DOMARK INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended February 28, 2013
NOTE 1. DESCRIPTION OF BUSINESS
DOMARK INTERNATIONAL INC. ("Domark" or the "Company") was incorporated under the laws of the State of Nevada on March 30, 2006. In 2008, the Company embarked on a business plan that was intended to acquire profitable businesses that would create shareholder value in diverse industries. During 2008 and 2009, the Company acquired several operating businesses, as set forth in various Current Reports on Form 8-K filed with the Securities and Exchange Commission. The Company has evolved into a merchant banking format with the focus on investing in distinctive patented or patent pending game changing private companies.
HISTORY & GENERAL OVERVIEW
On February 29, 2012, the Company formed a new wholly owned subsidiary, Solawerks Inc. in the state of Nevada, for the purposes of entering the business of marketing specialized solar consumer electronics. Solawerks' current focus is to develop and distribute the SolaPad: a combined cover and charging system for Apple's iPad, and the SolaCase: a combined cover and charging system for all versions of Apple's iPhone. Solawerks competes in a market that also includes 3D Systems (DDD), Dell (DELL) and Hewlett Packard (HPQ).
During the last half of 2009, the Company sold two of its operating subsidiaries, Javaco Inc. and ECFO Corporation and effected rescissions of acquisition transactions on the remainder of its operating businesses. Between October 2009 and May 2011, the Company had no material ongoing operations. The business of the Company during the period from October 2009 through May 2011 was to seek out new acquisitions and to conduct the litigation with Victory Lane.
On May 31, 2011, the Company formed a wholly owned subsidiary, Armada Sports & Entertainment, Inc. Armada is a sports marketing and Management Company engaged in owning, developing, and conducting made-for-television sports and entertainment events. On March 5, 2012, the Company entered into an Asset Purchase Agreement with its then controlling shareholder, R. Thomas Kidd, for the sale of Armada, and certain assets related thereto.
On March 5, 2012, the Company entered into an Asset Purchase Agreement with its then controlling shareholder, R. Thomas Kidd, for the sale of Armada, and certain assets related thereto.
On May 26, 2012, the Company hired a new Chairman and President Brent Strasler. He then hired a new Chief Executive Officer Andrew Ritchie on June 12, 2012. The Company then strengthened the executive team by adding Patrick Johnson as VP - business development. In June 2012, the Company entered into a retail sales strategy with North American retail specialist Chic and Savvy. During the 1st quarter of fiscal year 2013, they attended many retail sales exhibitions throughout Canada. On January 8, 2013 Patrick Johnson resigned his position as VP – Business Development.
On June 20, 2012, the Company formed a new wholly owned subsidiary, Musclefoot Inc. in the state of Nevada for the purpose of distributing, marketing, and acting as sales agent for the patented foot care system, Barefoot Science. This entity’s corporate status is currently in default under the Nevada Secretary of State.
On July 20, 2012, the Company formed a new wholly owned subsidiary, Domark Canada Inc. in the province of Ontario for the purpose of supporting the corporate operations based in Toronto, Ontario, Canada.
The Company then endorsed world champion triple jumper Will Claye, and US Olympian Nick Simmons prior to the London 2012 Olympic Games. This was part of a strategy to obtain global exposure and align brands with world class sports professionals. We then sponsored several UFC championship contenders.
During the nine month period ended February 28, 2013, Hui Shi You of China, the Company's supplier of old solar chargers, gave notice that our exclusivity had been revoked. The Company commissioned the design of new and improved Apple iPhone and iPad infra-red and solar powered products. These newly designed products encompass the latest technology available and will be available for all iPhones, iPads and Samsung Galaxy 3 PDA's. The Company has successfully tested these new products in the market with great success and customer and retailer feedback. Patents are pending for all new products and full market rollout is scheduled for mid 2013.
During the nine month period ended February 28, 2013, the Company's Sports Management Team, representing its patented shoe insole product, entered into discussions with several international sports footwear manufacturers. Much progress has been made as talks continue.
Management and the Company's Corporate Lawyers have undertaken a detailed review of all shares issued by previous management. During this review, counsel has put in a place an administrative hold on these shares.
On January 28, 2013, the Company entered into a finder agreement with Meadow Grove, Ltd. (the “Finder”) whereas the Finder has introduced the Company to Zaktek Limited, a privately owned intellectual property business, for the purpose of consummating a purchase of a significant portion of Zaktek by the Company; in exchange, the Company agrees to pay the Finder concurrent with closing of the proposed transaction, 2,900,000 shares in the capital of the Company. As of February 28, 2013, the Company entered into a Memorandum of Understanding to purchase 44% of Zaktek Ltd., a UK based innovative electronic products company, upon signing a definitive purchase agreement. Zaktek’s main product is the phonepad+, an Apple Inc. approved tablet device that incorporates PDA’S including the Apple iPhone and Samsung Galaxy products to improve functionality including video and gaming abilities. On April 23, 2013, the Company received notification that Zaktek was ending discussions in regards to the definitive purchase agreement with DoMark.
Management has successfully restructured the Company including dramatically reducing overhead cost and eliminating all long term debt and lawsuits, positioning the Company to properly attack new markets, invest in new products and establish long term growth. As a result of the change in the Company's business model, the disclosures and financial results contained herein should be reviewed as they relate to the Company's historical operations but should be discounted as they relate to the Company's potential future results.
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. The Company has consolidated losses from operations of $5,781,038 for the 3 months ending February 28, 2013 compared to a loss of $799,589 for the same period ending February 28, 2012. There is a total accumulated deficit of $40,753,600 as at February 28, 2013, and a net loss of $7,930,191for the nine months then ended. Furthermore, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from private investors and the financial support of certain stockholders.
These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty. In this regard, management is planning to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.
NOTE 3. BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for financial information and the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the three and nine months ended February 28, 2013 are not necessarily indicative of the results that may be expected for the year ending May 31, 2013.
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RECENT ACCOUNTNG PRONOUNCEMENTS
The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations or cash flows.
DEVELOPMENT STAGE COMPANY
The Company is a development stage company as defined in ASC Standard 915-10-05 and has recognized limited revenue and devotes substantially all of its efforts on establishing its business acquisition and product development business. Its planned principal operations in advancing its business acquisition and product development business have commenced. All losses accumulated since inception have been considered a part of the Company's development stage activities.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues, costs and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.
The primary management estimates included in these financial statements are related to licensing fees, stock option valuation and the fair value of its stock tendered in various non-monetary transactions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At February 28, 2013 cash and cash equivalents included cash on hand and cash in the bank.
INVENTORIES
Inventories consist of retail products which are stated at the lower of cost or market. Cost is determined by the specific identification method. All Solarwerks inventory were considered unsellable and subsequently returned to the manufacturer. Remaining inventory on the books was written off and any payables owing to the manufacturer have been offset against monies paid to date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash, accounts payable, and notes payable approximate the respective fair values due to the short maturities of these items.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements represent the consolidated financial position and results of operations of the Company and include the accounts and results of operations of the Company and its subsidiaries. The accompanying financial statements include the active entity of Domark International, Inc. and its wholly owned subsidiaries, Musclefoot Inc., Solawerks Inc., and Domark Canada Inc. All intercompany accounts have been eliminated.
STOCK-BASED COMPENSATION
The Company accounts for share based payments in accordance with ASC 718, Compensation - Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, Measurement Objective - Fair Value at Grant Date, the Company estimates fair value of the award using a valuation technique. For this purpose, the Company uses the Black-Scholes option pricing model. The Company believes the model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. Compensation cost is recognized over the requisite service period which is generally equal to the vesting period. Upon exercise, shares issued will be newly issued shares from authorized common stock.
ASC 505, "Compensation-Stock Compensation", establishes standards for the accounting for transactions in which an entity exchanges its equity instruments to non-employees for goods or services. Under this transition method, stock compensation expenses includes compensation expense for all stock-based compensation awards granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with provisions of ASC 505.
NET LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with the Earning per Share Topic of the FASB ASC 260. Under the provisions of ASC, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. As of February 28, 2013, options and warrants were outstanding were excluded from the calculation as their impact would be anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications to separate General and administration expenses to conform to the presentations used in the quarter ended February 28, 2013 have been made in prior year's consolidated financial statements, none of which had any effect on previously reported net income or loss, or related per share amounts, of any period.
RESEARCH AND DEVELOPMENT
All research and development expenditures are expensed as incurred. R&D costs incurred during the nine month ended February 28, 2013 included the design and development of new Solawerks products, media test campaigns, design of websites and structuring affiliate programs.
REVENUE RECOGNITION
The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Inventory is capitalized and costs of sales are recognized during the period in which the sales occurred. The Company derived its revenues for the nine month period through internet sales of our solar charging units of $16,131 and Barefoot insoles of $21,803. The Company recognized these sales once delivery is made from the warehouse (FOB shipping point).
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC Standard 360-10-40, long-lived assets, such as property, plant, and equipment, and purchased intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and other intangible assets are tested for impairment annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
As of February 28, 2013, the Company has recorded a total of $4,605,480 on impairment of asset for the prepaid license fee to Barefoot Science as a result of restructuring the original agreement from a licensing agreement to an ownership interest in Barefoot Science.
NOTE 5. RELATED PARTY TRANSACTIONS
On May 25, 2012, the Company entered into an employment agreement with an effective date of June 1, 2012 with its newly appointed President, Brent Strasler, for a period of no less than three years. Mr. Strasler is entitled to an annual salary of $150,000 and 100,000 stock purchase warrants exercisable to purchase common shares of the Company at $1.00 per share. The warrants are exercisable for a three year period and can be vested quarterly on a pro rata basis over twelve months from the date of issue. Additionally, Mr. Strasler will be enrolled in a long term Executive Option Plan no later than three months after the effective date of the employment agreement and is entitled to term life insurance in the face amount of $2,500,000, payable to the beneficiary designated by Mr. Strasler. The warrants awarded have been valued in accordance with ASC 718-10-30-9, Measurement Objective - Fair Value at Grant Date. The grant date fair value of the 100,000 warrants was estimated using the Black-Scholes option pricing model to be $262,000. The assumptions used were: expected dividend yield of 0.0%; expected volatility of 377%; risk free interest rate of .34%; and expected term of 3 years. The Company expensed $64,461 in the quarter ended February 28, 2013 and $195,102 in the nine month period ended February 28, 2013, with $66,898 remaining to be expensed. On October 31, 2012, Mr. Strasler resigned as President, Secretary, Chairman and Director of Domark International but remains with the Company as a consultant and non-executive Chairman to Domark International.
On June 12, 2012, the entered into an employment agreement with an effective date of June 12, 2012 with its newly appointed Chief Executive Officer, Andrew Ritchie, for a period of no less than three years. Mr. Ritchie is entitled to an annual salary of $240,000 and 150,000 stock purchase warrants exercisable to purchase common shares of the Company at $1.00 per share. The warrants are exercisable for a three year period and can be vested quarterly on a pro rata basis over twelve months from the date of issue. Additionally, Mr. Ritchie will be enrolled in a long term Executive Option Plan no later than three months after the effective date of the employment agreement and is entitled to term life insurance in the face amount of $2,500,000, payable to the beneficiary designated by Mr. Ritchie. The warrants awarded have been valued in accordance with ASC 718-10-30-9, Measurement Objective - Fair Value at Grant Date. The grant date fair value of the 150,000 warrants was estimated using the Black-Scholes option pricing model to be $196,500. The assumptions used were: expected dividend yield of 0.0%; expected volatility of 379%; risk free interest rate of .37%; and expected term of 3 years. The Company expensed $48,314 in the quarter ended February 28, 2013 and $138,758 in the nine month period ended February 28, 2013, with $57,742 remaining to be expensed.
On June 26, 2012, the Company entered into an employment agreement with an effective date of June 26, 2012 with its newly appointed Vice-President of Corporate Development, Patrick Johnson, for a period of no less than three years. Mr. Johnson is entitled to an annual salary of $84,000 and 100,000 stock purchase warrants exercisable to purchase common shares of the Company at $1.00 per share. The warrants are exercisable for a three year period and can be vested quarterly on a pro rata basis over twelve months from the date of issue. Additionally, Mr. Johnson will be enrolled in a long term Executive Option Plan no later than three months after the effective date of the employment agreement and is entitled to term life insurance in the face amount of $2,500,000, payable to the beneficiary designated by Mr. Johnson. The warrants awarded have been valued in accordance with ASC 718-10-30-9, Measurement Objective - Fair Value at Grant Date. The grant date fair value of the 100,000 warrants was estimated using the Black-Scholes option pricing model to be $117,000. The assumptions used were: expected dividend yield of 0.0%; expected volatility of 379%; risk free interest rate of .42%; and expected term of 3 years. On January 8, 2013, Mr Johnson resigned as Vice-President of Corporate Development for the Company. The Company expensed $66,674 in the quarter ended February 28, 2013 and $117,000 in the nine month period ended February 28, 2013, with $0 remaining to be expensed.
On January 1, 2013 the Company entered into an employment agreement with an effective date of January 1, 2013 with its newly appointed Cheif Financial Officer, James Kerr, for a period of no less than one year. Mr. Kerr is entitled to an annual salary of $80,000 plus compensation for additional work as needed and 500,000 stock purchases warrants exercisable to purchase common shares of the Company at $.01 per share. The warrants are exercisable for a three year period and can be vested quarterly on a pro rata basis over twelve months from the date of issue. Additionally, the warrants awarded have been valued in accordance with ASC 718-10-30-9, Measurement Objective - Fair Value at Grant Date. The grant date fair value of the 500,000 warrants was estimated using the Black-Scholes option pricing model to be $66,050. The assumptions used were: expected dividend yield of 0.0%; expected volatility of 192%; risk free interest rate of .37%; and expected term of 3 years. The Company expensed $10,496 in the quarter and nine month ended February 28, 2013, with $55,554 remaining to be expensed.
On September 1, 2012, Domark Canada entered into separate consulting agreements with the Domark International Executive team on an as needed basis. The consultants will receive a maximum of $1,000 per day based on an hourly rate of $100 per hour.
During the nine month period ended February 28, 2013, the Company has received advances totaling $193,288 from shareholders of the Company. As of February 28, 2013, the Company has not made any repayment of these advances. The advances are unsecured, bear no interest, and are due on demand.
NOTE 6. STOCKHOLDERS' EQUITY (DEFICIT)
* On May 25, 2012, - R Brentwood Strasler was appointed as Chairman, President and Director, with an annual compensation of $150,000 and 150,000 stock purchases warrants at $1.00 which will vest in one year on a quarterly basis. The Company valued the warrants using the Black-Scholes valuation model. As of the grant date the warrants were valued at $262,000 with $64,461 being expensed in the quarter ended February 28, 2013 and $195,102 being expensed in the nine month period ended February 28, 2013.
* On May 28, 2012 - Ian Nuttall received an additional 800,000 shares as a consultant to Domark of Rule 144 common `A' stock in Domark International Inc. valued at $2,304,000 with $0 being expensed in the quarter ended February 28, 2013 and $0 being expensed in the nine month period ended February 28, 2013.
* On June 18, 2012, - Andrew Ritchie was appointed as Chief Executive Officer/ Director with an annual Compensation of $240,000 and 250,000 stock purchases warrants at $1.00 which will vest in one year on a quarterly basis. The Company valued the warrants using the Black-Scholes valuation model. As of the grant date the warrants were valued at $196,500 with $48,314 being expensed in the quarter ended February 28, 2013 and $138,758 being expensed in the nine month period ended February 28, 2013.
* On June 21, 2012, - Domark signed a contract with Barefoot-Science to become exclusive marketing direct sales distributor for North America. Barefoot - Science will be issued 2,500,000 shares of Preferred B shares of Domark International Inc. which are convertible at any time at request of holder into common A shares at a 1 Preferred Series B into 2 Common shares ratio. Shares will hold a six month restriction under 144 rules. The shares have been valued at $6,000,000 USD which will be expensed over the term of the agreement (3 years). As of February 28, 2013 $500,000 has expensed in the quarter ended February 28, 2013 and $1,394,520 has been expensed in the nine month period ended February 28, 2013. As of the date of this filing, the shares have not been issued. During the quarter, the parties to the contract agreed to amend the original contract. The original license agreement was exchanged for a 15% ownership in Barefoot-Science global. As a result, the value of the license has been applied to Impaired Assets and will be replaced at a future date with a market value that represents 15% of Barefoot-Sciences’ value.
* On June 26, 2012, - Patrick Johnson was appointed as Vice President of Business Development, with an annual compensation of $84,000 and 100,000 stock purchases warrants at $1.00 which will vest in one year on a quarterly basis. The Company valued the warrants using the Black-Scholes valuation model. As of the grant date the warrants were valued at $117,000 with $66,674 being expensed in the quarter ended February 28, 2013 and $117,000 being expensed in the nine month period ended February 28, 2013. On January 8, 2013, Mr Johnson resigned as Vice-President of Corporate Development for the Company.
* On June 26, 2012, RBL were appointed to look after all Domark Social media campaigns. They were awarded a contract of $1,000 a month and were granted 20,000 free trading shares in Domark international valued at $23,400 with $0 being expensed in the quarter ended February 28, 2013 and $23,400 being expensed in the nine month period ended February 28, 2013.
* On July 11, 2012 - Ian Nuttall received an additional 425,000 shares as a consultant to Domark of Rule 144 common `A' stock in Domark International Inc. valued at $382,500 with $0 being expensed in the quarter ended February 28, 2013 and $382,500 being expensed in the nine month period ended February 28, 2013.
On July 19, 2012, - Domark signs Five-Time American 800 m Champion Nick Symmonds to endorse Domark products for compensation of 100,000 shares of rule144 common A stock in Domark International Inc. valued at $68,000 with $17,000 being expensed in the quarter ended February 28, 2013 and $42,500 being expensed in the nine month period ended February 28, 2013. As of the date of this filing, the shares have not been issued.
* On July 25, 2012, - Domark signs Will Claye to endorse Domark products for compensation of 50,000 shares of rule144 common A stock in Domark International Inc. valued at $34,000 with $8,500 being expensed in the quarter ended February 28, 2013 and $21,250 being expensed in the nine month period ended February 28, 2013. As of the date of this filing, the shares have not been issued.
* On October 1, 2012, - James Kerr was appointed as Chief Financial Officer. The Company has finalized James' employment contract on January 1, 2013. As a part-time CFO for the Company will receive a base of $80,000 and 500,000 shares of rule 144 common A stock in Domark International Inc. valued at $67,500 and an additional 500,000 stock purchases warrants exercisable at $0.01 which will vest in one year on a quarterly basis. The Company valued the warrants using the Black-Scholes valuation model. As of the grant date the warrants were valued at $66,050 with $10,496 being expensed in the nine month period ended February 28, 2013. As of the date of this filing, the 500,000 shares valued at $67,500 have not been issued.
* On December 11, 2012 - Ian Nuttall received an additional 775,000 shares as a consultant to Domark of Rule 144 common `A' stock in Domark International Inc. valued at $147,250 with $147,250 being expensed in the quarter and nine month period ended February 28, 2013.
*On January 2013, the Company amended its investment in Barefoot Science, moving from being a North American distributor to a 15% equity holder. The initial share investment that was entered into in June 2012 has not changed.
Our common stock is traded in the over-the-counter market, and quoted in the National Association of Securities Dealers Inter-dealer Quotation System ("Electronic Bulletin Board) and can be accessed on the Internet at www.otcbb.com under the symbol "DOMK.OB".
As of February 28, 2013, there were 30,315,298 shares of our common stock outstanding and 50,000 shares of Preferred Series A (1000:1 conversion) and 2,500,000 shares of Preferred Series B (2:1 conversion). There were approximately 74 shareholders of record of the Company's common stock. As of April 1, 2013 the 2,500,000 shares of Preferred Series B where converted into 5,000,000 shares of common stock.
NOTE 7. CONTINGENCIES
* On May 21, 2009, the Company entered into that certain Agreement for the Exchange of Common Stock (the "Victory Lane Agreement") with Victory Lane Financial Elite, LLC ("Victory Lane") with respect to a real estate lifestyle business known as Victory Lane (the "Victory Lane Business") pursuant to which the Company intended to purchase the Victory Lane Business. Shortly thereafter, a dispute arose between the Company and Victory Lane regarding alleged misrepresentations made by Victory Lane in connection with the Victory Lane Agreement.
* In August, 2009, Victory Lane Financial Elite, LLC, Legacy Development, LLC and Patrick Costello filed suit in the Superior Court of Tattnall County, Georgia (Civ. No. 2009-V-381-JW) against the Company, R. Thomas Kidd and various officers and directors of the Company, alleging that the Company was in breach of the Victory Lane Agreement and that the Company and certain of the individual defendants had committed various torts against the plaintiffs and that certain of the individual defendants had violated various fiduciary and other duties owed to the plaintiffs in connection with the Victory Lane Agreement and the handling of the Victory Lane Business (the "VLFE Case"). The plaintiffs sought a declaratory judgment to the effect that the Victory Lane Agreement had not been executed, as well as money damages from the Company and the individual defendants. The Company and Mr. Kidd have answered the Complaint, denying any liability for the plaintiff's claims and have asserted various counterclaims including fraud and other torts. In July 2010 the court dismissed all of the individual defendants, other than R. Thomas Kidd, in response to a motion to dismiss for lack of jurisdiction. The case has since been stayed.
* In December, 2009, AHIFO-21, LLC filed a lawsuit in the Superior Court of Tattnall County, Georgia (Civ. No. 2009-V-672-JS) against Victory Lane, LLC, Patrick J. Costello and Stephen Brown (the "Victory Lane Defendants") alleging that the Victory Lane Defendants owe the plaintiff more than $7,740,000 in respect of one or more loans made by the plaintiff to certain of the Victory Lane Defendants in connection with the Victory Lane Business (the "AHIFO Case"). In February, 2010, the Victory Lane Defendants filed a Third Party Complaint against the Company and R. Thomas Kidd, claiming that the Company and Mr. Kidd should be liable for any amounts the Victor Lane Defendants are required to pay to the plaintiff in this case. The Company and Mr. Kidd have answered the Complaint, denying any liability for the plaintiff's claims and have asserted various counterclaims including fraud and other torts. The Company and Mr. Kidd filed a motion to dismiss the Third Party Complaint, but the entire case was subsequently stayed.
* Because each of the VLFE Case and the AHIFO Case have been stayed and because discovery in those cases is not complete, the Company has reached a final determination with the party involved and all debt outstanding will be forgiven by the debt holder.
The Company has resolved all legal proceedings against the corporation.
NOTE 8. COMMITMENTS
* On June 28, 2012, - Domark donated a Noraxon foot Scanner to Sean Penna to assist in the training of the U.S Olympic team. The machine cost the Company $19,495. The machine was purchased by the Company through a rental buy agreement of $895 a month.
NOTE 9. NOTES PAYABLE
On February 29, 2012, Company entered into a Promissory Note with R. Thomas Kidd, our then Chief Executive Officer of the Company, and Infinite Funding, Inc. ("IFI"). This Note replaces four promissory notes issued by IFI to the Company as more fully described below.
Effective March 3, 2011, we obtained an unsecured loan in the amount of $75,000 from Infinite Funding, Inc. ("IFI") as evidenced by a Promissory Note from the Company to Infinite Funding, Inc. dated March 3, 2011 (the "IFI Note"). The Note was amended three times to extend the due date and was first amended on June 9, 2011, a second time on September 28, 2011, and a third amendment on December 9, 2011. Pursuant to the amendments, the Company agreed to pay extension fees of $30,000, thereby increasing the principle balance of this Note to $105,000.
Effective June 10, 2011, we obtained an unsecured loan in the amount of $75,000 from Infinite Funding, Inc. ("IFI") as evidenced by a Promissory Note from the Company to Infinite Funding, Inc. dated June 10, 2011 (the "IFI Note"). The Note was amended two times to extend the due date and was first amended on September 28, 2011 and again on December 9, 2011. Pursuant to the amendments, the Company agreed to pay extension fees of $20,000, thereby increasing the principle balance of this Note to $95,000.
Effective September 28, 2011, we obtained an unsecured loan in the amount of $40,000 from Infinite Funding, Inc. ("IFI") as evidenced by a Promissory Note from the Company to Infinite Funding, Inc. dated September 28, 2011 (the "IFI Note"). The Note was amended to extend the due date on December 9, 2011. Pursuant to this amendment, the Company agreed to pay an extension fee of $10,000, thereby increasing the principle balance of this Note to $50,000.
Effective December 9, 2011, we obtained an unsecured loan in the amount of $100,000 from Infinite Funding, Inc. ("IFI") as evidenced by a Promissory Note from the Company to Infinite Funding, Inc. dated December 9, 2011 (the "IFI Note").
As a result of consolidating the aforementioned debt, the Company is now obligated under a single Promissory Note dated February 29, 2012 in the aggregate principle amount of $355,645 along with $5,645 in accrued interest. The Note is due on October 15, 2012 and accrues interest at 3% per annum. In addition, R Thomas Kidd executed a Personal Guarantee of the Note, whereby Kidd guarantees the payment of $100,000 of the principle balance in an Event of Default pursuant to Article III of the Note. This debt has been forgiven by Infinite Funding as of March 5, 2013 (see Note 10).
ASHER CONVERTIBLE DEBENTURE
On January 30, 2013, the Company entered into an agreement with Asher Enterprises, a Delaware corporation, an accredited investor, whereby Asher Enterprises loaned the Company the aggregate principal amount of $53,000, less $3,000 for legal related costs, together with interest at the rate of eight percent (8%) per annum, until the maturity date of November 1, 2013. The original issue discount note, as described in ASC 480-55, may not be prepaid in whole or in part.
If the Note is not paid in full with interest on the maturity date, Asher has the right to convert this Note into restricted common shares of the Company. The Company at its option may elect to convert all or part of the principal and any accrued unpaid interest on these notes at any time or times on or before the maturity based on a conversion price. The conversion price (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower) shall equal to 55% multiplied by the average of the two lowest closing prices during the fifteen (15) trading days prior to conversion notice.
The conversion feature within this note has been determined to be an embedded derivative requiring bifurcation and was valued using Black Scholes at $67,256. The Company also recognized a loss on Derivative Valuation of $17,256 for the three and nine month periods ended February 28, 2013.
MASTER CREDIT AGREEMENTS
On March 2, 2012, the Company entered into a Master Credit Agreement with Infinite Funding, Inc. which provides for a non-revolving line of credit. The Company may request advances under the lending facility by issuing borrowing certificates to the Lender. Each borrowing certificate, together with simple interest accrued at 8% per year, becomes payable one year after the date of the advance received. Infinite Funding has amended the Master Credit Agreement, increasing the amount of the Lending Facility from $150,000 to $200,000. As of February 28, 2013, the Company received $190,000 in advances and the Company has accrued $1,375 in interest. This debt has been forgiven by Infinite Funding as of March 5, 2013 (see Note 10).
NOTE 10. DEBT FORGIVENESS
On February 29, 2012, the Company executed a Memorandum of Agreement with Xiamen Tiauyang Neng Gongsi and Michael Franklin related to the acquisition of certain exclusive worldwide licensing and joint patent rights. All old inventories total of $13,611 were returned to the manufacturer during the nine month period ended February 28, 2013 which reduced all outstanding payables owing to XSE of $37,808. As of February 28, 2013, the Company recorded debt forgiveness in the amount $24,197 for returned inventory to Xiamen Tiauyang Neng Gongsi as payment for all outstanding debt.
On March 5, 2013 the Company received confirmation that Infinite Funding Inc. has forgiving all debt held with Domark in the amounts of $355,645 and $190,000 plus accrued interest of $14,295. This debt has therefore been forgiven and fully written off by Infinite Funding Inc with no consideration given. The Company has treated this as a capital contribution which increased additional paid in capital.
NOTE 11 - WARRANTS AND OPTIONS
During the nine months ended February 28, 2013, the Company issued a total of 850,000 warrants to the officers of the Company, the warrants vest on a quarterly basis over twelve months from the date of the issuance. See Note 5.
The following is a summary of the status of all of the Company's stock warrants as of February 28, 2013 and changes during the nine months ended on that date:
| | | Number of | | | Weighted-Average | |
| | | Warrants | | | Exercise Price | |
| | | | | | | |
| Outstanding at June 1, 2012 | | -- | | | -- | |
| Granted | | | 350,000 | | | $ | 1.00 | |
| Granted | | | 500,000 | | | $ | 0.01 | |
| Exercised | | | -- | | | $ | 0.00 | |
| Cancelled | | | -- | | | $ | 0.00 | |
| | | | | | | | | |
| Outstanding at February 28, 2013 | | | 850,000 | | | $ | 0.42 | |
| | | | | | | | | |
| Warrants exercisable at February 28, 2013 | | | 850,000 | | | $ | 0.42 | |
| | | | | | | | | |
| Warrants exercisable at February 29, 2012 | | | -- | | | $ | 0.00 | |
The following table summarizes information about stock warrants outstanding and exercisable at February 28, 2013:
STOCK WARRANTS OUTSTANDING AND EXERCISABLE
| Exercise Price | | Number of WarrantsOutstanding | | Remaining Contractual Life in Years | | Weighted-Average Weighted- Average | |
| | | | | | | | | | |
| $ | 1.00 | | | 350,000 | | | 2.25 | | $ | 1.00 | |
| $ | 0.01 | | | 500,000 | | | 2.83 | | $ | 0.01 | |
NOTE 12. SUBSEQUENT EVENTS
The Company has entered into a Memorandum of Understanding to purchase 44% of Zaktek Ltd., a UK based innovative electronic products company. Zaktek’s main product is the phonepad+, an Apple Inc. approved tablet device that incorporates PDA’S including the Apple iPhone and Samsung Galaxy products to improve functionality including video and gaming abilities.
On March 21, 2013 a portion of debt owing to Ian Nuttall totaling $30,000 was converted to 1,500,000 shares of common stock.
On April 12, 2013 the Company completed the acquisition of 15% of Barefoot-Science with the conversion of 2,500,000 series B into 5,000,000 shares of common stock.
On April 12, 2013 a portion of debt owing to Ian Nuttall totaling $30,000 was converted to 1,500,000 shares of common stock.
On April 23, 2013 the Company concluded its settlement with the previous principle to DoMark, Thomas Kidd, and delivered to him 2,000,000 shares of common stock as a full and final settlement of all outstanding legal issues.
ITEM 2 - MANAGEMENT DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the current plans of our management. This report includes forward-looking statements. Generally, the words "believes", "anticipates", "may", "will", "should", "expect", "intend", "estimate", "continue", and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.
RECENT DEVELOPMENTS
The third Quarter represents a turning point in the Company's progress as management continued to review operations and restructuring initiatives. The main operations of the Company have been to search, negotiate and acquire ownership interests in companies with products at an advanced stage of their development or products already in production.
The Company has spent the third quarter restructuring the Company and securing adequate financing for acquisitions. Further testing of various products and full launch is expected in mid 2013. During the Quarter, several companies where contacted for the purpose of initiating acquisition dialog. These discussions are ongoing and are at different stages in their negotiations. The Company has entered into a Memorandum of Understanding to purchase 44% of UK based Zaktek Ltd., owner of the new and innovative patent pending and Apple Inc. approved product that incorporates PDA’s including the Apple iPhone and Samsung Galaxy with a tablet, improving functionality including gaming, video/t.v. abilities.
During the Quarter, management also asked our legal team to review all outstanding shares issued by the old management team that were due to be released in this Quarter. Our lawyers put an administrative hold on these shares while each case was individually reviewed for justification of issuance. Management continued to review the Company's past financial history, including share and debt structure, and has made tremendous progress in ensuring that the best capital structure is utilized going forward.
On June 1, 2012, the Company hired Andrew S. Ritchie as Chief Executive Officer.
On June 1, 2012, the Company hired Patrick Johnson as Vice-President of Business Development.
On June 20, 2012, the Company signed a long term 3 year license agreement with Barefoot Science. The agreement provided Barefoot with 2,500,000 shares of Series B preferred shares convertible to 2 shares of common for every preferred share held in exchange for rights to Barefoot Science technologies.
On October 31, 2012, C.E.O. Andrew Ritchie was appointed President of the Company with Brent Strasler remaining with the Company as Non-Executive Chairman.
On October 1, 2012, James Kerr, CMA was hired as Interim Chief Financial Officer of the Company.
On January 8, 2013, Vice-President of Business Development, Patrick Johnson, resigned.
LIQUIDITY AND CAPITAL RESOURCES
Our operating requirements have been funded primarily through financing facilities, sales of our common stock, and loans from shareholders and 3rd party financiers. Currently, the Company's cash flows do not adequately support the operating expenses of the Company. We received $0 in fiscal years 2012 and 2013 from the sale of our common stock. The Company will continue to require financing from loans and notes payable until such time as our business has generated income sufficient to carry our operating costs.
Cash used by operating activities for the nine month period ended February 28, 2013 was $332,697 compared to $426,804 for the same period 2012. Depreciation and amortization expense for the nine month period ended February 28, 2013 was $28,142 as compared to $9,253 for the nine month period ending February 29, 2012.
Cash used in investing activities was $0 for the nine month period ending February 28, 2013 compared to $33,000 for the nine month period ending February 29, 2012. Cash provided by financing activities was $285,846 for the nine month period ended February 28, 2013 versus $461,210 for the nine month period ending February 29, 2012. Financing activities consisted of cash received from related parties and notes payable.
OTHER CONSIDERATIONS
There are numerous factors that affect the Company's business and the results of its operations. Sources of these factors include general economic and business conditions, federal and state regulation of business activities, the level of demand for services, the level and intensity of competition in the, and our ability to continue to improve our infrastructure, including personnel and systems, to keep pace with our anticipated rapid growth in the development of our business.
RESULTS OF OPERATIONS
THREE MONTHS QUARTER ENDED FEBRUARY 28, 2013 VS. FEBRUARY 29, 2012
The Company had $1,396 in total revenues for the quarter ended February 28, 2013. Revenues earned for the period were related to sales through the Company's wholly owned subsidiaries Musclefoot Inc. $1,559 and Solawerks Inc. ($163). The same period in 2012 resulted in zero revenue for the Company.
General and administrative expenses for the quarter ended February 28, 2013 were $224,077 compared to $393,853 for the same quarter period in 2012. The decrease is primarily related to decreasing operating costs for Domark International during the 3 month period ending February 28, 2013.
The net loss for the quarter amounted to $5,781,038 and a net loss per share of $0.19 vs. a net loss of $799,589 and a net loss per share of $0.02 for the same 3 month period in 2012.
NINE MONTHS ENDED FEBRUARY 28, 2013 VS. FEBRUARY 29, 2012
General and administrative expenses for the nine months ended February 28, 2013 were $763,374 compared to $668,905 for the same nine month period in 2012. The increase is primarily related to the Company formed two new wholly owned subsidiaries Musclefoot Inc. and Domark Canada, Inc. The Company's operations during fiscal 2012/13 were funded through interest free, demand notes from related parties and a short term convertible loan financed through Asher Enterprises Inc. As of February 28, 2013, the Company is indebted to shareholders in the amount of $193,288 and to Asher Enterprises Inc. in the amount of $5,889 (comprised of $53,000 principal net of unamortized discount of $47,111).
The operating loss for the nine months ending February 28, 2013 amounted to $7,930,191 vs a loss of $1,356,519 ending February 29, 2012. This translates to a net loss per share of $0.27 for the period ending February 28, 2013 and a net loss per share of $0.04 for the same nine month period ending February 29, 2012.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the last day of the fiscal period covered by this report, February 28, 2013. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of February 28, 2013
Our principal executive officer and our principal financial officer, are responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations ("COSO"). The COSO framework, published in INTERNAL CONTROL-INTEGRATED FRAMEWORK, is known as the COSO Report. Our principal executive officer and our principal financial officer have chosen the COSO framework on which to base its assessment. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of February 28, 2013.
There were no changes in our internal control over financial reporting that occurred during the period ended February 28, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Controls have been put in place for daily operations which will allow for controlled cash management and oversite.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to clearly segregate duties do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On May 21, 2009, the Company entered into an Agreement for the Exchange of Common Stock (the "Victory Lane Agreement") with Victory Lane Financial Elite, LLC ("Victory Lane") with respect to a real estate lifestyle business known as Victory Lane (the "Victory Lane Business") pursuant to which the Company intended to purchase the Victory Lane Business. Shortly thereafter, a dispute arose between the Company and Victory Lane regarding alleged miss-representations made by Victory Lane in connection with the Victory Lane Agreement.
In August, 2009, Victory Lane Financial Elite, LLC, Legacy Development, LLC and Patrick Costello filed suit in the Superior Court of Tattnall County, Georgia (Civ. No. 2009-V-381-JW) against the Company, R. Thomas Kidd and various officers and directors of the Company, alleging that the Company was in breach of the Victory Lane Agreement and that the Company and certain of the individual defendants had committed various torts against the plaintiffs and that certain of the individual defendants had violated various fiduciary and other duties owed to the plaintiffs in connection with the Victory Lane Agreement and the handling of the Victory Lane Business (the "VLFE Case"). The plaintiffs sought a declaratory judgment to the effect that the Victory Lane Agreement had not been executed, as well as money damages from the Company and the individual defendants. The Company and Mr. Kidd have answered the Complaint, denying any liability for the plaintiff's claims and have asserted various counterclaims including fraud and other torts. In July 2010 the court dismissed all of the individual defendants, other than R. Thomas Kidd, in response to a motion to dismiss for lack of jurisdiction. The case has since been stayed.
In December, 2009, AHIFO-21, LLC filed a lawsuit in the Superior Court of Tattnall County, Georgia (Civ. No. 2009-V-672-JS) against Victory Lane, LLC, Patrick J. Costello and Stephen Brown (the "Victory Lane Defendants") alleging that the Victory Lane Defendants owe the plaintiff more than $7,740,000 in respect of one or more loans made by the plaintiff to certain Victory Lane Defendants in connection with the Victory Lane Business (the "AHIFO Case"). In February, 2010, the Victory Lane Defendants filed a Third Party Complaint against the Company and R. Thomas Kidd, claiming that the Company and Mr. Kidd should be liable for any amounts the Victor Lane Defendants are required to pay to the plaintiff in this case. The Company and Mr. Kidd have answered the Complaint, denying any liability for the plaintiff's claims and Mr. Kidd has asserted various counterclaims including fraud and other torts. The Company and Mr. Kidd filed a motion to dismiss the Third Party Complaint, but the entire case was subsequently stayed.
Because each of the VLFE Case and the AHIFO Case have been stayed and because discovery in those cases is not complete, the Company has not reached a determination that any loss is other than remote and that the amount of any damages, if any were determined adverse to the Company, would be reasonably estimable. The Company believes that it has meritorious claims against the opposing parties with respect to the Victory Lane Agreement and that the claims asserted against it are not meritorious. The Company intends to defend itself vigorously.
On January 24, 2012, the Company was made aware by the Chief Executive Officer of the Company, that a complaint had been filed against the Company for approximately $534,000 by the United States Trustee for the Middle District of Florida to claim against funds we owed to our Chief Executive Officer and his wife. On January 23, 2012, the Trustee's Motion for Approval and Notice of Compromise was filed to obtain the approval of the court of a settlement of the matters that were the subject of the complaint. On April 24, 2012, the Company was advised that the complaint, which was never served, was dismissed with prejudice by the US Trustee.
Management is pleased to report that all Corporate legal disputes have now been resolved.
ITEM 1A - RISK FACTORS
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the interim period ended February 28, 2013.
ITEM 4 - MINE SAFETY DISCLOSURE
None.
ITEM 5 - OTHER INFORMATION
Exhibit
| No. | | Document Description | |
| 31.1 | | Certification of Ceo Pursuant to 18 U.s.c. Section 1350, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | as Adopted |
| 31.2 | | Certification of Cfo Pursuant to 18 U.s.c. Section 1350, Pursuant to Section 302 of the Sarbanes-oxley Act of 2002. | as Adopted |
| 32.1* | | Certification of Ceo Pursuant to 18 U.s.c. Section 1350, Pursuant to Section 906 of the Sarbanes-oxleyact of 2002. | as Adopted |
| 32.2* | | Certification of Cfo Pursuant to 18 U.s.c. Section 1350, Pursuant to Section 906 of the Sarbanes-oxleyact of 2002. | as Adopted |
| 101 | | Interactive data files pursuant to Rule 405 of Regulation S-T. | |
* This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
DOMARK INTERNATIONAL, INC.
REGISTRANT
| Date: April 29, 2013 | By: | /s/ Andrew Ritchie | |
| | | Andrew Ritchie | |
| | | Chief Executive Officer | |
| | | | |
| | | | |
| | | | |
| Date: April 29, 2013 | By: | /s/ James Kerr, CMA | |
| | | James Kerr | |
| | | Principal Financial Officer | |
| | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 29th day of April.
| | By: | /s/ Andrew Ritchie | |
| | | Andrew Ritchie | |
| | | Chief Executive Officer | |
| | | | |
| | | | |
| | | /s/ James Kerr, CMA | |
| | | James Kerr | |
| | | Principal Financial Officer | |
