NUTRANOMICS, INC. - Quarter Report: 2014 October (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended October 31, 2014
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to ___________
Commission File Number 000-53551
NUTRANOMICS, INC.
(Exact name of registrant as specified in its charter)
Nevada		98-0603540
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
11487 South 700 East Salt Lake City, UT 84020
(Address of principal executive offices, including zip code)
(801) 576-8350
(Registrant's telephone number, including area code)
n/a
(Former name, former address and former fiscal year, if changed since last report)

 

Yes

☒

No

☐

Yes

☒

No

☐

Large accelerated filer  ☐	Accelerated filer  ☐
Non-accelerated filer  ☐	Smaller reporting company  ☒

Yes

☐

No

☒

NUTRANOMICS, INC.

FORM 10-Q

 

For the Quarterly Period Ended October 31, 2014

 

INDEX

 

 

 

 

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PART I – FINANCIAL INFORMATION 

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

 

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HEALTH EDUCATION CORPORATION

d.b.a NUTRANOMICS, INC.

Consolidated Balance Sheets

 

ASSETS
		October 31,				July 31,
		2014				2014
CURRENT ASSETS		(Unaudited)
Cash and cash equivalents		$	83,084			$	79,235
Accounts receivable, net of allowance			231,071				152,879
Prepaid expenses			81				4,516
Other current assets			1,279				23,254
Inventory			151,063				271,941
Total Current Assets			466,578				531,825
PROPERTY & EQUIPMENT, net			13,832				16,355
OTHER ASSETS
Rent deposit			2,000				2,000
Total Assets		$	482,410			$	550,180
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	470,772			$	518,890
Lines of credit			29,887				33,098
Convertible notes payable-current portion			546,658				58,999
Loan payable-current portion			52,426				51,071
Note Derivative Liability			139,409				177,907
Related party payable			20,109				21,083
Related party notes payable			35,036				36,608
Unearned revenue			262,084				338,263
Total Current Liabilities			1,556,381				1,235,919
LONG-TERM LIABILITIES
Convertible notes payable			70,479				525,000
Loan payable			148,805				157,830
Total Liabilities			1,775,665				1,918,749
STOCKHOLDERS' DEFICIT
Common stock; par value of $.001, 750,000,000 shares authorized;
54,023,354 and 51,151,766 shares issued and outstanding at
October 31, 2014 and July 31, 2014, respectively			54,025				51,153
Additional paid in capital			3,449,509				3,337,911
Accumulated deficit			(4,796,789	)			(4,757,633	)
Total Stockholders' Deficit			(1,293,255	)			(1,368,569	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	482,410			$	550,180

 

 

		For the Three Months Ended
		October 31,
		2014				2013
REVENUES		$	641,237			$	793,496
COST OF SALES			299,670				636,540
			341,567				156,956
OPERATING EXPENSES
General and administrative			63,785				85,981
Advertising and marketing			24,771				27,042
Professional fees			59,269				137,932
Research and development			-				31,617
Salaries and wages			142,307				94,575
Total Operating Expenses			290,132				377,147
OPERATING (LOSS)			51,435				(220,191	)
OTHER INCOME (EXPENSE)
Interest expense			(90,591	)			(8,505	)
Total Other Income (Expense)			(90,591	)			(8,505	)
NET (LOSS) BEFORE INCOME TAXES			(39,156	)			(228,696	)
Provision for income taxes			-				-
NET (LOSS)		$	(39,156	)		$	(228,696	)
BASIC AND DILUTED LOSS PER SHARE		$	(0.00	)		$	(0.01	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			52,321,884				36,457,164

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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		For the Three Months Ended
		October 31,
		2014				2013
OPERATING ACTIVITIES
Net (Loss)		$	(39,156	)		$	(228,696	)
Adjustments to reconcile net (loss) to net cash from operating activities:
Allowance for bad debt			-				(5,632	)
Gain (loss) on derivative			-				-
Amortization of debt discount			75,138				-
Short-term loan issued for professional fees			-				-
Depreciation expense			2,523				1,876
Share based compensation-common stock			-				-
Changes in operating assets and liabilities:
Accounts receivable			(78,192	)			(26,700	)
Other assets			26,410				(501	)
Inventory			120,878				(20,070	)
Deferred revenue			(76,179	)			83,889
Accounts payable and accrued expenses			(52,136	)			123,035
Net Cash (Used) From Operating Activities			(20,714	)			(72,799	)
INVESTING ACTIVITIES
Purchase of equipment			-				-
Net Cash (Used) Investing Activities			-				-
FINANCING ACTIVITIES
Proceeds from related party payable			-				-
Repayments of related party payable			(974	)			(825	)
Proceeds from convertible debt			-				375,000
Repayment of loan payable			(7,670	)			(7,321	)
Proceeds from line of credit			(3,211	)			6,000
Repayment of line of credit			-				(810	)
Repayments of notes payable- related party			(1,572	)			-
Sale of common stock			37,990				(1,374	)
Net Cash (Used) From Financing Activities			24,563				370,670
Net Increase (Decrease) in Cash and Cash Equivalents			3,849				297,871
Cash and Cash Equivalents, Beginning of Period			79,235				11,129
Cash and Cash Equivalents, End of Period		$	83,084			$	309,000
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest		$	3,208			$	1,811
Income Taxes		$	-			$	-
Non-cash Investing and Financing activities:
Stock issued for conversion of Note		$	42,000			$	-
Conversion of derivative feature		$	34,480			$	-

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basic loss per share ("EPS") is computed by dividing net loss (the numerator) by the weighted-average number of common shares outstanding for the period (the denominator). Diluted EPS is computed by dividing net loss by the weighted-average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include common shares to be issued related to convertible debentures and stock pending issue under the ratchet provision.

As the Company has incurred losses for the three months ended October 31, 2014 and 2013, the potentially dilutive shares are anti-dilutive and are thus not added into the loss per share calculations.

The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has generally had net losses after consideration of income taxes. Further, the Company has negative working capital and insufficient cash flows from operation as of October 31, 2014, and does not have the requisite liquidity to pay its current obligations. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management will seek to increase revenues and reduce costs, while raising capital through the sale of its stock. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect 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 revenue and expenses during the reporting period. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

Our revenue is derived from the service revenue from Live Blood Analysis, sale of retail products, and revenue derived from educational services.

The Company's revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition ("SAB 104"), and other applicable revenue recognition guidance under US GAAP. Sales revenue is recognized for our retail and wholesale customers when: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed or determinable, (iii) title and risk of loss have transferred, and (iv) collectability is reasonably assured — generally when products are shipped to the customer and services are rendered, except in situations in which title passes upon receipt of the products by the customer. In this case, revenues are recognized upon notification that customer receipt has occurred. The Company accrues an estimated amount for sales returns and allowances related to defective or returned products at the time of sale based on its ability to estimate sales returns and allowances using historical information. For the three months ended October 31, 2014 and 2013, the Company calculated the amount to be less than 1% of sales so no allowance was accrued in either year. Shipping and handling fees and related freight costs and supplies associated with shipping products to customers are included as a component of cost of sales. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

The Company also recognizes revenues from the distribution of its product through trade partners. Related revenues consist of product costs, distribution fees, testing and labeling costs, as well as any associated administrative fees. The Company recognizes these revenues after the product has been shipped from the outsource manufacturer to the trade partner. The Company has contractual obligation to pay the outsource manufacturers, and as a principal in these arrangements the Company includes the total product price as revenue in accordance with applicable accounting guidance. The Company has separately negotiated contractual relationships with its trade partners, and under contracts with these trade partners the Company assumes the credit risk of product produced by the outsource manufacturer and dispensed to the trade partner.

Unearned Revenues consist of cash received in advance for products to be delivered at a future date. The Company records the payments received as a liability until the products are delivered. The Company recorded unearned revenue of $262,084 and $338,263 as of October 31, 2014 and July 31, 2014, respectively.

The Company includes product costs (i.e. material, direct labor and overhead costs), shipping and handling expense, insurance on inventory, production-related depreciation expense and product license agreement expense in cost of sales.

NOTE 3 – COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS

Management of the Company has conducted a diligent search and concluded that there were no commitments, contingencies, or legal matters pending at the balance sheet dates that have not been disclosed.

NOTE 4 – LEASES

The Company leases a 3,000 square foot office in the Draper, Utah that serves as its principal executive offices. The lease expires on December 31, 2014. Pursuant to the lease, the rent for the three months ended October 31, 2014 and 2013, totaled $12,920 and $12,676, respectively.

The Company has three separate subleases for three rooms totaling 1,500 square feet of their Draper office space to three individuals on a month to month basis. The remaining two leases were terminated in September 2013 and October 2013. Pursuant to the sublease agreements, the monthly rent received for the three months ended October 31, 2014 and 2013 totaled $0 and $18,500, respectively.

The Company leased certain machinery and equipment in 2013 and 2012 under an agreement that is classified as an operating lease. The lease expired on July 15, 2013, and is now leased on a month-to-month basis. Rent expense under the operating lease totaled $1,036 and $1,143 at for the three months ended October 31, 2014 and 2013, respectively.

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The future minimum lease payments required under the operating leases as of July 31, 2014, are as follows:

NOTE 5 – RELATED PARTY NOTES PAYABLE

In January 2012, the Company entered into a two year, zero percent note with an 8% imputed interest rate with a director in the amount of $150,000. The note is due on December 31, 2014. The Company agreed to pay royalty payments in connection with sales of a certain product line. The Company paid royalty payments of $0 and $1,374 in the three months ended October 31, 2014 and 2013, respectively.

As of October 31, 2014 and July 31, 2014, the Company owed a total of $35,036 and $36,608 in principal in related party notes. On December 12, 2014, the Company paid off the related party note payable, see note 14 below.

NOTE 6 – RELATED PARTY PAYABLE

Related party payables consist of payments made by a director through credit cards and use of a line of credit related used to pay expenses on behalf of the Company. During the three months ended October 31, 2014 and 2013, the Company made payments of $974 and $1,023, respectively. As of October 31, 2014 and July 31, 2014, the Company owed a total of $20,109 and $21,083 in related party payables.

 

NOTE 7 – RESERVED AND OMITTED

NOTE 8 – LINES OF CREDIT AND LOAN PAYABLE

The Company maintains a Line of Credit with Key Bank (the "Lender"). The Line of Credit was opened on August 28, 2012, with an available $250,000 to be drawn on for one year, not to exceed the principal amount ("draw period"). Once the draw period is completed, advances will no longer be permitted and the Company shall repay the principal and interest outstanding, over 5 years ("repayment period"). The repayment period begins August 28, 2013, after which a minimum monthly payment amount will be determined. The initial interest rate is 5.210%, and is variable. The variable interest rate is based on an independent index which is the "prime rate" as published each business day in the "Money Rates" column of the Wall Street Journal. Interest on the note is computed on a 365/365 simple interest basis, using 1.960% points over the index. The Lender executed a commercial security agreement. With this agreement, the Lender is entitled to a security interest in the Company's inventory, chattel paper, accounts receivable and general intangibles. In August 2013, the line of credit was converted into a note, and the Company is no longer able to borrow any additional funds. Under the new terms of the note, the note has a face value of $250,000 that matures on September 1, 2018, with an interest rate of prime plus 1.960%, and as of the date of the note, the interest rate was 5.21%. The note has minimum monthly payments of $4,745 which started on October 1, 2013. The balance outstanding on this note and line of credit as of October 31, 2014 and July 31, 2014, was $201,231 and $208,901, respectively. As of October 31, 2014, the Company has paid $48,769 in principal payments. The Lender allowed the Company to absorb a prior $50,000 note into the note, not affecting the repayment date. The Company did incur issuance costs of $4,037, which were expensed upon occurrence.

Loans payable consisted of the following as of October 31, 2014 and July 31, 2014:

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In 1998, the Company entered into a line of credit with Zions Bank ("Lender") with a credit limit of $40,000. The line bears a compounding per annum fixed interest rate of 5.25%. As of October 31, 2014 and July 31, 2014, the Company owed $29,887 and $33,098 in principal, respectively. The Lender executed a commercial security agreement. With this agreement, the Lender is entitled to a security interest in the Company's inventory, chattel paper, accounts receivable and general intangibles. The Company did incur a setup fee, which has been fully amortized. There is no term limit on the line and the Company is allowed to draw up to its dollar limit.

NOTE 9 – CONVERTIBLE NOTES PAYABLE AND LOAN PAYABLE

Convertible notes payable consisted of the following as of October 31, 2014 and July 31, 2014, respectively:

On September 27, 2013, the Company issued a convertible note to an unrelated party for $250,000 that matures in September 27, 2015. The note bears an interest rate of 10% per annum with a floor of $.005 per share, and principal is convertible at any time after September 27, 2013 in part or in whole into shares of the Company's common stock using the average closing prices for five trading days directly preceding the conversion date. Interest is not convertible and is due upon conversion or at maturity date.

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On October 18, 2013, the Company issued a convertible note to an unrelated party for $125,000 that matures in October 18, 2015. The note bears an interest rate of 10% per annum with a floor of $.005 per share, and principal is convertible at any time after October 18, 2013 in part or in whole into shares of the Company's common stock using the average closing prices for five trading days directly preceding the conversion date. Interest is not convertible and is due upon conversion or at the maturity date.

On November 22, 2013, the Company issued a convertible note to an unrelated party for $150,000 that matures in November 22, 2015. The note bears an interest rate of 10% per annum with a floor of $.005 per share, and principal is convertible at any time after November 22, 2013 in part or in whole into shares of the Company's common stock using the average closing prices for five trading days directly preceding the conversion date. Interest is not convertible and is due upon conversion or at the maturity date.

On January 14, 2014, the Company entered into a convertible promissory note with Asher Enterprises, Inc. ("Asher") a Delaware corporation for an 8% convertible promissory note with an aggregate principal amount of $78,500 which together with any unpaid accrued interest is due on October 17, 2014. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder's option 180 days from inception at a variable conversion price calculated as 58% of the Market Price, which means the average of the lowest three Trading Prices (defined as the closing bid prices) during the ten trading day period ending on the last complete trading day prior to the conversion date with a floor of $.00005 as stated in the conversion feature. In January 2014, the Company received cash in the amount of $58,600, with the remaining $19,900 being used for legal and accounting fees. The Company analyzed the note on the issuance date on January 14, 2014. The Company determined that the variable conversion price and the floor exceeding the authorized number of shares results in the need for bifurcation into a separate derivative liability valued at fair market value. On January 14, 2014, the Company estimated the fair market value of the derivative liability associated with the bifurcated conversion feature to be $87,968 and a discount on the note of $78,500.

On March 19, 2014, the Company entered into a convertible promissory note with KBM Worldwide, Inc. ("KBM") a New York corporation for an 8% convertible promissory note with an aggregate principal amount of $53,000 which together with any unpaid accrued interest is due on December 26, 2014. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder's option 180 days from inception at a variable conversion price calculated as 58% of the Market Price, which means the average of the lowest three Trading Prices (defined as the closing bid prices) during the three trading day period ending on the last complete trading day prior to the conversion date with a floor of $.00005 as stated in the conversion feature. In March 2014, the Company received cash in the amount of $24,487, with the remaining $6,898 being used for legal and accounting fees. The Company analyzed the note on the issuance date on January 14, 2014. The Company determined that the variable conversion price and the floor exceeding the authorized number of shares results in the need for bifurcation into a separate derivative liability valued at fair market value. On March 19, 2014, the Company estimated the fair market value of the derivative liability associated with the bifurcated conversion feature to be $47,806 and a discount on the note of $49,010.

On May 15, 2014, the Company entered into a convertible promissory note with KBM Worldwide, Inc. ("KBM") a New York corporation for an 8% convertible promissory note with an aggregate principal amount of $63,000 which together with any unpaid accrued interest is due on February 2, 2015. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder's option 180 days from inception at a variable conversion price calculated as 58% of the Market Price, which means the average of the lowest three Trading Prices (defined as the closing bid prices) during the three trading day period ending on the last complete trading day prior to the conversion date with a floor of $.00005 as stated in the conversion feature. In May 2014, the Company received cash in the amount of $42,500, with the remaining $17,500 being used for legal fees. The Company analyzed the note on the issuance date on January 14, 2014. The Company determined that the variable conversion price and the floor exceeding the authorized number of shares results in the need for bifurcation into a separate derivative liability valued at fair market value. On May 15, 2014, the Company estimated the fair market value of the derivative liability associated with the bifurcated conversion feature to be $56,591 and a discount on the note of $56,591.

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As of October 31, 2014 and July 31, 2014, the Company estimated the fair market value of the derivative liability to be $139,409 and $177,907, with a change in fair value of $0, respectively. For the three months ended October 31, 2014 and 2013, the Company recorded $71,122 and $0 in amortization related to the discount on the note to interest expense and $4,016 and $0 in interest related to the three conversions of the Asher note. See note 12.

NOTE 11 – STOCK TRANSACTIONS

As of October  31, 2014 and July 31, 2014, the Company has 750,000,000 shares of common stock authorized with a par value of $.001, and 54,023,354 and 51,151,766 shares of common stock issued and outstanding, respectively.

During the three months ended October 31, 2014, the Company issued 607,554 shares of common stock as part of the Equity Purchase Agreement described below for cash for $37,990. The Company also issued 2,271,558 shares of common stock related to the three conversions of the Asher note for $42,000 in principal. The first conversion was for $15,000 of principal for 583,658 shares of the Company's common stock at $0.0257 per share, an additional $15,000 of principal was converted into 810,811 shares of the Company's common stock at $0.0185 per share, and the final conversion was for an additional $12,000 of principal into 869,565 shares of the Company's common stock at $0.0138 per share.

During the three months ended October 31, 2013, the Company did not issue any shares of common stock.

The Company entered into an equity purchase agreement with Southridge Partners II, LP ("Southridge") on December 9, 2013. Pursuant to the Equity Purchase Agreement, Southridge committed to purchase up to $10,000,000 of the Company's common stock, over a period of time terminating on the earlier of: (i) 24 months from the effective date of a registration statement to be filed in connection therewith or (ii) the date on which Southridge has purchased shares of common stock pursuant to this agreement for an aggregate maximum purchase price of $10,000,000; such commitment is subject to certain conditions. The purchase price to be paid by Southridge will be 90% of the average of the lowest three (3) daily volume weighted average prices for the Company's common stock for the ten (10) trading days immediately following clearing of the Estimated Put Shares (defined below) (such purchase price the "Put Purchase Price") under the Equity Purchase Agreement.

The Company will deliver to Southridge, simultaneously with delivery of a Put Notice, a number of Shares equal to 125% of the Investment Amount divided by the closing price of the Company's common stock on the day preceding the Put Notice date (the "Estimated Put Shares"). The actual number of Shares purchased by Southridge for the Investment Amount shall then be calculated by dividing the Investment Amount by the Put Purchase Price. Any excess Estimated Put Shares shall then be returned to the Company.

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The number of Shares sold to Southridge at any time shall not exceed the number of such shares that, when aggregated with all other shares of common stock of the Company then beneficially owned by Southridge, would result in Southridge owning more than 9.99% of all of the Company's common stock then outstanding. Also as part of the equity purchase agreement, the Company issued a promissory note to Southridge for $50,000, with 0% interest. This note matures on May 31, 2014 and is not convertible into common stock. Finally, as part of the equity purchase agreement, Southridge is prohibited from executing any short sales of the Company's common stock during the term of the equity purchase agreement.

The Company will not be entitled to put shares to Southridge:

 

·    unless there is an effective registration statement under the Securities Act to cover the resale of the shares by Southridge;
·    unless the common stock continues to be quoted on the OTC Bulletin Board and has not been suspended from trading;
·    if an injunction shall have been issued and remain in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the shares to Southridge;
·    if the Company has not complied with their obligations and are otherwise in breach of or in default under, the Equity Purchase Agreement, our registration rights agreement (the "Registration Rights Agreement") with Southridge or any other agreement executed in connection therewith with Southridge;
·    since the date of the filing of the Company's most recent filing with the Securities and Exchange Commission no event that had or is reasonably likely to have a Material Adverse Effect (as defined in the Equity Purchase Agreement) has occurred; and
·    to the extent that such shares would cause Southridge's beneficial ownership to exceed 9.99% of our outstanding shares.

The Equity Purchase Agreement further provides that Southridge is entitled to customary indemnification from the Company for any losses or liabilities it suffers as a result of any breach of any provisions of the Equity Purchase Agreement or the Registration Rights Agreement, or as a result of any lawsuit brought by a third-party arising out of or resulting from Southridge's execution, delivery, performance or enforcement of the Equity Purchase Agreement or the Registration Rights Agreement or from material misstatements or omissions in the prospectus accompanying the registration statement for the resale of the shares issued to Southridge.

As of October 31, 2014, 2,107,554 shares have been issued under the Equity Purchase Agreement.

NOTE 12 – DERIVATIVE LIABILITY

FASB ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FASB ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, with the first two inputs considered observable and the last input considered unobservable, that may be used to measure fair value as follows:

 

·	Level one -- Quoted market prices in active markets for identical assets or liabilities;

·	Level two – Inputs, other than level one inputs, that are either directly or indirectly observable; and

 

·	Level three -- Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

 

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Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company has one liability measured at fair value on a recurring basis, which consists of a derivative liability on certain convertible notes payable (see note 11). As of October 31, 2014 this derivative liability had an estimated fair value of $139,409. The Company has no assets that are measured at fair value on a recurring basis.

The following table presents information about our derivative liability, which was our only financial instrument measured at fair value on a recurring basis using significant inputs other than level one inputs that are either directly or indirectly observable (Level 2) as of October 31, 2014:

The fair value of this derivative liability was calculated using the multinomial lattice models that value the derivative liability within the notes based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes. The features in the notes that were analyzed and incorporated into the model included the conversion feature with the reset provisions; redemption provisions; and the default provisions. Assumptions used to calculate the fair value of the derivative liability were as follows:

In addition to the assumptions above, the Company also takes into consideration whether or not the Company would participate in another round of financing and if that financing is registered or not and what that stock price would be for the financing at that time. The Company will continue to adjust the derivative liability for changes in fair value until the notes matured on October 14, 2014, and mature on December 26, 2014 and February 2, 2015.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following summary of our results of operations should be read in conjunction with our financial statements for the three-month periods ended October 31, 2014 and 2013.

 

1)

Product sales: 98.97% and 98.89% for the three months ended October 31, 2014 and 2013, respectively; and

2)	Nutritional Blood Analysis (NBA) services: 1.03% and 1.11% for the three months ended October 31, 2014 and 2013, respectively.

 

Working Capital
		October 31,				July 31,
		2014				2014
Current Assets		$	466,578			$	531,825
Current Liabilities		$	1,556,381			$	1,235,919
Working Capital (deficit)		$	(1,089,803	)		$	(704,094	)

 

Cash Flows
		The Three Months Ended
		October 31,
		2014				2013
Net (Loss)		$	(39,156	)		$	(228,696	)
Net Cash Provided by (Used in) Operating Activities		$	(20,714	)		$	(72,799	)
Net Cash Provided by (Used in) Investing Activities		$	-			$	-
Net Cash From Financing Activities		$	24,563			$	370,670
Increase in Cash during the Period		$	3,849			$	297,871
Cash and Cash Equivalents, End of Period		$	83,084			$	309,000

 

 

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On November 14, 2014, Asher converted an additional $15,000 of principal related to the January 14, 2014, convertible note, into 931,677 shares of the Company's common stock at $0.0161 per share. The remaining principal balance due after the conversion was $21,500.

On December 8, 2014, Asher converted an additional $12,500 of principal related to the January 14, 2014, convertible note, into 1,041,667 shares of the Company's common stock at $0.012 per share. The remaining principal balance due after the conversion was $9,000.

On December 2, 2014, the Company entered into a collateralized secured convertible promissory note with LG Capital Funding, LLC ("LG"), a New York limited liability company, for an 8% convertible promissory note with an aggregate principal amount of $73,500, which together with any unpaid accrued interest is due on December 2, 2015. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder's option 180 days from inception at a variable conversion price calculated as 58% of the average of the lowest three closing bid prices during the ten trading day period ending on the conversion date. This note was funded on December 10, 2014, when the Company received cash in the amount of $70,000, with the remaining $3,500 being used for LG's legal and other origination expenses.  On December 2, 2014, the Company also entered into a second $73,500 convertible promissory note with LG on the same terms as the first note and due on December 2, 2015, which has not yet been funded.  This note is collateralized by a secured promissory note issued by LG to the Company for $73,500, due on August 2, 2015, and accruing interest at the rate of 8% per annum.

On December 2, 2014, the Company entered into a collateralized secured convertible promissory note with Typenex Co-Investment, LLC ("Typenex"), a Utah limited liability company, for an 10% convertible promissory note with an aggregate principal amount of $224,000, of which the company is to assume $20,000 in original interest discount ("OID") and legal fees and other expenses of Typenex totaling $4,000, which together with any unpaid accrued interest is due on September 10, 2016. The note is to be issued in tranches with an initial tranche of $59,000, of which the company received $50,000 on December 10, 2014, with the remaining $4,000 being used for legal and other expenses of Typenex and the Company assuming $5,000 in OID. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at a variable conversion price calculated as 58% of the average of the lowest three closing bid prices during the ten trading day period ending on the last complete trading day prior to the conversion date. The remaining three tranches of $55,000 of funding to the Company under the note will consist of $50,000 in principal and the $5,000 in OID, which have not yet been funded, and shall correspond to three $50,000 promissory notes issued by Typenex in favor of the Company, accruing interest at 8% per annum and maturing on September 2, 2016.

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On December 12, 2014, the Company settled its related party note payable in the amount of $35,036 with a Company director in exchange for $30,000 cash, and the settlement released the Company from all obligations to pay royalty payments in connection with sales of a product line.

Our financial statements are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates, assumptions, judgments, and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk, and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

Our significant accounting policies are summarized in Note 2 of our financial statements included in the Company's Current Reports on Form 10-K filed on November 12, 2014.  While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our results of operations, financial position, or liquidity for the periods presented in this report.

The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on its results of operations, financial condition, or cash flows, based on current information.

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Our revenue is derived from the service revenue from Nutritional Blood Analysis, sale of retail products, and revenue derived from educational services.

The Company's revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition ("SAB 104"), and other applicable revenue recognition guidance under US GAAP. Sales revenue is recognized for our retail and wholesale customers when: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed or determinable, (iii) title and risk of loss have transferred, and (iv) collectibility is reasonably assured — generally when products are shipped to the customer and services are rendered, except in situations in which title passes upon receipt of the products by the customer. In this case, revenues are recognized upon notification that customer receipt has occurred. The Company accrues an estimated amount for sales returns and allowances related to defective or returned products at the time of sale based on its ability to estimate sales returns and allowances using historical information. Shipping and handling fees and related freight costs and supplies associated with shipping products to customers are included as a component of cost of sales. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

The Company also recognizes revenues from the distribution of its product through trade partners.  Related revenues consist of product costs, distribution fees, testing and labeling costs, as well as any associated administrative fees.  The Company recognizes these revenues after the product has been shipped from the outsource manufacturer to the trade partner.  The Company has contractual obligation to pay the outsource manufacturers, and as a principal in these arrangements the Company includes the total product price as revenue in accordance with applicable accounting guidance.   The Company has separately negotiated contractual relationships with its trade partners, and under contracts with these trade partners the Company assumes the credit risk of product produced by the outsource manufacturer and dispensed to the trade partner. 

We have no off-balance sheet arrangements.

Management has considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements. The Company's management believes that these recent pronouncements will not have a material effect on the Company's consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As the Company is a "smaller reporting company," this item is not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

The Securities and Exchange Commission defines the term "disclosure controls and procedures" to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer's management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to the chief executive and interim chief financial officer to allow timely decisions regarding disclosure.

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As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are not effective as of such date.  The Chief Executive Officer and Chief Financial Officer have determined that the Company continues to have the following deficiencies which represent a material weakness:

 

1.

A lack of independent directors;

2.

Lack of in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions;

3.

Insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting;

4.

Insufficient written policies and procedures over accounting transaction processing and period end financial disclosure and reporting processes.

To remediate our internal control weaknesses, management intends to implement the following measures:

▪

The Company will add a sufficient number of independent directors to the board and form an Audit Committee.

▪

The Company will add sufficient accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements.

▪

The Company will hire staff technically proficient at applying U.S. GAAP to financial transactions and reporting.

▪

Upon the hiring of additional accounting personnel, the Company will develop and maintain adequate written accounting policies and procedures.

The additional hiring is wholly contingent upon the Company's ability to increase its cash flow as a result of its operations. Management hopes to have sufficient funds in the coming fiscal year to begin to institute the above measures but provides no assurances that it will be able to do so.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred in the quarter ending October 31, 2014, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Company's management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.  Further, the design of the control system must reflect that there are resource constraints and that the benefits 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.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls.  The design of any system of controls is based in part on 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.  Projections of any evaluation of controls effectiveness to future periods are subject to risks.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

 

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PART II – OTHER INFORMATION

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not aware of any such pending or threatened legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

On June 17, 2013, the Company's subsidiary, Health Education Corporation ("Health Education"), served a complaint on Ignite Naturals, Inc., a customer ("Ignite"), for breach of contract and failure to pay amounts owed by Ignite for its purchase orders with Health Education, and seeking general damages of $146,352.76.  Ignite subsequently removed the case from Utah state court to federal district court, and filed an Answer and Counterclaim, which the Company answered on September 9, 2013.  Ignite's counsel subsequently withdrew from the case, the court ordered Defendant to have new counsel appear within 21 days, and on November 18, 2013, the court entered an order ordering Defendant to, within 14 days of the order, show cause why sanctions against Defendant should not be imposed for failure to appoint counsel.  On December 10, 2013, for Defendant's failure to appear at the initial pretrial conference or show cause why sanctions against Defendant were not appropriate, the court entered an order imposing terminating sanctions on Defendant and directing the court clerk to enter judgment in favor of Health Education for $146,352.76.  On December 12, 2013, the court entered judgment in favor of Health Education against Ignite for $146,352.76.

 

On November 22, 2013, the Company, through counsel, sent a demand to Zions Bank ("Zions") in connection with the three wires sent by Zions pursuant to oral instructions received from the person fraudulently identifying himself as Dr. Gibbs via telephone (totaling $208,920), for an immediate credit to the Company's bank account of all unrecovered funds from those wires (totaling $54,028).  On January 7, 2014, the Company settled with Zions in full, and Zions paid the Company $27,014.

 

On March 20, 2014, the Company's subsidiary, Health Education Corporation ("Health Education"), was served a copy of a complaint filed by EpicEra Incorporated ("Epic") in the Utah Third Judicial District Court for the return of a $100,000 deposit paid by Epic to Health Education for the supply of nutritional products. On April 16, 2014, Health Education answered the Complaint and filed a counterclaim against Epic and third-party claims against eCosway USA, Inc. ("eCosway," which is Epic's owner), and its principals, for breach of a non-disclosure and non-circumvention agreement, unjust enrichment, fraud, and fraudulent nondisclosure. Health Education's claims alleged that (1) eCosway and its principals have defrauded Health Education and engaged in a scheme of corporate espionage to misappropriate Health Education's proprietary information and trade secrets to launch their new multilevel marketing company, Epic; (2) under the fraudulent guise of partnering with Health Education to have Health Education formulate and produce the health products to be sold by Epic's distributors, eCosway and its principals signed a non-disclosure and non-circumvention agreement that they had no intention of honoring in order to gain access to Health Education's proprietary information so that they could steal that information and use it for their own benefit; (3) Health Education relied upon the non-disclosure and non-circumvention agreement and misrepresentations of Epic, eCosway, and its principals, and disclosed the proprietary information and formulations, which Epic then appropriated as its own. Health Education's claims request general damages as well as punitive damages. The case is currently in the discovery phase.

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During the three months ended October 31, 2014, the Company issued 2,271,558 shares of common stock to Asher Enterprises, Inc. ("Asher") related to three conversions by Asher of the convertible promissory note dated January 14, 2014, for a total of $42,000 in principal. The first conversion was for $15,000 of principal for 583,658 shares of the Company's common stock at $0.0257 per share, an additional $15,000 of principal was converted into 810,811 shares of the Company's common stock at $0.0185 per share, and the final conversion was for an additional $12,000 of principal into 869,565 shares of the Company's common stock at $0.0138 per share.  The issuances of these shares were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act as there was no general solicitation, and the transactions did not involve a public offering.

 

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

None.

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Exhibit No.		Description
2.1		Share Exchange Agreement with Health Education and the Shareholders of Health Education dated September 13, 2013 (incorporated by reference to our Form 8-K filed on September 24, 2013)
3.1		Articles of Incorporation (incorporated by reference to our Registration Statement on Form S-1 filed on December 19, 2008)
3.2		Bylaws (incorporated by reference to our Registration Statement on Form S-1 filed on December 19, 2008)
3.3		Articles of Merger filed with the Nevada Secretary of State on September 9, 2013 with an effective date of September 19, 2013 (incorporated by reference to our Current Report on Form 8-K filed on September 19, 2013)
10.1		License Agreement with Tracy Gibbs for US Patent Number 7,235,390 B2, dated June 14, 2007  (incorporated by reference to our Amendment No. 2 to Current Report on Form 8-K/A filed on December 12, 2013)
10.2		Employment Agreement with Nathan Jenson, dated May 14, 2012 (incorporated by reference to our Amendment No. 2 to Current Report on Form 8-K/A filed on December 12, 2013)
10.3		Office Lease Agreement with Unity Investments, LLC (incorporated by reference to our Amendment No. 2 to Current Report on Form 8-K/A filed on December 12, 2013)
10.4		License and Distribution Agreement with Nutriband USA, LLC, dated March 10, 2013 (incorporated by reference to our Amendment No. 2 to Current Report on Form 8-K/A filed on December 12, 2013)
10.5		License Agreement with Gennesar Nutraceuticals, LLC d/b/a Genesar Nutraceuticles (incorporated by reference to our Current Report on Form 8-K filed on November 26, 2013)
10.6		Amended License Agreement with Gennesar Nutraceuticals, LLC d/b/a Genesar Nutraceuticles (incorporated by reference to our Annual Report on Form 10-K filed on November 13, 2014)
16.1		Letter from Sadler, Gibb & Associates, L.L.C., dated September 25, 2013 regarding change in registered public accounting firm (incorporated by reference to our Amendment No. 1 to Current Report on Form 8-K/A filed on September 27, 2013)
16.2		Letter from Mantyla McReynolds, LLC, dated May 22, 2014, regarding change in registered public accounting firm (incorporated by reference to our Current Report on Form 8-K filed on May 23, 2014)
21		List of Subsidiaries: Health Education Corporation dba Nutranomics, a Utah company
31.1 (1)		Certification of Principal Executive Officer required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 (1)		Certification of Principal Accounting Officer required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 (1)		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 Of 18 U.S.C. 63
32.2 (1)		Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 Of 18 U.S.C. 63
101.SCH (1)		XBRL Taxonomy Extension Schema Document
101.CAL (1)		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF (1)		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB (1)		XBRL Taxonomy Extension Label Linkbase Document
101.PRE (1)		XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)      Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

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