UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | |
| | For the quarterly period endedMay 31, 2013 |
| | |
| [ ] | Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 |
| | |
| | For the transition period from __________ to__________ |
| | |
| | Commission File Number:333-165692 |
Southern Products, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 27-1963282 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| 115 East Wilson St., Unit B, Costa Mesa, CA 92627 |
| (Address of principal executive offices) |
| (626) 213-3266 |
| (Registrant’s telephone number) |
___________________________ |
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| [ ] Large accelerated filer Accelerated filer | [ ] Non-accelerated filer |
| [X] Smaller reporting company | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 111,111,112 as of July 19, 2013.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended May 31, 2013 are not necessarily indicative of the results that can be expected for the full year.
Southern Products, Inc.
Balance Sheets
| | May 31, | | February 29 |
| | 2013 | | 2012 |
| | | | |
| Current assets: | | | | | | | |
| Cash | $ | 11,975 | | | $ | 2,361 | |
| Accounts receivable | | 390 | | | | 9,120 | |
| Inventory | | 15,000 | | | | 15,000 | |
| Prepaid expenses | | 500 | | | | — | |
| Total current assets | | 27,865 | | | | 26,481 | |
| | | | | | | | |
| Fixed assets: | | | | | | | |
| net of accumulated depreciation of $286 and $243, respectively | | 914 | | | | 957 | |
| | | | | | | | |
| Total assets | $ | 28,779 | | | $ | 27,438 | |
| | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable and accrued liabilities | $ | 3,008,485 | | | $ | 2,978,332 | |
| Accrued interest | | 84,071 | | | | 58,196 | |
| Accrued compensation - related party | | 56,667 | | | | — | |
| Derivative liability | | 49,766 | | | | — | |
| Convertible note payable, net of discount of $381,412 and $385,122 | | 152,553 | | | | 98,337 | |
| Total current liabilities | | 3,351,542 | | | | 3,134,865 | |
| | | | | | | | |
| Total liabilities | | 3,351,542 | | | | 3,134,865 | |
| | | | | | | | |
| Contingent liabilities | | — | | | | — | |
| | | | | | | | |
| Stockholders' (deficit) | | | | | | | |
Preferred stock; $0.001 par value; 10,000,000 shares authorized;
No shares authorized and issued at
February 28, 2013 and February 28, 2012, respectively | | — | | | | — | |
Common stock; $0.001 par value; 450,000,000 shares authorized;
111,111,112 authorized and issued at
February 28, 2013 and February 28, 2013, respectively | | 111,112 | | | | 111,112 | |
| Additional paid-in capital | | 743,090 | | | | 700,590 | |
| Accumulated (deficit) | | (4,176,965 | ) | | | (3,919,129 | ) |
| Total stockholders' (deficit) | | (3,322,763 | ) | | | (3,107,427 | ) |
| | | | | | | | |
| Total liabilities and stockholders' (deficit) | $ | 28,779 | | | $ | 27,438 | |
The Accompanying notes are an integral part of these financial statements.
Southern Products, Inc.
Statements of Operations
| | For the Three Months Ended |
| | 2013 | | 2012 |
| | | | |
| Sales revenue | $ | 453 | | | $ | 776,292 | |
| Cost of goods sold | | 1 | | | | 845,822 | |
| | | | | | | | |
| Gross profit (loss) | | 452 | | | | (69,530 | ) |
| | | | | | | | |
| Operating expenses | | | | | | | |
| Consulting services | | 45,588 | | | | 43,929 | |
| General and administrative | | 19,365 | | | | 130,782 | |
| Professional fees | | 8,180 | | | | 263,002 | |
| Promotional and marketing | | 302 | | | | 119,802 | |
| Rent expense | | 3,000 | | | | 19,590 | |
| Salaries and wages | | 60,000 | | | | 183,934 | |
| Total operating expenses | | 136,435 | | | | 761,039 | |
| | | | | | | | |
| Loss from operations | | (135,983 | ) | | | (830,569 | ) |
| | | | | | | | |
| Other income (expense) | | | | | | | |
| Finance costs | | — | | | | (39,905 | ) |
| Amortization of debt discount | | (46,211 | ) | | | (3,389 | ) |
| Interest expense, net | | (25,876 | ) | | | — | |
| Unrealized gain (loss) on change in fair value of derivatives | | (49,766 | ) | | | — | |
| Gain (loss) on asset sale | | — | | | | (7,555 | ) |
| Total other income (expense) | | (121,853 | ) | | | (50,849 | ) |
| | | | | | | | |
| Net loss | $ | (257,836 | ) | | $ | (881,418 | ) |
| | | | | | | | |
| Basic and fully diluted loss per common share | $ | (0.00 | ) | | $ | (0.01 | ) |
| | | | | | | | |
| Basic and fully diluted - weighted average common shares outstanding | | 111,111,120 | | | | 111,111,120 | |
The Accompanying notes are an integral part of these financial statements.
Southern Products, Inc.
Statements of Cash Flows
| | For the Three Months Ended |
| | 2013 | | 2012 |
| Cash flows from operating activities: | | | | | | | |
| Net (loss) | $ | (257,836 | ) | | $ | (881,418 | ) |
| Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | |
| Depreciation and amortization | | 43 | | | | 43 | |
| Amortization of debt discount | | 49,766 | | | | — | |
| (Gain) loss on fair value of derivatives | | 46,211 | | | | — | |
| Decrease (increase) in assets: | | | | | | | |
| Accounts receivable | | 8,730 | | | | 436,731 | |
| Inventory | | — | | | | 319,119 | |
| Prepaid expenses | | (500 | ) | | | (112,118 | ) |
| Increase (decrease) in liabilities: | | | | | | | |
| Accounts payable and accrued liabilities | | 30,153 | | | | (642,317 | ) |
| Accrued interest | | 25,875 | | | | — | |
| Accrued compensation - related party | | 56,667 | | | | 40,313 | |
| Customer deposits | | — | | | | (3,510 | ) |
| Net cash (used) by operating activities | | (40,891 | ) | | | (843,157 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from line of credit | | — | | | | 400,000 | |
| Proceeds from convertible note payable | | 50,505 | | | | — | |
| Payments on convertible note payable | | — | | | | — | |
| Net cash provided by financing activities | | 50,505 | | | | 400,000 | |
| | | | | | | | |
| Net increase (decrease) in cash | | 9,614 | | | | (443,157 | ) |
| Cash, beginning of period | | 2,361 | | | | 493,759 | |
| Cash, end of period | $ | 11,975 | | | $ | 50,602 | |
| | | 1 | | | | — | |
| Supplemental disclosure of cash flow information: | | | | | | | |
| Cash paid for income taxes | $ | — | | | $ | — | |
| Cash paid for interest | $ | — | | | $ | 20,393 | |
| | | | | | | | |
| Supplemental non-cash disclosures: | | | | | | | |
| Accounts payable converted to convertible note payable | $ | — | | | $ | 174,271 | |
The Accompanying notes are an integral part of these financial statements.
Southern Products, Inc.
Notes to Financial Statements
NOTE 1 – Organization, History and Business
Organization
Southern Products, Inc. (the “Company”) was incorporated in Nevada on February 23, 2010 and is doing business as SIGMAC USA. The Company is a consumer electronics company utilizing its d.b.a., SIGMAC USA to develop and brand its products. The Company began its plan of operations by entering into agreements for the sale of branded, low-priced televisions in the United States. The business consists of the design, assembly, import, marketing and sale of our models of Sigmac branded flat panel televisions into the US market. Upon establishment of the SIGMAC brand, management intends to expand its market to international consumers.
NOTE 2 – Significant Accounting Policies and Procedures
Cash and cash equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At May 31, 2013 and February 28, 2013, the Company had no cash equivalents.
Concentration of Credit and Business Risk
The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company’s financial instruments that are exposed to concentration of credit risks consist primarily of cash. The Company maintains its cash in bank accounts which, may at times, exceed federally-insured limits.
Accounts receivable
Accounts receivable is reported at the customers’ outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.
An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of May 31, 2013, management has deemed all receivables to be collectible, and has not historically recorded bad debt expenses; therefore no allowance has been recorded.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. As of May 31, 2013 and February 28, 2013, finished goods inventory was $15,000, respectively.
Fixed Assets
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
Equipment 3-5 years
Furniture 7 years
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there were no impairments needed as of May 31, 2013 or 2012. Depreciation expense for the three-months ended ended May 31, 2013 and 2012, was $43, respectively.
Revenue recognition
The Company recognizes revenue in accordance with ASC subtopic 605-10 (formerly SEC Staff Accounting Bulletin No. 104 and 13A, “Revenue Recognition”) net of expected cancellations and allowances. As of May 31, 2013 and February 28, 2013, the Company evaluated evidence of cancellation in order to make a reliable estimate and determined there were no material cancellations during the years and therefore no allowances has been made.
The Company's revenues, which do not require any significant production, modification or customization for the Company's targeted customers and do not have multiple elements, are recognized when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the Company's fee is fixed and determinable; and (iv) collectability is probable.
Substantially all of the Company's revenues are derived from the sales ofLCD and LED televisions.The Company's customers are charged for these products on a per transaction basis. Pricing varies depending on the product sold. Revenue is recognized in the period in which the products are sold net of any discounts or allowances.
Loss per share
The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed exercise or conversion of stock options, warrants, and debt to purchase common shares, would have an anti-dilutive effect. At May 31, 2013 and February 28, 2013, the Company had no potential common shares that have been excluded from the computation of diluted net loss per share.
Income taxes
The Company follows ASC subtopic 740-10 for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Fair Value of Financial Instruments
The Company has financial instruments whereby the fair value of the financial instruments could be different from that recorded on a historical basis in the accompanying balance sheets. The Company's financial instruments consist of cash, receivables, accounts payable, accrued liabilities, and notes payable. The carrying amounts of the Company's financial instruments approximate their fair values as of May 31, 2013 and February 28, 2013 due to their short-term nature.
Long-lived assets
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost or carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and its fair value or disposable value. For the three-month periods ending ended May 31, 2013 and 2012, the Company determined that none of its long-term assets were impaired.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affects the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Advertising
The Company expenses advertising costs as incurred. Pursuant to its vendor agreement with Fry’s electronics, the Company contributes 5% of each sale to a co-operative advertising, promotional and marketing campaign. The Company’s advertising expenses were $302 and $119,802 for the three-month periods ending May 31, 2013, and 2012.
Share-Based Compensation
The Company accounts for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the consolidated statement of operations based on their fair values at the date of grant.
The Company accounts for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” Stock-based payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the consolidated statement of operations based on the value of the vested portion of the award over the requisite service period as measured at its then-current fair value as of each financial reporting date. The Company calculates the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. The Company estimates forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, the Company monitors both stock option and warrant exercises as well as employee termination patterns.
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period of the award.
Recent accounting pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financials properly reflect the change. There are no new accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.
Year-end
The Company has adopted February 28, as its fiscal year end.
NOTE 3 - Going concern
These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. The Company has not yet achieved profitable operations and has accumulated losses of $4,176,965 and a working capital deficit of $3,323,677. Management expects to incur further losses in the development of its business, all of which raises substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.
The Company expects to continue to incur substantial losses as it executes its business plan and does not expect to attain profitability in the near future. Since its inception, the Company has funded operations through short-term borrowings and equity investments in order to meet its strategic objectives. The Company's future operations are dependent upon external funding and its ability to execute its business plan, realize sales and control expenses. Management believes that sufficient funding will be available from additional borrowings and private placements to meet its business objectives, including anticipated cash needs for working capital, for a reasonable period of time. However, there can be no assurance that the Company will be able to obtain sufficient funds to continue the development of its business operation, or if obtained, upon terms favorable to the Company.
NOTE 4- Accounts receivable
Accounts receivable consisted of the following:
| | May 31, | | February 28, |
| | 2013 | | 2013 |
| Trade accounts receivable | $ | 390 | | | $ | 9,120 | |
| Due from factoring | | — | | | | — | |
| Customer hold-back | | — | | | | — | |
| Less: Allowance for doubtful accounts | | — | | | | — | |
| | $ | 390 | | | $ | 9,120 | |
As of May 31, 2013 and February 28, 2013, respectively, the Company had not established an allowance for doubtful accounts.
NOTE 5 - Property and equipment
The following is a summary of property and equipment:
| | May 31, | | February 28, |
| | 2013 | | 2013 |
| Furniture and fixtures | $ | 1,200 | | | $ | 1,200 | |
| Less: accumulated depreciation | | (286 | ) | | | (243 | ) |
| | $ | 914 | | | $ | 957 | |
Depreciation for the three-months ended May 31, 2013 and 2012 totaled $43 for each respective period.
NOTE 6 - Related party transactions
Employment/Consulting commitments
On June 1, 2011, the Company agreed to pay its executive officer an annual salary of $240,000 with 50% to be paid in cash and the remaining $120,000 to accrue until such time the Company has sufficient operating capital to pay the accrued compensation. During the three-months-ended May 31, 2013 and 2012, the Company paid $3,333 and $29,844 in cash to its chief executive officer and accrued $56,667 as of May 31, 2013. The Company also accrued compensation of $6,000 for a relative of the officer, as of May 31, 2013.
NOTE 7 – Short-term note and line of credit
Line of credit
On March 15, 2012, the Company signed an addendum to their factoring agreement dated January 11, 2012 with Pacific Business Capital Corporation (“PBCC”). The addendum provides for a short-term line of credit with a limit of $1,000,000 to be advanced based on specific purchase orders presented by the Company. Pursuant to the terms of the agreement, interest will be charged at a rate of 1.5% per month on the unpaid balance. Additionally, any amounts outstanding in excess of thirty-days will have an additional interest charge of 0.05% per day until paid in full. All advances are collateralized with the inventory of the Company. During the three-month periods ending May 31, 2013 and 2012, the Company recorded interest expense of $0 and $3,200 in connection with the advance.
Convertible notes payable
On June 29, 2012, the Company issued a $488,489 Convertible Promissory Note and Security Interest in favor of a trade creditor representing the past due invoices of the creditor for professional fees. During the three-month period ended May 31, 2013, the creditor advanced a total of $8,006 for payment of the Company’s operating expenses whereby increasing the principal balance of the note to $491,465. The note is collateralized through the granting of a Security Interest in all the current and future assets of the Company until such time the note is fully satisfied. The Security Interest was subsequently perfected by the holder through filing. The note bears interest at a rate of 12% per annum and requires monthly installments of $15,000 per month until paid in full commencing on July 10, 2012. Further, at the sole option of the holder, demand for payment can be made with a thirty-day written notice of such demand. In the event of default, the unpaid balance will accrue interest at a default rate of 18% per annum. The Company has not paid in accordance with the terms of the note, and is currently in default and accruing interest at the default rate of 18%. Interest charged to operations relating to this note amounted to $25,395 for the period ended May 31, 2013.
Pursuant to the terms of the note, it is convertible into shares of the Company’s common stock at the option of the holder at any time in whole or in part at a conversion rate of $0.10. On the commitment date, management evaluated the conversion feature with respect to the benefit of the holder and determined the value of the conversion feature to be equal to the face value of the note, $488,489. This amount has been recorded as a discount against the outstanding balance of the note. The discount is amortized to interest expense over the estimated life of the debt using the effective interest method. Interest charged to operations relating to the amortization of the debt discount as of May 31, 2013 amounted to $38,346.
On April 9, 2013, the Company issued a Convertible Promissory Note to Asher Enterprises, Inc. in the amount of $42,500. The notes bears interest at a rate of 8% per annum, are unsecured and mature on January 15, 2014. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 45% discount to the 10-day average trading price prior to the conversion date. The Company recorded a discount in the amount of $42,500 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized a derivative liability in the amount of $34,773 resulting from the variable change in conversion rate in relation to the change in market price of the Company’s common stock on the date of issuance.
As of the May 31, 2013, the Company fair valued the derivative at $49,766 and recorded an unrealized loss on the change in fair value of $49,766. As of May 31, 2013, the unpaid principal balance was $7,865 net of discount in the amount of $34,635. Accrued interest totaled $480.
NOTE 8 - Fair value measurement
The Company adopted ASC Topic 820-10 at the beginning of 2009 to measure the fair value of certain of its financial assets required to be measured on a recurring basis. The adoption of ASC Topic 820-10 did not impact the Company’s financial condition or results of operations. ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
Level I – Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level II – Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level III – Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.
The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of May 31, 2013:
| | Level I | | Level II | | Level III | | Fair Value |
| May 31, 2013 | | | | | | | | | | | | | | | |
| Convertible notes payable | | — | | | | 152,553 | | | | — | | | | 152,553 | |
| Derivative liability | | — | | | | 49,766 | | | | | | | | 49,766 | |
| | $ | — | | | $ | 202,319 | | | $ | — | | | $ | 202,319 | |
NOTE 9 – Shareholders’ equity
The Company is authorized to issue up to 90,000,000 shares of $0.001 par value common stock and 450,000,000 shares of $0.001 par value preferred stock. The Preferred Stock may be issued in one or more series, with all rights and preferences being determined by the board of directors.
Preferred Stock
The voting rights, rate of dividends preference in relation to other classes or series, and rights in the event of liquidation related to shares of Preferred Stock of any series are determined by the board of directors and may vary from time to time.
Common Stock
Holders of common stock have voting rights equal to one vote for each share of Common Stock held and are entitled to receive dividends when, and if declared by the board of directors subject to the rights of any Preferred Stock having preference as to dividends. In the event of liquidation or dissolution, subject to the rights of Preferred Stock Holders’ are entitled to share ratably in the Corporations assets. Holders of Common Stock do not have conversion, redemption or preemptive rights.
Recapitalization
During the year ended February 28, 2013 the Company effectuated a 5-for-1 forward stock split in the form of a stock dividend. All share and per share data has been retroactively restated to reflect the split.
NOTE 10 - Subsequent events
The Company’s Management has reviewed all material events through the date of the issuance of these financial statements in accordance with ASC 855-10, and believes there are no further material subsequent events to report.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
We are a consumer electronics company, incorporated in the state of Nevada and doing business under the brand name Sigmac. Our business consists of the design, assembly, import, marketing and sale of our models of Sigmac branded flat panel televisions into the US market.
As a result of the high costs of operating a publicly reporting company, our current substantial debt and our inability to obtain adequate equity financing, we have been unable to effectively implement our business plan. Thus, we have recently been negotiating with another company to enter into a possible reverse merger, or similar transaction, in which the other company and its management would take over operations of our company. We anticipate this reverse merger will occur, if at all, in the near future, but at this time we can not specify the terms or timing of the transaction, or even if it will occur at all. In the event such a transaction occurs, we will file the appropriate documents with the Securities and Exchange Commission and provide other announcements to the public as the new management determines.
Results of operations for the three months ended May 31, 2013 and 2012.
We generated gross revenues of $453 during the three months ended May 31, 2013. Our cost of goods sold was $1 resulting in a gross profit of $452. Our total operating expenses during the three months ended May 31, 2013 were $136,435. Our operating expenses during the quarter consisted of consulting services $45,588, salaries and wages of $60,000, general and administrative expenses of $19,365, rent expense of $3,000, professional fees in the amount of $8,180, and promotional and marketing of $302. In addition, we incurred an amortization of debt discount in the amount of $46,211, unrealized loss on the change in the fair value of derivatives in the amount of $49,766, and net interest expense of $25,876. Our net loss for the three months ended May 31, 2013 was $257,836.
By comparison, during the three months ended May 31, 2012, we generated gross revenues of $776,292. Our cost of goods sold was $845,822 resulting in a gross loss of $69,530. Our total operating expenses during the three months ended May 31, 2012 were $830,569. Our operating expenses during the quarter consisted of consulting services $43,929, salaries and wages of $183,934, general and administrative expenses of $130,782, rent expense of $19,590, professional fees in the amount of $263,002, and promotional and marketing of $119,802. In addition, we incurred an finance costs in the amount of $39,905, amortization of debt discount in the amount of $3,389, and a loss on asset sale of $7,555. Our net loss for the three months ended May 31, 2012 was $881,418.
Our sales and operating expenses were substantially lower during the quarter ended May 31, 2013 compared to the same period last year because our usual Chinese suppliers have refused to provide us with additional trade credit, rendering us unable to obtain products to fill orders from our customers. As a result, our total sales and overall level of business activity have declined significantly. We are presently seeking to establish relationships with additional manufacturers. There can be no assurance that such additional relationships will be established or that we will be able to obtain additional capital or trade credit on acceptable terms, or at all.
Liquidity and Capital Resources
As of May 31, 2013, we had current assets in the amount of $27,865, consisting of cash in the amount of $11,975, accounts receivable of $390, prepaid expenses of $500, and inventory of $15,000.
Our current liabilities as of May 31, 2013 were $3,351,542, consisting of accounts payable and accrued liabilities of $3,008,485, accrued interest of $84,071, accrued compensation due to a related party of $56,667, a derivative liability of $49,766 and a convertible note payable of $153,553 net of discount in the amount of $381,412. Our working capital deficit as of May 31, 2013 was therefore $3,323,677. Our largest accounts payable as of May 31, 2013, were to our two primary Chinese suppliers, Anhui Technology Import & Export Co. in the amount of $1,690,831 and to AHCOF International Development Co., Ltd., in the amount of $500,000.
Our ability to obtain product and component parts are presently severely constrained by our limited access to sufficient equity or other debt capital. During the fiscal year ended February 28, 2013, we purchased our products on credit supplied by our Chinese suppliers, primarily Anhui Technology Import & Export Co. and AHCOF International Development Co., Ltd. Subsequent to the end of the reporting period, these suppliers ceased providing us with additional credit, thereby rendering us unable to obtain product and to fill our orders from our customers. We are presently negotiating with new suppliers to provide us with additional credit but there can be no assurance what we will be successful in obtaining that additional credit on acceptable terms, or at all. We are also seeking equity and debt capital from other sources. With additional capital, we would be able to purchase additional product necessary for our current and expected distribution opportunities as well as negotiate more favorable supplier terms. In addition, if we are able to increase our equity base, we expect that we will be able to obtain better terms on our current accounts receivable and inventory financing. If we are unable to obtain that additional credit or capital, however, we will be unable to fill our existing orders or to make any additional sales and in all likelihood we will need to change our business plan or cease our business operations altogether. Our board is currently considering alternative business plans in the event adequate funding or a credit facility is not obtained.
In addition to the cost of producing and delivering product for sale, if we continue with our current business plan, we anticipate incurring approximately $1,600,000 in general operating expenses over the course of the next year to support our growth.
On April 9, 2013, we received financing from Asher Enterprises, Inc. (“Asher”) under a Securities Purchase Agreement (the “SPA”) and a Convertible Promissory Note (the “Note”) in the amount of $42,500. The Note bears interest at an annual rate of 8%, with principal and interest coming due on January 15, 2014. The Note may be converted in whole or in part, at the option of the holder, to shares of our common stock, par value $0.001, at any time following 180 days after the issuance dates of the Note. The conversion price under the Note is 55% of the Market Price of our common stock on the conversion date.
Off Balance Sheet Arrangements
As ofMay 31, 2013, there were no off balance sheet arrangements.
Going Concern
We have negative working capital and have incurred losses since inception. These factors create substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.
Our ability to continue as a going concern is dependent on generating cash from the sale of our common stock and/or obtaining debt financing and attaining future profitable operations. Management’s plans include selling our equity securities and obtaining debt financing to fund our capital requirement and ongoing operations; however, there can be no assurance we will be successful in these efforts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to include this item.
Item 4. Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of May 31, 2013. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, Edward Meadows. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of May 31, 2013, our disclosure controls and procedures were not effective. There have been no changes in our internal controls over financial reporting during the quarter ended May 31, 2013. Management determined that the material weaknesses that resulted in controls being ineffective are primarily due to lack of resources and number of employees. Material weaknesses exist in the segregation of duties required for effective controls and various reconciliation and control procedures not regularly performed due to the lack of staff and resources.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are 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 in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed in prior reports, we have been in litigation with two of our suppliers, Anhui Technology Import and Export Co. (“Anhui”), and Zhuhai Yuehua Electronics Co., Ltd. (“Zhuhai”).
On April 15, 2013, we reached a settlement of all claims and disputes with Anhui. The terms of the settlement are embodied in a Settlement Term Sheet. Under the Settlement Term Sheet, our wholly owned subsidiary SigmacUSA, Inc. (“Sigmac”) has agreed to pay Anhui a percentage of all funds raise from privately-placed equity investments as follows:
| | a) | 9.8% of the first $3 million |
| | b) | 13.1% of the next $3 million |
| | c) | 19.7% of the next $4 million |
In addition, Sigmac has agreed to pay Anhui 0.98% of its ongoing net collections on sales, to be paid on a monthly basis. Our payment obligations under the Settlement Term Sheet will continue until we have paid Anhui the total sum of $1,679,400. If a minimum of $1 million in new equity is not raised within 120 days from the date of the Settlement Term Sheet, however, the agreement will be null and avoid.
On May 20, 2013, we reached a settlement of all claims and disputes with Zhuhai. The terms of the settlement are embodied in a Settlement Agreement. Under the Settlement Agreement, Sigmac has again agreed to pay Zhuhai a percentage of all funds raised from privately-placed equity investments as follows:
| | a) | 2.4% of the first $3 million |
| | b) | 3.3% of the next $3 million |
| | c) | 4.9% of the next $4 million |
In addition, Sigmac has agreed to pay Zhuhai 0.25% of its ongoing net collections on sales, to be paid on a monthly basis. The payment obligations under the Settlement Agreement will continue until Sigmac has paid Zhuhai a total sum of $425,000. If the sum of $425,000 is not paid to Zhuhai within 1 year from the date of the Settlement Agreement, the agreement will be deemed to be in default. The Settlement Agreement also provides for the dismissal of certain pending litigation and a mutual release and covenant not to sue. The parties to the litigation have already filed a request for dismissal with prejudice of the claims involving Southern Products, Sigmac and Ed Meadows, personally.
Other than as disclosed above, we are not a party to any other pending legal proceeding. Other than as disclosed above, we are not aware of any other pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
Item 1A. Risk Factors
A smaller reporting company is not required to include this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Southern Products, Inc. |
| | |
| Date: | July 19, 2013 |
| | |
| | /s/ Edward Measows |
| By: | Edward Meadows |
| Title: | President, CEO, CFO, and Director |
