We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.
During the nine months ended December 31, 2012, the Company entered into Convertible Promissory Notes which refinance non-interest bearing advances. The Convertible Promissory Notes entered into had the following terms:
All principal along with accrued interest is payable on the maturity date. The notes are convertible into common stock at the option of the holder.
There were no convertible notes payable outstanding as of March 31, 2012.
The Company evaluated the terms of these notes in accordance with ASC Topic No. 815 – 40,Derivatives and Hedging - Contracts in Entity’s Own Stock and determined that the underlying common stock is indexed to the Company’s common stock. The Company determined that the conversion features did not meet the definition of a liability and therefore did not bifurcate the conversion features and account for them as a separate derivative liabilities. The Company evaluated the conversion features for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of underlying common stock at the inception of the note. Therefore, the Company recognized beneficial conversion features in the amounts of $69,586, $18,650, $94,515 and $117,775 on the date the note was signed. The beneficial conversion features were recorded as an increase in additional paid-in capital and a discount to the Convertible Notes Payable. The discounts to the Convertible Notes Payable will be amortized to interest expense over the life of the respective notes.
On August 1, 2012, the holder of the Convertible Promissory Note in the original amount of $69,586 elected to the convert the note into 6,958,598 shares of common stock. These shares were issued to Glendive Investments, a significant shareholder of the Company. As a result of the conversion on August 1, 2012, the remaining unamortized discount of $69,586 was immediately amortized to interest expense.
On August 2, 2012, the holders of Convertible Promissory Notes in the original amount of $18,650 elected to convert principal in the amount of $11,250 into 1,125,000 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $9,270 was immediately amortized to interest expense.
On August 30, 2012, the holder of the Convertible Promissory Note in the original amount of $18,650 elected to convert principal in the amount of $4,300 into 430,000 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $3,536 was immediately amortized to interest expense.
On December 17, 2012, the holders of the Convertible Promissory Note in the original amount of $94,515 elected to convert principal in the amount of $90,000 into 1,800,000 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $75,594 was immediately amortized to interest expense.
NOTE 5. STOCKHOLDERS’ EQUITY
On April 13, 2012, the Company issued 20,000 shares of common stock to a third party for services. The shares were valued at $200,000 based on the market value of the stock on the date of issuance.
On April 30, 2012, the Company issued 30,000 shares of common stock to a third party for services. The shares were valued at $216,000 based on the market value of the stock on the date of issuance.
On May 31, 2012, the Company issued 30,000 shares of common stock to a third party for services. The shares were valued at $126,000 based on the market value of the stock on the date of issuance.
On August 1, 2012, the Company issued 6,958,596 shares of common stock as a result of conversion of a Convertible Note Payable in the amount of $69,586.
On August 2, 2012, the Company issued 1,125,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $11,250.
On August 30, 2012, the Company issued 430,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $4,300.
On December 17, 2012, the Company issued 1,800,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $90,000.
NOTE 6. SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date these consolidated financial statements were issued. Based on our evaluation, only the event described below requires disclosure.
On February 4, 2013, the holder of the Convertible Promissory Note in the original amount of $18,650 elected to convert the remaining principal in the amount of $3,100 and accrued interest in the amount of $1,286 into 438,646 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $1,697 was immediately amortized to interest expense.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Rainbow Coral Corp. (“we”, “us”, “our”, “RBCC”, or the “Company”) was incorporated in the State of Florida on August 13, 2010. On June 13, 2011 we acquired all of the assets and the business of Father Fish Aquarium, Inc, (“Father Fish”) for $50,000. We plan to continue the business of Father Fish under the name of Rainbow Coral Corp. The Company was formed to build a coral farm facility to develop and propagate (or grow) live coral, independent of oceans, as a future farm reserve against the decline of natural wild reefs. We intend to grow, harvest and distribute as many varieties of hard and soft sizes as possible for use by consumers and as a source for advances in bio-research. The uses for coral as a source of potential leading edge medical discoveries are an attractive opportunity for the Company’s coral farming activity. We believe that the world of bio-research is a natural continuation of our core coral propagation business. Accordingly on October 23, 2011, the Company formed a subsidiary, Rainbow Biosciences, LLC to look into the opportunities within the bioscience market. On March 13, 2012, we entered into a stock purchase agreement (“N3D Stock Purchase Agreement”) with Nano3D Biosciences, Inc. (“N3D”), a Texas corporation that has developed a unique concept in three dimensional cell research tools. Under the terms of the N3D Stock Purchase Agreement, we have agreed to acquire 604 shares of common stock of N3D, representing approximately 5% of the outstanding shares on the date of the agreement, for a price of $413.62. The total purchase price of $249,826 will be paid by making weekly payments of $5,000 until fully paid. We may discontinue payment of the purchase price at any time by providing written notice to N3D. This would result in our owning fewer than 604 shares. Rainbow Biosciences, LLC will continue to research opportunities into the bioscience markets.
The Company was incorporated on August 13, 2010 with its corporate headquarters located in Nokomis, Florida. Through Board resolution, the Company’s fiscal year has been changed from August 31 to March 31.
We were a development stage entity until June 13, 2011 when we acquired Father Fish Aquarium, Inc.
Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements for the year ended March 31, 2012 included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”). Results of interim periods may not be indicative of results for the full year.
Nine months ended December 31, 2012 compared to the nine months ended December 31, 2011
Revenue
Revenue increased to $76,808 for the nine months ended December 31, 2012 compared to $57,180 for the nine months ended December 31, 2011. The Company has been able to increase sales due to increased marketing efforts.
Cost of Goods Sold
Cost of goods sold increased to $52,569 for the nine months ended December 31, 2012 compared to $37,213 for the comparable period of 2011. The increase in cost of goods sold was greater than the increase in revenue since the Company made more sales at discounted prices.
Gross Profit
Gross profit increased from $19,967 for the nine months ended December 31, 2011 to $24,239 for the nine months ended December 31, 2012. The increase in gross profit was a result of increased revenues as discussed above partially offset by a lower profitability rate on sales during the nine months ended December 31, 2012.
General and administrative expenses
We recognized general and administrative expenses in the amount of $813,391 and $120,221 for the nine months ended December 31, 2012 and 2011, respectively. During the nine months ended December 31, 2012, we issued stock for services resulting in general and administrative expense of $542,000. The remaining increase in general and administrative expenses was the result of the increased operations of the Company as a result of the acquisition of Father Fish and exploring other business opportunities.
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Interest Expense
Interest expense increased from $1,156 for the nine months ended December 31, 2011 to $205,928 for the nine months ended December 31, 2012. Interest expense for the nine months ended December 31, 2012 included amortization of discount on convertible notes payable in the amount of $191,747. The remaining increase is the result of the Company entering into interest-bearing convertible notes payable.
Net Loss
We incurred a net loss of $995,080 for the nine months ended December 31, 2012 as compared to $101,410 for the comparable period of 2011. The increase in the net loss was primarily the result of the increase in the general and administrative expense and interest expense as discussed above.
Three months ended December 31, 2012 compared to the three months ended December 31, 2011
Revenue
Revenue increased slightly to $24,852 for the three months ended December 31, 2012 compared to $22,490 for the three months ended December 31, 2011. The slight increase in revenue was the result in increased sales quantities partially offset by lower sales prices.
Cost of Goods Sold
Cost of goods sold increased to $24,912 for the three months ended December 31, 2012 compared to $11,245 for the comparable period of 2011. The increase in cost of goods sold was the result of increased sales quantities, although more sales were made at a discounted price.
Gross Profit
Gross profit decreased from $11,245 for the three months ended December 31, 2011 to a loss of $60 for the three months ended December 31, 2012. The decrease in gross profit was a result of a decreased profitability rate during the three months ended December 31, 2012.
General and administrative expenses
We recognized general and administrative expenses in the amount of $63,689 and $69,820 for the three months ended December 31, 2012 and for the three months ended December 31, 2011, respectively. The slight decrease was the result of lower expense related to business development during 2012.
Interest Expense
Interest expense increased from $425 for the three months ended December 31, 2011 to $118,601 for the three months ended December 31, 2012. Interest expense for the three months ended December 31, 2012 includes amortization of discount on convertible notes payable in the amount of $105,810. The remaining increase is the result of the Company entering into interest-bearing convertible notes payable.
Net Loss
We incurred a net loss of $182,350 for the three months ended December 31, 2012 as compared to $59,000 for the comparable period of 2011. The increase in the net loss was primarily the result of the increase in interest expense as discussed above.
Going Concern
We incurred a net loss of $995,080 for the nine months ended December 31, 2012. Net cash used by operations for the nine months ended December 31, 2012 was $245,070. We do not anticipate having positive net income in the immediate future. These conditions create an uncertainty as to our ability to continue as a going concern.
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We will need to obtain loans or other financing in order to fund operating shortfalls and do not foresee a change in this situation in the immediate future. There can be no assurance that we will be able to obtain these loans or that they will be available to us on terms that are acceptable to the Company. We will not be able to continue operations without them. We are pursuing alternate sources of financing, but there is no assurance that additional capital will be available to the Company when needed or on acceptable terms.
Liquidity and Capital Resources
At December 31, 2012, we had cash on hand of $17,075 and negative working capital of $87,358.
Net cash used in operating activities for the nine months ended December 31, 2012 was $245,070. We do not expect to achieve positive cash flow from operating activities in the near future. We will require additional cash in order to fully implement our business plan. There is no guarantee that we will be able funds when we need them or that funds will be available on terms that are acceptable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As smaller reporting company, this information is not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
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| · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
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| · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
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| · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of December 31, 2012, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
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The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of December 31, 2012.
Management believes that the material weaknesses set forth in items (2) and (3) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
Management’s Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
We will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. And, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.
We will work as quickly as possible to implement these initiatives; however, the lack of adequate working capital and positive cash flow from operations will likely slow this implementation.
Changes in internal controls over financial reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Not applicable to a smaller reporting company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On December 17, 2012, we issued 1,800,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $90,000.
An exemption under Section 4(1) of the Securities Act is claimed for the common stock issued in the above conversions since the criteria of Rule 144 were satisfied.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
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2.1 | Stock Purchase Agreement, dated as of June 13, 2011, by and among Rainbow Coral Corporation and Father Fish Aquarium, Inc. (1) |
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2.2 | Membership Interest Purchase Agreement, dated as of June 13, 2011 by and among Father Fish Aquarium, Inc. and Father Fish Aquarium, LLC. (1) |
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3.1 | Articles of Incorporation of Rainbow Coral Corp. (2) |
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3.2 | Articles of Amendment of Rainbow Coral Corp. (1) |
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3.3 | Articles of Amendment of Rainbow Coral Corp. (3) |
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3.4 | Bylaws of Rainbow Coral Corp. (2) |
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3.5 | Articles of Incorporation of Father Fish Aquarium, Inc. (1) |
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3.6 | Articles of Amendment of Father Fish Aquarium, Inc. (1) |
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3.7 | Bylaws of Father Fish Aquarium, Inc. (1) |
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3.8 | Articles of Organization of Father Fish Aquarium, LLC (1) |
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3.9 | Articles of Amendment of Father Fish Aquarium, LLC (1) |
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3.10 | Bylaws of Father Fish Aquarium, LLC (1) |
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10.1 | Note from Rainbow Coral Corp. to Louis Foxwell (1) |
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31.1 * | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer |
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31.2 * | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial and accounting officer |
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32.1 * | Section 1350 Certification of principal executive officer and principal financial and accounting officer |
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101 ** | XBRL Interactive Data |
* Filed or furnished herewith
** To be submitted by amendment.
(1) Incorporated by reference to the comparable exhibit filed with our Form 8-K filed on June 13, 2011
(2) Incorporated by reference to the comparable exhibit filed with our Registration Statement on Form S-1
(3) Incorporated by reference to the Registrant’s Form 10-K for the year ended March 31, 2012.
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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.
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| RAINBOW CORAL CORP. |
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| BY: | /s/ Patrick Brown |
| | Patrick Brown |
| | President, Secretary, Treasurer, |
| | Principal Executive Officer, |
| | Principal Financial and Accounting |
| | Officer and Sole Director |
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| Dated: February 19, 2013 |
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