The Company evaluated the terms of the 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. We determined that the conversion features did not meet the definition of a liability and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability. We 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, we recognized a discount for the beneficial conversion features of $423,909, in aggregate, on the date the notes were signed. We amortize the discounts for the notes dated June 30, 2015; September 30, 2015 and December 31, 2015 at effective interest rate of 277.49%; 222.23% and 224.88%, respectively. The beneficial conversion feature was recorded as an increase in additional paid-in capital and a discount to the convertible notes payable. The discount to the convertible notes payable will be amortized to interest expense over the life of the notes. During the nine months ended December 31, 2015 and 2014, the Company amortized discounts on convertible notes payable of $95,517 and $343,385, respectively, to interest expense.
During the nine months ended December 31, 2015, Essen Enterprises, Inc. (“Essen”), the original payee of the Convertible Note Payable dated December 31, 2014 elected to convert principal and accrued interest in the amounts show below into share of common stock at a rate of $0.02 per share. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement that provided for conversion.
As a result of this conversion, Essen became a significant shareholder of the Company.
During the nine months ended December 31, 2015, the holders of the Convertible Note Payable dated June 30, 2014 elected to convert principal and accrued interest in the amounts show below into share of common stock at a rate of $0.02 per share. On the conversion date, the unamortized discount related to the principal amount converted was immediately amortized to interest expense. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement that provided for conversion.
During the nine months ended December 31, 2015, the holders of the Convertible Note Payable dated September 30, 2014 elected to convert principal and accrued interest in the amounts show below into share of common stock at a rate of $0.01 per share. On the conversion date, the unamortized discount related to the principal amount converted was immediately amortized to interest expense. No gain or loss was recognized on the conversions as they occurred within the terms of the agreement that provided for conversion.
| | | | | | |
Date | | Amount Converted | | Shares of Common Stock Issued | |
December 22, 2015 | | $ | 1,920 | | 192,000 | |
Total | | $ | 1,920 | | 192,000 | |
In connection with the 1 for 100 reverse common stock split on May 29, 2015, the conversion rates of the outstanding convertible notes payable were not modified. As a result, in the event all potentially issuable shares were converted, the holders of the existing notes at December 31, 2015 would be issued 27,841,559 shares of common stock representing approximately 99% of the Company’s total shares outstanding on an if-converted basis. The holders of the notes are limited to holding no greater than 4.99% of the common stock at any time.
Note 5. Long-term Notes Payable
On December 30, 2013, we entered into a promissory note for $50,000 with a third party bearing interest at 5% per annum. Under the terms of the note payable, the Company is required to pay the note payable beginning on January 1, 2015 and over a period of 4 years. At December 31, 2015 and March 31, 2015, we owed the noteholder $41,280 and $48,150, respectively.
During the year ended March 31, 2015, we entered into a promissory note for $5,000 with a third party bearing interest at 5% per annum. Under the terms of the note payable, we are required to repay the note in twenty-six equal monthly installments beginning October 2014. At December 31, 2015 and March 31, 2015, we owed the noteholder $844 and $2,936, respectively.
Note 6. Related Party Transactions
During the nine months ended December 31, 2015 and 2014, the Company paid consulting fees of $47,115 and $49,500, respectively, to Kimberly Palmer for her services as CEO of the Company.
During the nine months ended December 31, 2015, Mr. Foxwell, the president of Father Fish, advanced $35,791 to our subsidiary, Father Fish, for working capital. As of December 31, 2015 and March 31, 2015, related party advances payable to Mr. Foxwell totaled $201,005 and $165,214, respectively. The advances bear no interest and are due on demand.
On July 22, 2015, we issued 1,000,000 shares of Series E Preferred stock to Essen Enterprises. See Note 7.
Services Provided by KM Delaney & Assoc.
During the nine months ended December 31, 2015 and 2014, KM Delaney & Assoc. (“KMDA”) has provided office space and certain administrative functions to us. The services provide include a furnished executive suite, use of office equipment and supplies, accounting and bookkeeping services, treasury and cash management services, financial reporting, and other support staffing requirements. As part of the services provided to the Company, KMDA receives the advances from the lender (See note 4.) and disburses those funds to us. During the nine months ended December 31, 2015 and 2014, KMDA billed us $142,881 and us $127,264, respectively, for those services. As of December 31, 2015 and March 31, 2015, we owed KMDA $174,760 and $245,365, respectively. These amounts are included in accounts payable and accrued liabilities on the balance sheet.
Note 7. Stockholders’ Equity
On May 29, 2015, the Company reincorporated from Florida to Nevada. The Company’s board of directors and majority shareholder consented to the reincorporation. Each of our shareholders on the record date received one share of the Nevada Company’s common stock for each 100 shares of common stock they own in the Florida company. The information contained herein gives retroactive effect to the stock split for all periods presented. Fractional shares were rounded up to the next whole share, and each shareholder received at least five shares. Following the reincorporation, the Company is authorized to issue 500 million shares of common stock and 20 million shares of preferred stock, each with a par value of $0.001 per share.
At December 31, 2015, the Company had 26,014,935 potentially issuable common shares with exercise prices ranging from $0.09 per share to $0.25 per share. The exercise prices of the convertible debt were not modified as a result of the reincorporation and the stock split. See Note 5.
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Preferred Stock
On July 22, 2015, we issued 1,000,000 shares of Series E Preferred stock to Essen Enterprises, Inc (“Essen”). The beneficial owner of Essen is Filipp Korolev. On that date, Essen owned 6,513,344 shares of our common stock, which constituted 63.55% of our outstanding common shares. The Series E Preferred stock is subordinate to our common stock and does not participate in dividends or equity distributions. The Series E preferred stock has ⅔ voting control of the company. The shares were issued so that Essen could retain stable control of the Company, which could have been lost as a result of expected issuance of common stocks resulting from conversion of our convertible notes. These shares were valued at $140,000 which was the estimated market value of the Series E Preferred Stock on the date of the transaction. The market value was determined by estimating the market value of the controlling interest in a public company.
Conversion of shares
During the nine months ended December 31, 2015, the holders of our convertible notes elected to convert principal and accrued interest of $199,959 into 10,093,994 shares of common stock.
Note 8. Business Segments
The Company has two reportable operating segments: (1) aquarium and aquarium supplies and (2) medical technology. These reportable segments are managed separately due to differences in their products.
The only segment that generates revenue is aquarium and aquarium supplies. Management evaluates and monitors performance of this segment primarily through, among other measures, gross profit. The medical technology segment is in the development stage and not begun to generate revenue.
The results of operations and financial position of the two reportable operating segments and corporate were as follows:
Results of Operations:
| | | | | | | | | | | | |
| Nine months ended December 31, | | Three months ended December 31, | |
| 2015 | | 2014 | | 2015 | | 2014 | |
| | | | | | | | | | |
REVENUE | | | | | | | | | | | | |
Aquarium and aquarium supplies | $ | 84,387 | | $ | 99,503 | | $ | 28,040 | | $ | 28,182 | |
Medical technology | | — | | | — | | | — | | | — | |
Corporate | | — | | | — | | | — | | | — | |
| $ | 84,387 | | $ | 99,503 | | $ | 28,040 | | $ | 28,182 | |
| | | | | | | | | | | | |
GROSS PROFIT | | | | | | | | | | | | |
Aquarium and aquarium supplies | $ | 50,290 | | $ | 51,176 | | $ | 18,857 | | $ | 17,590 | |
Medical technology | | — | | | — | | | — | | | �� | |
Corporate | | — | | | — | | | — | | | — | |
| $ | 50,290 | | | 51,176 | | $ | 18,857 | | | 17,590 | |
| | | | | | | | | | | | |
GENERAL AND ADMINISTRATIVE EXPENSE | | | | | | | | | | | | |
Aquarium and aquarium supplies | $ | 72,827 | | $ | 83,376 | | $ | 25,254 | | $ | 23,902 | |
Medical technology | | 15,000 | | | 70,000 | | | — | | | 10,000 | |
Corporate | | 510,987 | | | 324,768 | | | 131,795 | | | 113,311 | |
| $ | 598,814 | | $ | 478,144 | | $ | 157,049 | | $ | 147,213 | |
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Corporate operating expense includes general and administrative costs not allocated to operating segments.
| | | | | | | |
| | December 31, 2015 | | March 31, 2015 | |
| | | | | | | |
TOTAL ASSETS | | | | | | | |
Aquarium and aquarium supplies | | $ | 5,528 | | $ | 6,800 | |
Medical technology | | | — | | | — | |
Corporate | | | 1,166 | | | 4,528 | |
| | $ | 6,694 | | $ | 11,328 | |
Note 9. Subsequent Events
The Company evaluated material events occurring between the end of our fiscal year, March 31, 2016, and through the date when the consolidated financial statements were available to be issued for disclosure consideration.
On January 20, 2016, the holders of the convertible promissory note dated June 30, 2014 converted $2,388 of principal and accrued interest into 119,418 shares of common stock.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Rainbow Coral Corp. (the “Company”), a Nevada corporation, was incorporated on August 13, 2010. The Company’s year-end is March 31.
We were formed to build a coral farm facility to develop and propagate (or grow) live coral, independent of the 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 of captive-bred corals that are attractive, to as many consumers as possible who can maintain them in a healthy ecosystem aquarium. We believe that coral and other marine aquarium livestock should be supplied by farms or captive breeders, rather than removed from the natural reefs. The additional 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 bioresearch is a natural continuation of our core coral propagation business. Accordingly, on October 23, 2011, we formed a subsidiary, Rainbow Biosciences, LLC to look into the opportunities within the bioscience market. Rainbow Biosciences, LLC will continue to research opportunities into the bioscience markets.
On May 5, 2015, we reincorporated from Florida to Nevada. On May 29, 2015, each shareholder received one share in the Nevada company for each 100 shares they held in the Florida company. Fractional shares were rounded up, and each shareholder received at least five shares. The executive officers and directors of the Nevada company are unchanged from the executive officers and directors of the Florida company. All share and per share amounts have been retroactively restated to reflect the reverse split.
Critical Accounting Policies
We prepare our Consolidated financial statements in conformity with GAAP, which requires management to make certain estimates and apply judgments. We base our estimates and judgments on historical experience, current trends, and other factors that management believes to be important at the time the condensed Consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed Consolidated financial statements.
While we believe that the historical experience, current trends and other factors considered support the preparation of our condensed consolidated financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.
For a full description of our critical accounting policies, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended March 31, 2015 on Form 10-K.
Results of Operations
Nine months ended December 31, 2015 compared to the nine months ended December 31, 2014.
Revenue
Revenue decreased to $84,387 for the nine months ended December 31, 2015, compared to $99,503 for the nine months ended December 31, 2014 due to slower sales during the current period.
Cost of Goods Sold
Cost of goods sold decreased to $34,097 for the nine months ended December 31, 2015, compared to $48,327 for the comparable period in 2014 due to slower sales during the current period.
Gross Profit
Gross profit decreased to $50,290 for the nine months ended December 31, 2015, compared to $51,176 for the nine months ended December 31, 2014. This was a result of the decline in sales partially offset by the decline in cost of goods sold during the current period.
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General and Administrative Expenses
We recognized general and administrative expenses in the amount of $583,814 and $408,144 for the nine months ended December 31, 2015 and 2014, respectively. The increase was driven by the issuance of Series E Preferred stock for services, which were valued at $140,000. This was offset by a decrease in our investments in profit participation agreements.
Interest Expense
Interest expense decreased from $360,550 for the nine months ended December 31, 2014 to $127,988 for the nine months ended December 31, 2015. Interest expense for the nine months ended December 31, 2015 included amortization of discount on convertible notes payable in the amount of $95,517, compared to $343,385 for the comparable period of 2014. The remaining amount is the result of the Company entering into interest-bearing convertible notes payable.
Net Loss
We incurred a net loss of $676,512 for the nine months ended December 31, 2015 as compared to $787,518 for the comparable period of 2014. The decrease in the net loss was driven by the decline in interest expense, which was offset by the issuance of Series E Preferred stock for services that were valued at $140,000.
Three months ended December 31, 2015 compared to the three months ended December 31, 2014.
Revenue
Revenue decreased to $28,040 for the three months ended December 31, 2015, compared to $28,182 for the three months ended December 31, 2014. This was due to lower volumes which were offset by higher margins.
Cost of Goods Sold
Cost of goods sold decreased to $9,183 for the three months ended December 31, 2015, compared to $10,592 for the comparable period in 2014 due to lower sales at our fish store.
Gross Profit
Gross profit increased to $18,857 for the three months ended December 31, 2015, compared to $17,590 for the three months ended December 31, 2014 as a result higher margins on our sales.
General and Administrative Expenses
We recognized general and administrative expenses in the amount of $157,049 and $137,213 for the three months ended December 31, 2015 and ended 2014, respectively. This is a primarily due to increased professional fees and higher costs at our retail fish shop.
Interest Expense
Interest expense decreased from $121,858 for the three months ended December 31, 2014 to $41,566 for the three months ended December 31, 2015. Interest expense for the three months ended December 31, 2015 included amortization of discount on convertible notes payable in the amount of $27,461, compared to $117,026 for the comparable period of 2014. The remaining amount is the result of the Company entering into interest-bearing convertible notes payable.
Net Loss
We incurred a net loss of $179,758 for the three months ended December 31, 2015 as compared to $251,481 for the comparable period of 2014. The decrease in the net loss was primarily the result of lower interest expense related to the amortization of the discount on our convertible notes payable.
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Liquidity and Capital Resources
At December 31, 2015, we had cash on hand of $1,372. The company has negative working capital of $518,425. Net cash used in operating activities for the nine months ended December 31, 2015 was $454,830. Cash on hand is adequate to fund our operations for less than one month. We do not expect to achieve positive cash flow from operating activities in the near future. We will require additional cash in order to implement our business plan. There is no guarantee that we will be able to attain fund when we need them or that funds will be available on terms that are acceptable to the Company. We have no material commitments for capital expenditures as of December 31, 2015.
Additional Financing
Additional financing is required to continue operations. Although actively searching for available capital, the Company does not have any current arrangements for additional outside sources of financing and cannot provide any assurance that such financing will be available.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on Internal Control over Financial Reporting
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2015. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2015, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
| | |
| 1. | As of December 31, 2015, we did not maintain effective controls over the control environment. Specifically we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. |
| | |
| 2. | As of December 31, 2015, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness. |
Our management, including our principal executive officer and principal financial officer, who is the same person, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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. Due to 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, have been detected.
Change 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 have a material effect, our internal controls over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered beneficial shareholder are an adverse party or has a material interest adverse to us.
ITEM 1A. RISK FACTORS
Not applicable to a smaller reporting company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered equity securities during the nine months ended December 31, 2015.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has not defaulted upon senior securities.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to the Company.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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3.1 | Articles of Incorporation (1) |
| |
3.2 | Bylaws (1) |
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14 | Code of Ethics (1) |
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21 | Subsidiaries of the registrant (2) |
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31.1 | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer and principal financial and account officer. (2) |
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32.1 | Section 1350 Certification of principal executive officer and principal financial accounting officer. (2) |
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101 | XBRL data files of Financial Statement and Notes contained in this Quarterly Report on Form 10-Q. (2),(3) |
__________
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(1) | Incorporated by reference to our Form S-1 filed with the Securities and Exchange Commission on September 23, 2010. |
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(2) | Filed or furnished herewith. |
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(3) | In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.” |
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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. |
| |
| |
Date: February 19, 2016 | BY: /s/ Kimberly Palmer |
| Kimberly Palmer |
| President, Secretary, Treasurer, Principal Executive Officer,
Principal Financial and Accounting Officer and Sole Director. |
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