SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2008
o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 333-130344
NOVORI INC.
(Name of Small Business Issuer in its charter)
| Delaware | 47 - 0948014 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer I.D. No.) |
5550 152nd Street, Suite 206,
Surrey, British Columbia, Canada V3S 5J9
(Address of principal executive offices)
___________________________
(Address of former executive offices)
(778) 571 0880
Issuer’s telephone number
______________________________
Former name, former address, and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” 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 Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
As of October 15, 2008, the registrant had 35,072,489 shares of common stock and 19,000,000 shares of Series A Convertible Preferred Stock outstanding
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited interim consolidated financial statements of Novori Inc. (the “Company”, “Novori”, “we”, “our”, “us”) follow. All currency references in this report are in US dollars unless otherwise noted.
Novori Inc.
(Formerly a Development Stage Company)
(Unaudited)
| | Index |
| Consolidated Balance Sheets | F-1 |
| Consolidated Statements of Operations | F-2 |
| Consolidated Statements of Cash Flows | F-3 |
| Notes to the Consolidated Financial Statements | F-4 |
Novori Inc.
Consolidated Balance Sheets
(Expressed in US dollars)
| | August 31, 2008 $ (unaudited) | May 31, 2008 $ |
| ASSETS | | |
| Current Assets | | |
| Cash | 18,186 | 20,806 |
| Inventory, net (Note 3) | 39,756 | 31,291 |
| Prepaid expenses | 3,917 | 4,189 |
| Total Current Assets | 61,859 | 56,286 |
| Property and Equipment (Note 4) | 1,365 | 1,410 |
| Total Assets | 63,224 | 57,696 |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | |
| Current Liabilities | | |
| Accounts payable | 153,479 | 156,771 |
| Accrued liabilities (Note 5) | 115,698 | 67,523 |
| Due to a related party (Note 6(a)) | 6,953 | 6,953 |
| Due to shareholder (Note 6(b)) | 30,000 | 30,000 |
| Deferred revenue | 34,832 | 10,898 |
| Convertible note payable, less discount of $16,102 (Note 7(b)) | 83,898 | 75,598 |
| Derivative liability (Note 7(b)) | 30,983 | 64,405 |
| Promissory notes (Note 8) | 117,000 | 97,000 |
| Total Current Liabilities | 572,843 | 509,148 |
| Agreement Payable (Note 12(b)) | 13,750 | 24,062 |
| Long-Term Promissory Notes (Note 8(d)) | 3,000 | 3,000 |
| Total Liabilities | 589,593 | 536,210 |
| 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, 2008 – 19,000,000) | 1,900 | 1,900 |
| Common Stock, 100,000,000 shares authorized, with a par value of $0.0001; 35,072,489 shares issued and outstanding (May 31, 2008 – 34,663,398 shares) | 3,507 | 3,466 |
| Additional Paid-in Capital | 1,039,673 | 994,714 |
| Common Stock Subscribed | – | 45,000 |
| Donated Capital | 139,736 | 139,736 |
| Accumulated Other Comprehensive Income (Loss) | 8,512 | (26,581) |
| Deficit | (1,719,697) | (1,636,749) |
| Total Stockholders’ Deficit | (526,369) | (478,514) |
| Total Liabilities and Stockholders’ Deficit | 63,224 | 57,696 |
(The accompanying notes are an integral part of the financial statements)
Novori Inc.
Consolidated Statements of Operations
(Expressed in US dollars)
(unaudited)
| | For the Three Months Ended | For the Three Months Ended |
| | August 31, 2008 | August 31, 2007 |
| | $ | $ |
| Revenue | 513,428 | 468,315 |
| Cost of sales | 428,428 | 398,869 |
| Gross Profit | 85,000 | 69,446 |
| Expenses | | |
| Amortization | 65 | 52 |
| Consulting fees (Note 6(c)) | 65,409 | 51,044 |
| General and administrative | 69,995 | 128,717 |
| Professional fees | 57,601 | 45,001 |
| Total Operating Expenses | 193,070 | 224,814 |
| Operating Loss | (108,070) | (155,368) |
| Other Income (Expense) | | |
| Accretion of discount on convertible notes (Note 7(b)) | (8,300) | (5,483) |
| Gain on change in fair value of conversion feature (Note 7(b)) | 33,422 | 408,000 |
| Net Income (Loss) | (82,948) | 247,149 |
| Other Comprehensive Income (Loss) | | |
Foreign currency translation adjustment | 35,093 | (1,324) |
| Comprehensive Loss | (47,855) | 245,825 |
| Net Loss Per Share – Basic and Diluted | – | 0.01 |
| Weighted Average Shares Outstanding | 34,779,011 | 38,988,174 |
(The accompanying notes are an integral part of the financial statements)
Novori Inc.
Consolidated Statements of Cash Flows
(Expressed in US dollars)
(unaudited)
| | For the Three Months Ended August 31, 2008 $ | For the Three Months Ended August 31, 2007 $ |
| Operating Activities | | |
| Net loss for the period | (82,948) | 247,149 |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Accretion of discount on convertible notes | 8,300 | 5,483 |
| Amortization | 65 | 52 |
| Gain on change in fair value of conversion feature | (33,422) | (408,000) |
| Changes in operating assets and liabilities: | | |
| Inventory | (8,465) | (34,113) |
| Accounts payable and accrued liabilities | 35,129 | 37,656 |
| Deferred revenue | 23,934 | 30,057 |
| Net Cash Used In Operating Activities | (57,407) | (121,716) |
| Financing Activities | | |
| Proceeds from issuance of promissory note | 20,000 | – |
| Proceeds from common stock subscribed | – | 135,000 |
| Net Cash Flows Provided By Financing Activities | 20,000 | 135,000 |
| Effect of Exchange Rate Changes on Cash | 34,787 | (1,338) |
| (Decrease) Increase in Cash | (2,620) | 11,946 |
| Cash - Beginning of Period | 20,806 | 11,293 |
| Cash - End of Period | 18,186 | 23,239 |
| Supplemental Disclosures: | | |
Interest paid | – | – |
Income taxes paid | – | – |
(The accompanying notes are an integral part of the financial statements)
Novori Inc.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
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. At August 31, 2008, the Company has a working capital deficit of $510,984 and has accumulated losses of $1,719,697 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.
| | b) | Interim Consolidated Financial Statements |
The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-QSB. They do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended May 31, 2008, included in the Company’s Annual Report on Form 10-K filed on October 9, 2008 with the SEC.
The consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at August 31, 2008 and May 31, 2008, and the consolidated results of its operations and consolidated cash flows for the three months ended August 31, 2008 and 2007. The results of operations for the three months ended August 31, 2008 are not necessarily indicative of the results to be expected for future quarters or the full year.
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.
Novori Inc.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
2. Summary of Significant Accounting Policies (continued)
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 August 31, 2008, and May 31, 2008, the Company’s only component of comprehensive loss was foreign currency translation adjustments.
| | e) | 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.
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. At August 31, 2008 , inventory consisted of diamonds and settings that were held with a supplier on refund (supplier products).
| | g) | 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.
| | h) | 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.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
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.
| | l) | 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 three month period ended August 31, 2008, the Company recorded advertising costs of $2,645 (2008 - $51,870).
| | p) | 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.
Novori Inc.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
2. Summary of Significant Accounting Policies (continued)
| | q) | Stock-based Compensation |
The Company records stock-based compensation in accordance with SFAS 123(R), “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.
| | r) | 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.
Novori Inc.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
2. Summary of Significant Accounting Policies (continued)
| | r) | Recently Issued Accounting Pronouncements (continued) |
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.
| | s) | Recently Adopted Accounting Pronouncements |
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 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. 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 did not have a material effect on the Company’s reported financial position or results of operations.
3. Inventory
| | August 31, 2008 $ | May 31, 2008 $ |
| Supplier products | 46,243 | 37,778 |
| Provision for inventory obsolescence | (6,487) | (6,487) |
| | 39,756 | 31,291 |
4. Property and Equipment
| | Cost $ | Accumulated Amortization $ | August 31, 2008 Net Carrying Value $ | May 31, 2008 Net Carrying Value $ |
| Computer hardware | 2,520 | 1,155 | 1,365 | 1,410 |
5. Accrued Liabilities
| | August 31, 2008 $ | May 31, 2008 $ |
| Accrued interest | 23,369 | 18,984 |
| Allowance for sales returns | 3,273 | 4,359 |
| Product purchases | 44,764 | - |
| Professional fees | 3,042 | 13,242 |
| Contingent liability | 41,250 | 30,938 |
| | 115,698 | 67,523 |
Novori Inc.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
6. Related Party Transactions
| | a) | As of August 31, 2008, the Company owes $6,953 (May 31, 2008 - $6,953) to a company controlled by two directors of the Company. This amount is non-interest bearing, unsecured, and due on demand. |
| | b) | As of August 31, 2008, the Company owes $30,000 (May 31, 2008 - $30,000) 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 three month period ended August 31, 2008, two officers of the Company received $58,422 (2008 - $51,044) 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.
| | 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. |
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 three month period ended August 31, 2008, the Company recognized a gain on the change in the fair value of the conversion feature of $33,422 (August 31, 2007 – gain of $408,000) decreasing the carrying value of the derivative liability to $30,983 (May 31, 2008 – $64,405).
For the three month period ended August 31, 2008, the Company accreted interest expense of $8,300 (August 31, 2007 – $5,483) increasing the carrying value of the note to $83,898 (May 31, 2008 – $75,598). The Company will record further interest expense over the term of the Note of $16,102 resulting in the carrying value of the convertible debentures to be accreted to the face value of $100,000 at maturity. At August 31, 2008, accrued interest of $12,421 has been recorded.
Novori Inc.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
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 August 31, 2008, the amount has not been repaid and accrued interest of $1,233 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 are due upon demand 90 days after advancement of funds. At August 31, 2008, the amount has not been repaid and the Company has recorded $6,271 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 August 31, 2008, the amount has not been repaid and the Company has recorded $596 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 August 31, 2008, accrued interest of $255 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 August 31, 2008, accrued interest of $2,493 has been recorded. |
| | f) | On August 13, 2008, the Company received $20,000 and issued a promissory note. Under the terms of the Promissory note, the amount is unsecured, accrues interest at 1% per month, and the principal and interest are due upon demand. At August 31, 2008, accrued interest of $100 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. |
| | 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
On August 5, 2008, the Company issued 409,091 shares of common stock in connection with a $45,000 advance received on May 20, 2008 pursuant to the equity distribution agreement described in Note 11(b).
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 $22,579 |
| 2010 | Cdn $32,022 |
| 2011 | Cdn $33,057 |
| 2012 | Cdn $33,977 |
| 2013 | Cdn $14,344 |
During the three month period ended August 31, 2008, the Company incurred rent expense of $7,179 (CDN$7,373). During the three month period ended August 31, 2007, the Company incurred rent expense of $5,409 (CDN$5,724).
Novori Inc.
Notes to the Consolidated Financial Statements
August 31, 2008
(Expressed in U.S. dollars)
(unaudited)
11. Commitments (continued)
| | 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 of August 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. On August 5, 2008, the Company issued 409,091 shares of common stock in connection to a $45,000 advance received.
| | 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 three month period ended August 31, 2008, the Company received advances of $nil and recorded consulting fees of $nil. |
12. Contingent Liabilities
| | a) | 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.
| | b) | 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. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including "could", "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report.
Business Overview and Uncertainties
We are in the business of selling a selection of over 50,000 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.”
Revenues
All of our revenues were generated from the sale of diamonds and jewelry through our website, www.novori.com, 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.
Our total revenues increased by $45,113 to $513,428 for the three months ended August 31, 2008 from $468,315 for the three months ended August 31, 2007. We attribute the increase in our total revenues to two factors: increased consumer awareness of the Novori brand; and increased traffic to our website resulting from consistently high rankings on internet search engines.
Gross Profit
For the three months ended August 31, 2008, our cost of sales totaled $428,428, resulting in a gross profit of $85,000 or 17%. This compares to the three months ended August 31, 2007, for which our cost of sales totaled $398,869 and resulted in a gross profit of $69,446 or 15%. Our profit margins fluctuate as a result of our sales mix in a given period as each of our jewelry pieces can have dramatically different profit margins depending on a number of factors, including which supplier we work with and the degree of customization involved. We also sell loose, unset diamonds, which sales have the lowest mark-up. Our profit margins are also affected by strong competition in the retail jewelry and engagement ring market, and the price sensitivity of diamonds and diamond jewelry.
We had a net loss of $82,948 for the three months ended August 31, 2008 compared to a gross profit of $247,149 for the same period in 2007. Our net loss was higher for the three months ended August 31, 2008 compared to August 31, 2007 due to a reduction in other income recognized for the three months ended August 31, 2008 as compared to the three months ended August 31, 2007.
Expenses
Our total expenses decreased by $31,744 from $224,814 for the three months ended August 31, 2007 to $193,070 for the three months ended August 31, 2008. The decrease in our total expenses was due to lower costs of sales, which varies based on the product mix we sell which impacts our profit margins as described above. We anticipate that we will incur increased expenses in order to implement our business growth strategy, which includes the following: higher marketing expenses associated with our marketing campaign as we increase our marketing presence on television and online; higher sales related expense; and increased broker fees and tradeshow attendance fees.
Our total expenses during the three months ended August 31, 2008 and the three months ended August 31, 2007 include general and administrative expenses, consulting and professional fees, and amortization.
Our general and administrative costs decreased by $58,722 to $69,995 for the three months ended August 31, 2008 from $128,717 for the three months ended August 31, 2007. The decrease in general and administrative costs was due to a reduction in general and administrative expenses, including promotional and marketing activities. Our general and administrative expenses consist of bank charges, travel, meals and entertainment, promotional activities, rent, foreign exchange, office maintenance, communication expenses (cellular, internet, fax, and telephone), courier, postage costs and office supplies.
Our professional fees increased by $12,600 from $45,001 for the three months ended August 31, 2007 to $57,601 for the three months ended August 31, 2008. The increase in our professional fees is due to additional accounting and auditing fees resulting from enhanced regulatory and disclosure requirements, and additional legal services necessitated by our increasing level of operations.
Our consulting fees increased by $14,365 from $51,044 for the three months ended August 31, 2007 to $65,409 for the three months ended August 31, 2008. We paid consulting fees to Harold Schaffrick and Mark Neild for providing us with consulting services in accordance with our equity agreements. The increase in our consulting fees is due to a rise in the amount of compensation to be paid under our equity agreements.
Operating and Net Loss
We incurred an operating loss of $108,070 for the three months ended August 31, 2008, compared to an operating loss of $155,368 for the same period in 2007. The decrease in operating loss for the three months ended August 31, 2008 was due to higher revenue and a decrease in operating expenses including general and administrative expenses.
We incurred a net loss of $82,948 for the three months ended August 31, 2008, compared to net income of $247,149 for the same period in 2007. The difference is attributable to a decrease in other income for the three months ended August 31, 2008 as compared to the three months ended August 31, 2007.
Liquidity and Capital Resources
We expect that our sales will continue to grow over the next twelve months. We intend to continue making financial investments in marketing and developing our website and expect to incur losses over the next two years.
As of August 31, 2008, we had a working capital deficit of $510,984, with total current assets of $61,859 and total current liabilities of $572,843. Our current liabilities include accounts payable of $153,479; and accrued liabilities of $115,698, which is comprised of accrued interest, an allowance for sales returns, professional fees and an amount for contingent liabilities. As at August 31, 2008, we had cash of $18,186 in our bank accounts. Our accumulated deficit of $1,719,697 has mainly been funded by a combination of debt, including promissory and convertible notes, and equity financing by way of private placements of our common stock.
For the three months ended August 31, 2008, we borrowed $20,000 in cash under a promissory note. From our inception on July 26, 2004 until August 31, 2008, we have received, or have the right to receive, a total of $230,000 from the issuances of two convertible notes and four promissory notes. 0775270 BC Ltd. has the right to purchase up to $1,260,000 worth of our common stock for a purchase price described under the terms of the standby equity distribution agreement. As at October 15, 2008, we have received proceeds of $540,000 pursuant to the standby equity distribution agreement and have issued 2,116,989 shares of our common stock to 0775270 BC Ltd.
We used net cash of $57,407 in operating activities for the three months ended August 31, 2008, compared to $121,716 used to fund operating activities for the same period in 2007. We received net cash of $20,000 from financing activities for the three months ended August 31, 2008, compared to $135,000 from financing activities for the same period in 2007. Net cash of $20,000 was borrowed under a promissory note which is unsecured, payable on demand and bears interest at a rate of 1% per month.
Our currently monthly burn rate is $19,136. Our cash level of $18,186 as of August 31, 2008 is insufficient to cover our monthly burn rate. Our cash level decreased by $2,620 for the three months ended August 31, 2008.
| Description | Estimated Expenses ($) |
| 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 in May 2009 to pay salaries to employees working in these two areas. We believe that we will incur additional costs for personnel. In order for us to attract and retain quality personnel, our management anticipates we will 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 $18,186 in cash as of August 31, 2008. We intend to meet the balance of our cash requirements for the next 12 months of approximately $622,000 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.
Going Concern
Off Balance Sheet Transactions
We had 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.
Item 4T. Controls and Procedures.
a) Evaluation of disclosure controls and procedures
Harold Schaffrick, our Chief Executive Officer and Mark Neild, our Chief Financial Officer evaluated our “disclosure controls and procedures” as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of a date within 90 days before the filing date of this report and have concluded that as of the evaluation date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There was no change in our internal control over financial reporting in the fiscal quarter ended August 31, 2008 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
For the quarter ended August 31, 2008, we issued 409,091 common shares to 0775270 BC Ltd. as compensation for receiving proceeds of $45,000 on May 20, 2008 under a standby equity agreement entered into on January 24, 2007 which allows us to receive up to $1,260,000 over a 24 month period in exchange for the sale of our common stock. As of October 15, 2008, we have issued an aggregate of 2,116,989 shares of our common stock as compensation for receiving total advances of $540,000.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit No. | Description |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 32.2 | |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Novori Inc. | |
| | (Registrant) | |
| | | |
| | /s/ Harold Schaffrick | |
| Date: October 20, 2008 | Harold Schaffrick | |
| | President, Chief Executive Officer, Director | |
| | | |
| | | |
| | /s/ Mark Neild | |
| Date: October 20, 2008 | Mark Neild | |
| | Chief Financial Officer, Principal Accounting Officer, Director | |
| | | |
