During the six months ended September 30, 2013, the holders of the convertible promissory note in the original amount of $101,333 elected to convert all principal and accrued interest in the amount of $5,354 into 2,133,738 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $74,493 was immediately amortized to interest expense and the note payable was extinguished.
During the six months ended September 30, 2013 and 2012, the Company received non-interest bearing advances of $283,229 and $177,895, respectively, from Vista View Ventures Inc. The funds were advanced to the Company through an intermediary agent which also provides certain legal, accounting and support services to the Company.
During April and May, 2012, the Company issued 80,000 shares of common stock to a third party for services. The shares were valued at $542,000 based on the market value of the stock on the date of issuances.
During the six months ended September 30, 2013, $179,123 of convertible notes payable and $20,990 of accrued interest were converted into 4,412,149 shares of common stock.
Management has evaluated subsequent events through the date these consolidated financial statements were issued. Based on our evaluation, only the events described below requires disclosure.
On October 15, 2013, the holder of the convertible promissory note in the original amount of $43,575 elected to convert the principal and interest in the amount of $45,996 into 919,923 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $32,651 was immediately amortized to interest expense.
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 per share. 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. The Company’s fiscal year end is 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, 2013 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.
Six months ended September 30, 2013 compared to the six months ended September 30, 2012.
Revenue
Revenue increased slightly to $58,553 for the six months ended September 30, 2013 compared to $51,956 for the six months ended September 30, 2012 as a result of increased volumes of sales in 2013.
Cost of Goods Sold
Cost of goods sold increased to $34,876 for the six months ended September 30, 2013 compared to $27,657 for the comparable period of 2012. The increase in cost of goods sold was greater than the increase in revenue since the Company made more sales at discounted prices during the first quarter of 2013.
Gross Profit
Gross profit decreased from $24,299 for the six months ended September 30, 2012 to $23,677 for the six months ended September 30, 2013. The decrease in gross profit was a result of increase in cost of goods sold as discussed above.
General and administrative expenses
We recognized general and administrative expenses in the amount of $310,944 and $749,702 for the six months ended September 30, 2013 and 2012, respectively. During the six months ended September 30, 2012, we issued stock for services resulting in general and administrative expense of $542,000. Excluding this expense, general and administrative expense for the six months ended September 30, 2012 would have been $207,702. General and administrative expense, excluding the stock issued for services, increased from the six months ended September 30, 2012 compared to 2013 as a result of higher costs related to professional services.
- 12 -
Interest Expense
Interest expense increased from $87,327 for the six months ended September 30, 2012 to $180,679 for the six months ended September 30, 2013. Interest expense for the six months ended September 30, 2013 included amortization of discount on convertible notes payable in the amount of $170,465 compared to 85,937 for the comparable period of 2012. The remaining increase is the result of the Company entering into interest-bearing convertible notes payable.
Net Loss
We incurred a net loss of $467,946 for the six months ended September 30, 2013 as compared to $812,730 for the comparable period of 2012. The decrease in the net loss was primarily the result of the decrease in the general and administrative expense as discussed above.
Three months ended September 30, 2013 compared to the Three months ended September 30, 2012.
Revenue
Revenue increased to $33,971 for the three months ended September 30, 2013 compared to $27,568 for the three months ended September 30, 2012.
Cost of Goods Sold
Cost of goods sold increased to $17,068 for the three months ended September 30, 2013 compared to $13,784 for the comparable period of 2012. The increase in cost of goods sold comparable to the increase in revenue.
Gross Profit
Gross profit increased from $13,784 for the three months ended September 30, 2012 to $16,903 for the three months ended September 30, 2013. The increase in gross profit was a result of increase in revenue as discussed above.
General and administrative expenses
We recognized general and administrative expenses in the amount of $171,313 and $82,355 for the three months ended September 30, 2013 and 2012, respectively. The increase in general and administrative expense was the result of increased costs related to professional services
Interest Expense
Interest expense increased from $87,116 for the three months ended September 30, 2012 to $94,167 for the three months ended September 30, 2013. The increase is the result of the Company entering into interest-bearing convertible notes payable.
Net Loss
We incurred a net loss of $248,577 for the three months ended September 30, 2013 as compared to $155,687 for the comparable period of 2012. The increase in the net loss was primarily the result of the increase in the general and administrative expense as discussed above.
Going Concern
We incurred a net loss of $467,946 for the six months ended September 30, 2013. Net cash used by operations for the six months ended September 30, 2013 was $315,003. 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.
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.
- 13 -
Liquidity and Capital Resources
At September 30, 2013, we had cash on hand of $79,641.
Net cash used in operating activities for the six months ended September 30, 2013 was $315,003. 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:
| |
· | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| |
· | 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 |
| |
· | 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 September 30, 2013, 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.
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 September 30, 2013.
- 14 -
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.
One July 9, 2013, we issued 733,738 shares of common stock as a result of the conversion of interest on a Convertible Note Payable in the amount of $36,687.
One July 15, 2013, we issued 1,400,000 shares of common stock as a result of the conversion of interest on a Convertible Note Payable in the amount of $70,000.
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
- 15 -
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| |
2.1 | Stock Purchase Agreement, dated as of June 13, 2011, by and among Rainbow Coral Corporation and Father Fish Aquarium, Inc. (1) |
| |
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) |
| |
3.1 | Articles of Incorporation of Rainbow Coral Corp. (2) |
| |
3.2 | Articles of Amendment of Rainbow Coral Corp. (1) |
| |
3.3 | Articles of Amendment of Rainbow Coral Corp. (3) |
| |
3.4 | Bylaws of Rainbow Coral Corp. (2) |
| |
3.5 | Articles of Incorporation of Father Fish Aquarium, Inc. (1) |
| |
3.6 | Articles of Amendment of Father Fish Aquarium, Inc. (1) |
| |
3.7 | Bylaws of Father Fish Aquarium, Inc. (1) |
| |
3.8 | Articles of Organization of Father Fish Aquarium, LLC (1) |
| |
3.9 | Articles of Amendment of Father Fish Aquarium, LLC (1) |
| |
3.10 | Bylaws of Father Fish Aquarium, LLC (1) |
| |
10.1 | Note from Rainbow Coral Corp. to Louis Foxwell (1) |
| |
31.1 * | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer |
| |
31.2 * | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial and accounting officer |
| |
32.1 * | Section 1350 Certification of principal executive officer and principal financial and accounting officer |
| |
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, 2013.
- 16 -
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.
| | |
| RAINBOW CORAL CORP. |
| | |
| BY: | /s/ Patrick Brown |
| | Patrick Brown |
| | President, Secretary, Treasurer, |
| | Principal Executive Officer, |
| | Principal Financial and Accounting |
| | Officer and Sole Director |
| | |
| Dated: November 19, 2013 |
- 17 -
