Company incurred rent expense of $23,114 (CDN$23,447). For the year ended May 31, 2007, the Company incurred rent expense of $6,960 (CDN$7,905).
| | b) | On January 24, 2007, the Company entered into a standby equity distribution agreement with an investor, whereby the Company has the option to issue and sell to the investor the Company’s common stock up to an aggregate amount of $1,260,000 over a term of 24 months. |
The number of shares of common stock of the Company that the investor shall receive for each advance shall be determined by dividing the amount of the advance by the purchase price which shall be 60% of the volume weighted average stock price during the five consecutive trading days after the date that the notice requesting an advance was made. The maximum amount for each advance shall be $45,000 for the first 12 months of the commitment period, and $60,000 thereafter. There must be a minimum of 28 days between each advance of funds and the corresponding delivery of common shares.
The Company has agreed to file a Registration Statement with the United States Securities and Exchange Commission with respect to the resale of all of the common stock underlying the distribution agreement. The Registration Statement must be effective before the Company is allowed to send a notice to the investor requesting an advance of a portion of the commitment amount of $1,260,000. After twelve months from the date the Registration Statement is declared effective, the distribution agreement may be terminated at any time by either party, upon thirty days written notice to the other party.
The agreement will also terminate permanently in the event that (a) any stop order or suspension of the effectiveness of the registration statement for 50 days; (b) the Company fails materially to comply any of its covenants under the distribution agreement.
As at May 31, 2008, the Company has received proceeds of $540,000. On April 14, 2008, the Company issued 1,707,898 shares of common stock in connection to $495,000 of advances received. At May 31, 2008, advances of $45,000 remained in common stock subscribed and the Company is committed to issue 409,091 common shares of the Company to the investor.
| | c) | On January 24, 2007, the Company entered into a consulting agreement with the same investor as noted in Note 11(b) to provide consulting services for a period of 24 months. The Company is obligated to pay $15,000 of consulting fees for any month when an advance of funds is requested by the Company and made by the investor, pursuant to the distribution agreement entered between the parties on January 24, 2007. During the year ended May 31, 2008, the Company received advances of $405,000 and recorded consulting fees of $135,000, of which $15,000 is included in accounts payable. |
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
11. Commitments (continued)
| | d) | On December 1, 2006, the Company entered into a consulting agreement with a company to provide professional services relating to the search engine optimization of the Company’s Website. |
Under the terms of the agreement, the Company is obligated to pay $15,000 per month for an 18-month term commencing December 1, 2006. The Company changed the term to pay $7,500 per month beginning on January 1, 2008. During the year ended May 31, 2008, the Company recorded promotion and advertising fee of $135,000 of which $55,000 is included in accounts payable.
12. Contingent Liabilities
| | a) | In July 2007, Blue Nile, Inc. (the “Plaintiff”) filed a claim against the Company in the United States District Court for the Western District of Washington, in Seattle, Washington. The Plaintiff sought money damages against the Company alleging illicit appropriation by the Company of eight copyrighted images of diamonds which appeared on the Company’s website. |
The Company negotiated with the Plaintiff to settle the claim and on October 24, 2007, the Company paid $20,000 to settle the claim.
| | b) | On January 25, 2008, a civil lawsuit was filed against the Company, its officers, and an independent party with which the Company has no relationship, (collectively, the “Defendants”). The lawsuit was filed in State Court in Hillsborough County, Florida by three plaintiffs. The plaintiffs allege that the Defendants violated provisions of the Telephone Consumer Protection Act of 1991 by sending one or more unsolicited fax advertisements for the purchase of the Company’s securities to them and are seeking damages in excess of $15,000 together with declaratory and injunctive relief. |
| | | |
| | | The Defendants have retained a lawyer in Florida who filed an appearance on their behalf and has filed an application to dismiss the claim on the basis that it has no merit whatsoever. The Company plans to vigorously defend the action and has been advised by legal counsel that it is probable the claim will be dismissed. |
| | | |
| | c) | On August 25, 2008, the Company filed a lawsuit against Incentaclick Media Group Inc. (the “Plaintiff”) in the Supreme Court of British Columbia, Canada. The Company is claiming negligence and breach of contract due to failure to provide services as stipulated under an Agreement between the parties that had a term of 18 months commencing December 2006. Pursuant to the Agreement, the Company paid a monthly fee of $15,000 for custom website search engine optimization services. However, the Company claims that such services were never provided. Beginning December 2007 and for the remaining term of the contract, the monthly fee was reduced to $7,500. On July 28, 2008, the Company received a demand letter for payment of the remaining $67,500 outstanding under the Agreement. The Company proposed a settlement which was rejected, and the Plaintiff countersued for breach of contract, claiming damages of $67,500. On September 19, 2008, the parties settled and the Company agreed to pay $55,000 payable in 16 monthly payments of $3,437 commencing September 30, 2008. |
13. Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income tax expense differs from the amount that would result from applying the U.S federal and state income tax rates to earnings before income taxes. The Company has a net operating loss carryforward of approximately $1,284,600 available to offset taxable income in future years which commence expiring in fiscal 2013. Pursuant to SFAS 109, the potential benefit of the net operating loss carryforward has not been recognized in the consolidated financial statements since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years.
The Company is subject to United States federal and state income taxes at an approximate rate of 35%. The reconciliation of the provision for income taxes at the United States federal statutory rate compared to the Company’s income tax expense as reported is as follows:
| | May 31, 2008 $ | May 31, 2007 $ |
| Income tax recovery at statutory rates | 69,100 | 304,000 |
| Permanent differences | 132,000 | (168,000) |
| Valuation allowance change | (201,100) | (136,000) |
| Provision for income taxes | – | – |
Novori Inc.
(Formerly a Development Stage Company)
Note to the Consolidated Financial Statements
For the year ended May 31, 2008
(Expressed in US dollars)
13. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income taxes arise from temporary differences in the recognition of income and expenses for financial reporting and tax purposes. The significant components of deferred income tax assets and liabilities are as follows:
| | May 31, 2008 $ | May 31, 2007 $ |
| Net operating loss carryforward | 418,322 | 217,175 |
| Valuation allowance | (418,322) | (217,175) |
| Net deferred income tax asset | – | – |
The Company has recognized a valuation allowance for the deferred income tax asset since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years. The valuation allowance is reviewed annually. When circumstances change and which cause a change in management's judgment about the realizability of deferred income tax assets, the impact of the change on the valuation allowance is generally reflected in current income.
Since inception, we have had no changes in or disagreements with our accountants. Our audited financial statements for the fiscal year ended May 31, 2008 have been included in this annual report in reliance upon Manning Elliott LLP, Independent Registered Public Accounting Firm, as experts in accounting and auditing.
Not applicable.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of May 31, 2008. Based on this evaluation, our Chief Financial Officer and Chief Executive Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in the reports we file, within the time periods specified in the SEC’s rules and forms. Such evaluation did not identify any change in our internal control over financial reporting that occurred during the year ended May 31, 2008 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
The term "internal control over financial reporting" is defined as a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; |
| | |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. |
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of our Chief Executive Officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of May 31, 2008 using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of May 31, 2008, we determined that there were control deficiencies that constituted material weaknesses, as described below.
| 1. | We did not maintain a sufficient complement of personnel with an appropriate level of technical knowledge of U.S. generally accepted accounting principles (“US GAAP”) including financial statement footnote disclosures, experience in the application of US GAAP commensurate with our financial accounting and reporting requirements.. This material weakness, if not remediated, has the potential to cause a material misstatement in the future. |
| 2. | Due to the significant number and magnitude of out-of-period adjustments identified during the year-end closing process, management has concluded that the controls over the period-end financial reporting process were not operating effectively. Specifically, controls were not effective to ensure that significant non-routine transactions, accounting estimates, and other adjustments were appropriately reviewed, analyzed, and monitored on a timely basis. This was evidenced by a significant number of out-of-period adjustments noted during the year-end closing process. A material weakness in the period-end financial reporting process could result in us not being able to meet our regulatory filing deadlines and, if not remediated, has the potential to cause a material misstatement or to miss a filing deadline in the future. |
| We lacked sufficient internal controls to ensure the correct cutoff of expenses at period end which resulted in material out of period adjustments to the financial statements. This material weakness if not remediated, has the potential to cause a material misstatement in the future. |
| | |
| 4. | Certain entity level controls establishing a “tone at the top” were considered material weaknesses. We have an audit committee however it is not independent. There is no policy on fraud and no code of ethics at this time, though we plan to implement such policies in fiscal 2008. A whistleblower policy is not necessary given the small size of the organization. |
| | |
| 5. | Management override of existing controls is possible given the small size of the organization and lack of personnel. |
| | |
| 6. | There is no system in place to review and monitor internal control over financial reporting. We maintain an insufficient level of personnel to carry out ongoing monitoring responsibilities and ensure effective internal control over financial reporting. |
Management is currently evaluating remediation plans for the above control deficiencies.
Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of
May 31, 2008 based on criteria established in Internal Control—Integrated Framework issued by COSO.
Manning Elliott LLP, an independent registered public accounting firm, was not required to and has not issued a report concerning the effectiveness of our internal control over financial reporting as of May 31, 2008.
Changes in Internal Controls
During the period ended May 31, 2008 there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
The following table sets forth the name, age, and position of the executive officers and directors of Novori as of September 12, 2008.
Name and Age | Position(s) Held in Novori Inc. | Principal Occupation(s) During Past 5 Years | Other Directorships Held by Director |
| Harold Schaffrick, 46 | Director, President, CEO since July 2004 to present | President and CEO of Novori from July 2004 to present President of Blue Guru Investment Group Inc. d.b.a. iCanRx from Feb 2002 to July 2004 | None |
| Mark Neild, 41 | Director, CFO, Secretary, and Chief Accounting Officer since July 2004 to present; Treasurer since May 2005 to present | Secretary, CAO and CFO of Novori from July 2004 to present Treasurer of Novori from May 2005 to present Developer of online presence for ICanRx from Feb 2002 to July 2004 | None |
Harold Schaffrick has been our director, President and CEO since our inception in July 2004. For the past five years, Mr. Schaffrick has worked as a consultant with small businesses to assist them with the process of becoming public entities. He also founded, in February 2002, and was the President of, an online retail sales business, Blue Guru Investment Group Inc. d.b.a. iCanRx. Prior to this, he worked as a project manager in information systems at the British Columbia Automobile Association for ten years designing, developing and implementing business solutions. Mr. Schaffrick attended British Columbia Institute of Technology and graduated with a Diploma in Engineering. He also has a Diploma in Computer Programming from the Career Data Institute.
Mark Neild has been our Chief Financial Officer, Secretary and Chief Accounting Officer since July 2004 and our treasurer since May 2005. Mr. Neild has worked as a consultant with many private and public companies establishing their online corporate identities, designing and developing corporate websites and assisting with public relations for these companies. Since February 2002 to July 2004, Mr. Neild has assisted in developing the online presence for iCanRx, an online retail sales business of which he was an executive officer and the Secretary.
There are no individuals other than our executive officers who are expected to make a significant contribution to our business.
Family Relationships
There are no family relationships among directors, executive officers, or persons nominated or chosen by us to become directors or executive officers.
There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholders are an adverse party or have a material interest adverse to us.
None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past five years:
| | · | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
| | · | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| | · | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or |
| | · | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
Section 16(a) Beneficial Ownership Compliance Reporting
Section 16(a) of the Securities Exchange Act of 1934 requires a company’s directors and officers, and persons who own more than ten-percent (10%) of the company’s common stock, to file with the Securities and Exchange Commission reports of ownership on Form 3 and reports of change in ownership on Forms 4 and 5. Such officers, directors and ten-percent stockholders are also required to furnish the company with copies of all Section 16(a) reports they file. Based on the fact that we do not have a class of securities registered under the Section 12 of the Securities Exchange Act of 1934 none of our 10% shareholders, directors or officers have been required for file reports under Section 16(a) of the Securities Exchange Act of 1934.
Code of Ethics
We have not yet adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions because we have not yet finalized the content of such a code.
Audit Committee
The functions of the Audit Committee are currently carried out by our Board of Directors. Our Board of Directors has determined that we do not have an audit committee financial expert on its Board of Directors carrying out the duties of the Audit Committee. The Board of Directors has determined that the cost of hiring a financial expert to act as a director and to be a member of the Audit Committee or otherwise perform Audit Committee functions outweighs the benefits of having a financial expert on the Audit Committee
Director Nominees
We do not have a nominating committee. The Board of Directors, sitting as a Board, selects individuals to stand for election as members of the Board. Since the Board of Directors does not include a majority of independent directors, the decision of the Board as to director nominees is made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, not less than 90 days prior to the next annual Board of Directors' meeting at which the slate of Board nominees is adopted, the Board will accept written submissions of proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the shareholder submitting the proposed nominee believes that the nomination would be in the best interests of shareholders. If the proposed nominee is not the same person as the shareholder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee's qualifications to serve on the Board of Directors, as well as a list of references.
The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual's experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of management's slate of director nominees submitted to shareholders for election to the Board.
Among the factors that the Board considers when evaluating proposed nominees are their knowledge of, and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from the candidate prior to reaching a determination. The Board is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.
The following table sets forth, as of May 31, 2008, compensation awarded to our Principal Executive Officer and our Principal Financial Officer (collectively, the “Named Executive Officers”) for the last three completed fiscal years. There were no other persons serving as executive officers whose salary and bonus for such years exceeded $100,000.
SUMMARY COMPENSATION TABLE
Name and principal position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | Total ($) |
Harold Schaffrick President & CEO | 2008 | 111,252 (1) | 0 | 0 | 0 | 0 | 0 | $111,252 |
| 2007 | 50,981 (1) | 0 | 0 | 0 | 0 | 0 | $50,981 |
| 2006 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Mark Neild
CFO, Secretary, CAO | 2008 | 111,252 (2) | 0 | 0 | 0 | 0 | 0 | $111,252 |
| 2007 | 50,981 (2) | 0 | 0 | 0 | 0 | 0 | $50,981 |
| 2006 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
1) Represents management consulting fees paid to Mr. Schaffrick as Chief Executive Officer and President.
(2) Represents management consulting fees paid to Mr. Neild as Chief Financial Officer, Secretary and Chief Accounting Officer.
Equity Awards
None.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
Compensation Committee
We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Compensation of Directors
We do not pay members of the Board of Directors any fees for attendance at Board meetings or similar remuneration or reimburse them for any out-of-pocket expenses incurred by them in connection with our business.
Change of Control
As of May 31, 2008 we had no pension plans or compensatory plans or other arrangements which provide compensation on the event of termination of employment or change in control of us.
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of October 7, 2008 by: (i) each of our directors; (ii) each of our named executive officers; and (iii) each person or group known by us to beneficially own more than 5% of our outstanding shares of common stock. Unless otherwise indicated, the shareholders listed below possess sole voting and investment power with respect to the shares they own.
As of October 7, 2008, there were 34,663,398 common shares and 19,000,000 series A convertible preferred shares issued and outstanding. The holders of series A convertible preferred stock can convert their series A convertible preferred stock into our common stock at a rate of 1 share of common stock for 1 share of series A convertible preferred stock. The holders have the option to voluntarily convert the series A convertible preferred stock into common stock after June 12, 2009.
Name and Address of Beneficial Owner | Title of Class | Amount and Nature of Beneficial Ownership (1) (#) | Percent of Class (2) (%) |
Harold Schaffrick (3) Suite 105 – 5450 152nd St. Surrey, BC V3S 5J9 | Common | 9,500,000 | 27.4 |
| Preferred | 9,500,000 | 50 |
Mark Neild (4) Suite 105 – 5450 152nd St. Surrey, BC V3S 5J9 | Common | 9,500,000 | 27.4 |
| Preferred | 9,500,000 | 50 |
| All Officers and Directors as a Group | Common | 19,500,000 | 54.8 |
| Preferred | 19,000,000 | 100 |
| (1) | The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. |
| | Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table. |
| (2) | Based on 34,663,398 issued and outstanding shares of common stock and 19,000,000 issued and outstanding shares of series A convertible preferred stock as of October 7, 2008. |
| (3) | Harold Schaffrick is our director, President and Chief Executive Officer. |
| (4) | Mark Neild is our director and Chief Financial Officer. |
As at May 31, 2008, we owed $6,953 to Blue Guru Investment Group Inc., a company controlled by Harold Schaffrick, our director and Chief Executive Officer, and Mark Neild, our director and Chief Financial Officer. These amounts are non-interest bearing, unsecured and due on demand.
As at May 31, 2008, we also owed $30,000 to 0775270 BC Ltd., one of our shareholders, pursuant to a standby equity distribution agreement. The terms of the agreement specify that the loan is non-interest bearing and due on demand.
We paid approximately $239,865 to Harold Schaffrick and Mark Neild as compensation for consulting services from June 1, 2007 to May 31, 2008.
Other than as described above, we have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of these persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets for the last three fiscal years.
Director Independence
The OTC Bulletin Board on which our common stock is listed on does not have any director independence requirements.
We also do not currently have a definition of independence as all of our directors are also employed in management positions as our officers. Once we engage further directors and officers, we will develop a definition of independence and scrutinize our Board of Directors with regard to this definition.
Audit and Non-Audit Fees
The following table represents fees for the professional audit services and fees billed for other services rendered by our current auditors, Manning Elliott LLP for the audit of our annual financial statements for the year ended May 31, 2007 and 2008 and any other fees billed for other services rendered by Manning Elliott LLP during these periods. All fees are paid by US dollars.
| | Year Ended May 31, 2007 | Year Ended May 31, 2008 |
| Audit fees | $19,000 | $34,320 |
| Audit-related fees | - | - |
| Tax fees | - | $4,000 |
| All other fees | - | - |
| Total | $19,000 | $38,320 |
Since our inception, our Board of Directors, performing the duties of the Audit Committee, reviews all audit and non-audit related fees at least annually. The Board of Directors as the Audit Committee pre-approved all audit related services in the fiscal year ending May 31, 2008.
PART IV
| (a)(1) | Financial Statements |
| See “Index to Consolidated Financial Statements” set forth on page F-1. |
| (a)(2) | Financial Statement Schedules |
| None. The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our financial statements or related notes thereto. |
Exhibit Number | Exhibit Description |
| 21 | Subsidiaries (1) |
| |
| |
| |
| |
(1) Included as an exhibit to our Form SB-2 filed on December 15, 2005.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Novori Inc. |
| Date: October 8, 2008 | |
| | By: /s/ Harold Schaffrick |
| | Harold Schaffrick |
| | President, Chief Executive Officer, Director |
Pursuant to the requirements of the Exchange Act this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| | | |
/s/ Harold Schaffrick | President, Chief Executive Officer, Director | October 8, 2008 |
| Harold Schaffrick | | |
| | | |
/s/ Mark Neild | Director, Chief Financial Officer, Principal Accounting Officer | October 8, 2008 |
| Mark Neild | | |
