Management has evaluated subsequent events through the date these consolidated financial statements were issued. Based on our evaluation, only the events described below require disclosure.
On January 1, 2014, the holder of the convertible promissory note in the original amount of $192,600 elected to convert principal and interest in the amount of $32,000 into 800,000 shares of common stock. As a result of this conversion, unamortized discount related to the converted principal in the amount of $20,975 was immediately amortized to interest expense.
On January 27, 2014, the holder of the convertible promissory note in the original amount of $192,600 elected to convert principal and interest in the amount of $32,000 into 800,000 shares of common stock. As a result of this conversion, unamortized discount related to the converted principal in the amount of $29,346 was immediately amortized to interest expense.
On February 7, 2014, the holder of the convertible promissory note in the original amount of $192,600 elected to convert principal and interest in the amount of $32,000 into 800,000 shares of common stock. As a result of this conversion, unamortized discount related to the converted principal in the amount of $29,313 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.
Our subsidiary, Father Fish, is a retail tropical fish store with a license from the Florida Department of Agriculture to raise a number of ornamental animals. Among these are various types of coral and the live food they require for nutrition. In addition, Father Fish raises a number of fresh water and salt water fish and invertebrates. Sales are made out of a retail location in Florida and online to hobbyists and serious collectors and by contracts with local departments of education for classroom and science lab use. Father Fish has a varied customer base and no individual customer is significant to the total sales of the Company.
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.
Ninemonths ended December 31, 2013 compared to the nine months ended December 31, 2012.
Revenue
Revenue increased to $84,044 for the nine months ended December 31, 2013 compared to $76,808 for the nine months ended December 31, 2012. The sales increase was driven by increased advertising.
Cost of Goods Sold
Cost of goods sold increased to $57,506 for the nine months ended December 31, 2013 compared to $52,569 for the comparable period of 2012. The increase in cost of goods is consistent with the increase in revenue.
Gross Profit
Gross profit increased from $24,239 for the nine months ended December 31, 2012 to $26,538 for the nine months ended December 31, 2013. The increase in gross profit was a result of increased sales, offset by increased cost of goods sold.
General and administrative expenses
We recognized general and administrative expenses in the amount of $476,084 and $813,391 for the nine months ended December 31, 2013 and 2012, respectively. During the nine months ended December 31, 2012, we issued stock for services resulting in general and administrative expense of $542,000. Excluding this expense, general and administrative expense for the nine months ended December 31, 2012 would have been $271,391. General and administrative expense, excluding the stock issued for services, increased from the nine months ended December 31, 2012 compared to 2013 as a result of higher costs related to professional services.
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Interest Expense
Interest expense increased from $205,928 for the nine months ended December 31, 2012 to $234,389 for the nine months ended December 31, 2013. Interest expense for the nine months ended December 31, 2013 included amortization of discount on convertible notes payable in the amount of $215,122 compared to $191,747 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 $683,935 for the nine months ended December 31, 2013 as compared to $995,080 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 December 31, 2013 compared to the three months ended December 31,2012.
Revenue
Revenue increased slightly to $25,491 for the three months ended December 31, 2013 compared to $24,852 for the three months ended December 31, 2012.
Cost of Goods Sold
Cost of goods sold decreased to $22,630 for the three months ended December 31, 2013 compared to $24,912 for the comparable period of 2012. The decrease in cost of goods is due to the mix of products sold.
Gross Profit
Gross profit increased to $2,861 for the three months ended December 31, 2013 from a loss of $60 for the three months ended December 31, 2012. The increase in gross profit was a result of higher margins on sales.
General and administrative expenses
We recognized general and administrative expenses in the amount of $165,140 and $63,689 for the three months ended December 31, 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 decreased from $118,601 for the three months ended December 31, 2012 to $53,710 for the three months ended December 31, 2013. The decrease is due to less amortization of discount on convertible notes payable.
Net Loss
We incurred a net loss of $215,989 for the three months ended December 31, 2013 as compared to $182,350 for the comparable period of 2012. The increase in the net loss was primarily due to the increase in general and administrative expenses, as discussed above.
Going Concern
We incurred a net loss of $683,935 for the nine months ended December 31, 2013. Net cash used by operations for the nine months ended December 31, 2013 was $392,094. 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.
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Liquidity and Capital Resources
At December 31, 2013, we had cash on hand of $107,848.
Net cash used in operating activities for the nine months ended December 31, 2013 was $392,094. 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 MARK 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, 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 December 31, 2013.
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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 independent 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 independent 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 independent 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 independent 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 October 15, 2013, we issued 500,000 shares of common stock as a result of the conversion of principal interest on a Convertible Note Payable in the amount of $25,000.
On October 25, 2013, we issued 419,923 shares of common stock as a result of the conversion of principal interest on a Convertible Note Payable in the amount of $20,996.
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.
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ITEM 5. OTHER INFORMATION.
On December 1, 2013, our Board of Directors appointed Kimberly Palmer to serve as CEO, President and a member of the Board of Directors. A registered nurse with extensive healthcare experience, Ms. Palmer will be tasked with implementing the Company’s business strategy in the field of regenerative medicine. From 1997 until the present, she has served as a registered nurse at Vancouver General Hospital in the post anesthetic recovery room and the solid organ transplant/cardiac surgery telemetry unit. In addition, from 2008 to the present, Ms. Palmer has served as a business consultant to private surgeons, providing administrative and clinical support for a variety of medical practices. Ms. Palmer holds a Bachelor of Science, Nursing degree from the University of British Columbia. She is a registered nurse in British Columbia.
Ms. Palmer will be compensated $5,000 per month for her services. She is not covered under an employment agreement and does not own any shares of our stock.
Additionally, on December 1, 2013, Mr. Patrick Brown resigned as our CEO, President and Director. Mr. Foxwell’s resignation was not the result of a disagreement with the Company.
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, 2013.
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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/ Kimberly Palmer |
| | Kimberly Palmer |
| | President, Secretary, Treasurer, |
| | Principal Executive Officer, |
| | Principal Financial and Accounting |
| | Officer and Sole Director |
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| Dated: February 19, 2014 |
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