NUTRANOMICS, INC. - Quarter Report: 2015 January (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 January 31, 2015
☐	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

☒

 

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ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

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

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HEALTH EDUCATION CORPORATION
d.b.a NUTRANOMICS, INC.
Consolidated Statements of Stockholders' Deficit
			-																			Total
		Common Stock								Additional Paid				Accumulated				Accumulated Other				Stockholders'
		Shares				Amount				in Capital				Deficit				Comprehensive Income				(Deficit)
Balance, July 31, 2013			25,005,544			$	25,006			$	2,271,519			$	(2,585,391	)		$	-			$	(288,866	)
Common stock issued for merger			21,500,000				21,500				(20,100	)			-								1,400
Common stock issued for cash			1,500,000				1,500				91,912				-								93,412
Common stock issued for services			2,429,555				2,430				805,422				-								807,852
Common stock issued for prepaid services			716,667				717				189,158				-								189,875
Net loss for the year ended July 31, 2014			-				-				-				(2,172,242	)							(2,172,242	)
Balance, July 31, 2014			51,151,766			$	51,153			$	3,337,911			$	(4,757,633	)		$	-			$	(1,368,569	)
Common stock issued for cash			600,000				600				37,390				-								37,990
Common Stock issued for acquisition			47,290,201				47,291				567,481				-								614,772
Common stock issued for services			43,425,743				43,425				521,110				-								564,535
Common stock for conversion of convertible note principal			9,410,107				9,410				92,229				-								101,639
Conversion of derivative liability			-				-				92,935				-								92,935
Other Comprehensive Income: Foreign Currency Items			-				-				-				-				(108	)			(108	)
Net loss for the period ended January 31, 2015			-				-				-				(983,163	)			-				(983,163	)
Balance, January 31, 2015			151,877,817			$	151,879			$	4,649,056			$	(5,740,796	)		$	(108	)		$	(939,969	)

 

 

HEALTH EDUCATION CORPORATION

d.b.a NUTRANOMICS, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

January 31, 2015

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

The condensed consolidated unaudited interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company's annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the July 31, 2014 audited consolidated financial statements and the accompanying notes thereto. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company's consolidated condensed financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

These condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.

 

Health Education Corporation d.b.a. NutraNomics, Inc., (the "Company") was incorporated under the laws of the State of Delaware on February 14, 1996, and later reincorporated under the laws of the State of Utah on January 5, 1998. The Company was originally organized to provide education services, books, cassette tapes and public presentations. The Company utilized several revenue generating tools in order to accomplish this goal including Live Blood Analysis, iridology, bone density screening and other self-help methods. In 1998, the Company changed its incorporation to the State of Utah, the primary place of business. In 2001, the Company created its own line of nutritional products that quickly became its leading revenue source. The Company filed for the d.b.a. of NutraNomics, Inc., in order to fully prepare and utilize the brand name for expansion. In retail outlets and to its clientele, the Company is known as NutraNomics, Inc. The Company sells its own brand of supplements in 16 countries direct to the public. The Company also performs research and development services and outsource manufacturing for third party entities. Beyond its sales in both the United States and Canada, the Company maintains sales representatives in Taiwan, Japan, Singapore, Philippines, Malaysia and South Korea. The Company maintains multiple different trademarks, trade names and patents.

Merger

On September 13, 2013, Buka Ventures, Inc., a Nevada corporation ("Buka") and Health Education Corporation dba. Nutranomics, Inc., a Utah corporation ("Nutranomics"), executed and delivered a Share Exchange Agreement (the "Share Agreement") and all required or necessary documentation to complete a merger (collectively, the "Transaction Documents"), whereby Buka became the parent company and Nutranomics became the wholly-owned subsidiary on the closing of the Share Agreement. Prior to the closing of this transaction and pursuant to a certain Share Exchange Agreement dated September 13, 2013, Buka canceled 25,000,000 of its 46,500,000 issued and outstanding common shares and simultaneously issued 25,005,544 shares of its common stock in exchange for 8,994,800 shares of Nutranomics common stock. The merger has been treated as a reverse acquisition and a recapitalization of a public company. Accordingly, the historic financial statements of the Company are the historic financial statements of Nutranomics, which was incorporated on January 5, 1998.

On January 26, 2015, Nutranomics, Inc. (the "Company") entered into a Share Exchange Agreement with Nutriband Ltd., an Irish private limited company ("Nutriband"), and its shareholders to acquire 100% of Nutriband in exchange for (1) the issuance of 3,172,554 shares of the Company's common stock to Nutriband's shareholder, Gareth Sheridan, and (2) the payment of a perpetual 10% royalty on gross global sales of all Nutriband products to the Nutriband shareholders.  This was a small immaterial subsidiary addition to the Company.

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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 six months ended January 31, 2015 and 2014, the potentially dilutive shares are anti-dilutive and are thus not added into the loss per share calculations. As of January 31, 2015, there were 77,732,923 anti-dilutive shares related to convertible notes based on their terms and conditions with none related to warrants.

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 January 31, 2015, 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 Company has considered the guidance regarding Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ASU 205-40 issued on Aug 28, 2014 and effective December 15, 2016 — that will explicitly require management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances.

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.

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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 six months ended January 31, 2015 and 2014, 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 $233,259 and $338,263 as of January 31, 2015 and July 31, 2014, respectively.

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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, which lease was renewed on December 15, 2014, for 2 years. Pursuant to the lease, the rent for the six months ended January 31, 2015 and 2014, totaled $24,300 and $24,040, 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 Company terminated two subleased rooms in September 2013 and terminated the remaining sublease room in October 2013. The monthly rent received on the sublease agreements, for the six months ended January 31, 2015 and 2014 totaled $0 and $1,850, 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 $2,058 and $2,189 for the six months ended January 31, 2015 and 2014, respectively.

The future minimum lease payments required under the operating leases as of January 31, 2015, 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, with an initial maturity date of December 31, 2014, and relating to which the Company agreed to pay royalty payments in connection with sales of a certain product line. As of July 31, 2014, the balance on the related party note payable was $36,608.  On December 12, 2014, the Company settled the related party note payable in the amount of $35,036 with the Company director in exchange for $30,000 cash.

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NOTE 6 – RELATED PARTY PAYABLE

Related party payables consist of payments made by a director through credit cards and use of a personal line of credit used to pay expenses on behalf of the Company. During the six months ended January 31, 2015 and 2014, the director lent $0 and $0, and the Company made payments of 2,954 and $1,603, respectively, to reimburse the director. As of January 31, 2015 and July 31, 2014, the Company owed a total of $18,482 and $22,911 in related party payables to the director.

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 January 31, 2015 and July 31, 2014, was $189,618 and $208,901, respectively. As of January 31, 2015, the Company has made $60,382 in principal repayments. 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 January 31, 2015 and July 31, 2014:

Loan Payable
	January 31,				July 31,
	2015				2014
$250,000 face value, converted from a LOC on August 28, 2013, interest rate of 5.21%, matures on September 1, 2018.		$	189,618			$	208,901
$50,000 face value, issued on December 9, 2013, with no interest rate, matured and was paid in full on May 31, 2014.			-				-
Total Loan payable			189,618				208,901
Less current portion			52,873				51,071
Loan payable, long-term		$	136,745			$	157,830

 

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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 January 31, 2015 and July 31, 2014, the Company owed $38,764 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 January 31, 2015 and July 31, 2014, respectively:

 

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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.

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 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.

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 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 2, 2014, the Company entered into a convertible promissory note with JMJ Financial, a Nevada sole proprietorship ("JMJ"), with a face amount of $350,000, of which the company is to assume $35,000 in original interest discount ("OID"), which together with any unpaid accrued interest is due on Dec 2, 2016.  The note is to be funded by JMJ at its discretion, and the initial tranche was funded on December 16, 2014, when the Company received cash in the amount of $55,000. The note balance funded (plus a pro rata portion of the OID) together with any unpaid accrued interest is convertible into shares of common stock at a variable conversion price calculated as 65% of the average of the lowest trade price during a 25-day period ending on the last complete trading day prior to the conversion date.

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 23, 2014, Asher converted an additional $12,500 of principal related to the January 14, 2014, convertible note, into 1,686,111 shares of the Company's common stock at $0.0072 per share. The remaining principal balance due after the conversion was $0.

On January 20, 2015, KBM converted $5,000 of principal related to the March 19, 2014, convertible note, into 892,857 shares of the Company's common stock at $0.0056 per share. The remaining principal balance due after the conversion was $48,000.

On January 26, 2015, KBM converted $15,000 of principal related to the March 19, 2014, convertible note, into 2,586,207 shares of the Company's common stock at $0.0140 per share. The remaining principal balance due after the conversion was $33,000.

As of January 31, 2015 and July 31, 2014, the Company estimated the fair market value of the derivative liability to be $273,084 and $177,907, with a change in fair value of $37,815, respectively. For the six months ended January 31, 2015 and 2014, the Company recorded $156,939 and $0 in amortization related to the discounts on the notes to interest expense and $7,158 and $0 in interest related to the six conversions of the Asher and KBM notes. See note 12. For the six months ended January 31, 2014 and 2015 total interest expense increased from $38,901 to $281,000, an increase of 622.35% totaling $242,099. The increase is due to the Company taking out five convertible notes in the current six month period.

 

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NOTE 11 – STOCK TRANSACTIONS

As of January  31, 2015 and July 31, 2014, the Company has 750,000,000 shares of common stock authorized with a par value of $.001, and 151,877,817 and 51,151,766 shares of common stock issued and outstanding, respectively.

During the six months ended January 31, 2015, the Company issued 600,000 shares of common stock as part of the Equity Purchase Agreement described below for cash for $37,990.

During the six month period ended January 31, 2015, the Company issued 9,410,107 shares of common stock related to convertible notes.

The Asher convertible note issued January 14, 2014, for $78,500 in total principal was fully converted into common stock. The first conversion, on September 24, 2014, converted $15,000 of principal into 583,658 shares of the Company's common stock at $0.0257 per share. The second conversion, on October 2, 2014, converted an additional $15,000 of principal into 810,811 shares of the Company's common stock at $0.0185 per share. The third conversion, on October 9, 2014, converted an additional $12,000 of principal into 869,565 shares of the Company's common stock at $0.0138 per share. The fourth conversion, on November 14, 2014, converted an additional $15,000 of principal into 931,677 shares of the Company's common stock at $0.0521 per share. The fifth conversion, on December 12, 2014, converted an additional $12,500 of principal into 1,041,667 shares of the Company's common stock at $0.012 per share. The sixth conversion, on December 23, 2014, converted an additional $9,000 of principal plus $3,140 in accrued interest into 1,686,111 shares of the Company's common stock at $0.0072 per share. The remaining principal balance due after the December conversion was $0.

The KBM note issued on March 19, 2014, for $53,000 in principal had two principal conversions during the six months ended January 31, 2015, for a total of $20,000. The first conversion on January 20, 2015, converted $5,000 of principal into 892,857 shares of the Company's common stock at $0.0056 per share. The second conversion on January 26, 2015, converted an additional $15,000 in principal into 2,586,207 shares of the Company's common stock at $0.0058 per share.

During the six month period ended January 31, 2015, the Company also issued 90,715,944 shares of common stock for share-based compensation, acquisitions, and consulting services.

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On January 29, 2015, the Company completed the acquisitions of Nutriband and the AES™ intellectual property by issuing (1) 3,172,554 shares of the Company's common stock to the Nutriband seller, and (2) 44,117,647 shares of the Company's common stock to the family partnership of the Company's founder and director, Dr. Gibbs.

On January 29, 2015, the Company issued 5,000,000 shares of the Company's common stock to an entity controlled by Michael Doron, the Company's CEO and director, in consideration for Mr. Doron's previous appointment to the Company's Board of Directors.

On January 29, 2015, the Company issued 2,500,000 shares of the Company's common stock to an entity controlled by Mr. Doron in consideration for Mr. Doron's negotiation and closing of the Nutriband acquisition.

On January 29, 2015, the Company issued 30,157,463 shares of the Company's common stock to an entity controlled by Mr. Doron in satisfaction of the Company's obligations to Mr. Doron under the Company's employment contract with Mr. Doron.

 

On January 29, 2015, the Company issued 5,768,280 shares of the Company's common stock to an outside consultant for general business and marketing consulting services rendered during the quarter.

During the six months ended January 31, 2014, the Company issued 1,938,667 shares of Common Stock as share-based compensation to employees and non-employees valued at $715,680, based on the market price of the stock as of the applicable measurement date. The Company issued 416,667 shares of fully vested and nontransferable common stock as prepaid services over a six month period valued at $155,375 based on the market price as of the measurement date.

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.

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.

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

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 January 31, 2015, 2,107,554 shares had 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.

 

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 January 31, 2015 this derivative liability had an estimated fair value of $273,084. The Company has no assets that are measured at fair value on a recurring basis.

 

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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 January 31, 2015:

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 mature. The company had notes mature during the six months ended January 31, 2015 on October 14, 2014 and December 26, 2014.

NOTE 13 – INDUSTRY SEGMENT, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS

Geographic Sales Regions

We currently sell and distribute our products six geographic regions: North Asia, Greater China, South Asia/Pacific, Europe, Middle East, and Americas. The following table sets forth the revenue for each of the geographic regions for the three and six months ended January 31, 2015 and 2014:

 

		Three Months Ended January 31,
		2015								2014
Americas		$	144,706				53.31	%		$	293,025				67.60	%
North Asia			9,818				3.62				26,794				6.18
Greater China			18,442				6.79				21,555				4.97
South Asia/Pacific			97,324				35.85				92,109				21.25
Europe			1,169				0.43				-				-
		$	271,459				100.00	%		$	433,483				100.00	%

 

 

	Six Months Ended January 31,
	2015								2014
Americas		$	507,794				55.64	%		$	983,778				80.18	%
North Asia			11,838				1.30				26,794				2.18
Greater China			170,547				18.69				41,087				3.35
Middle East			46				0.01				-				-
South Asia/Pacific			221,302				24.25				175,320				14.29
Europe			1,169				0.13				-				-
		$	912,696				100.00	%		$	1,226,979				100.00	%

 

		Three Months Ended								Six Months Ended
		January 31,								January 31,
		2015				2014				2015				2014
Revenues		$	271,474			$	433,483			$	912,696			$	1,226,979
Cost of Sales		$	(162,459	)		$	(262,857	)		$	(462,327	)		$	(899,397	)
Operating Expenses		$	(879,186	)		$	(1,100,826	)		$	(1,169,105	)		$	(1,477,973	)
Loss on settlement of fraudulent activity		$	-			$	(37,300	)		$	-			$	(37,300	)
Other Income		$	3,989			$	-			$	-			$	-
Change in fair value		$	16,573			$	617			$	16,573	)		$	617
Interest Expense		$	(194,398	)		$	(30,396	)		$	(281,000	)		$	(38,901	)
Net Income (Loss)		$	(944,008	)		$	(997,279	)		$	(983,163	)		$	(1,225,975	)

1)	Product sales: 99.67% and 99.40%  and 99.18% and 99.07% for the three and six months ended January 31, 2015 and 2014, respectively; and
2)	Nutritional Blood Analysis (NBA) services: .33% and .60% and .82% and .93% for the three and six months ended January 31, 2015 and 2014, respectively.

Revenues derived from product sales totaled $270,577 and $905,238, or 99.67% and 99.40%, in the three and six months ended January 31, 2015, as compared to $430,879 and $1,215,590, or 99.40% and 99.07%, in the comparable period in 2014, respectively. The company also derived revenue from NBA services in the amount of $882 and $7,458, or 0.33% and 0.82%, in the three and six months ended January 31, 2015, as compared to $2,604 and $11,389, or 0.60% and 0.93%, in the three and six months ended January 31, 2014, respectively. The company did not derive revenues from educational services in 2015 or 2014.

Our cost of sales decreased from $262,857 and $899,397 in the three and six months ended January 31, 2014, to $162,459 and $462,357 in the three and six months ended January 31, 2015, a decrease of 38.19% and 48.60% totaling $100,398 and $437,070. The decrease directly relates to the decrease in product sales in 2015.

Interest expense increased from $30,396 and $38,901 in the three and six months ended January 31, 2014, to $194,398 and $281,000 in the three and six months ended January 31, 2015, an increase of 539.55% and 622.35% totaling $164,002 and $242,099, respectively. The increase is due to the Company taking out five convertible notes in the current six month period.

Our operating expenses for the three and six-month periods ended January 31, 2015 and 2014, are outlined in the table below:

 

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Working Capital
		January 31,				January 31,
		2015				2014
Current Assets		$	479,920			$	872,643
Current Liabilities		$	1,833,644			$	761,785
Working Capital (deficit)		$	(1,353,724	)		$	110,858

 

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The Company had current assets of $479,920 during the six months ended January 31, 2015, as compared to $872,643 in the comparable period in 2014; the decrease is mostly due to the Company reducing the amounts of Accounts Receivable through collections, lower inventory levels, and reduced prepaid expenses, and increased cash payments to vendors in the current period.  The Company had current liabilities of $1,833,644 during the six months ended January 31, 2015, as compared to $761,785 in the comparable period in 2014. The increase is mainly due to an increase in convertible notes, derivative liability, increase in unearned revenues, and an increase in accounts payable and accrued expenses due to a decrease in sales. The Company has incurred cumulative losses since inception of $4,757,634. As of January 31, 2014, the Company had a working capital deficit of ($1,353,724) due to recurring losses and borrowing to cover those losses during the six months ended January 31, 2015, as compared to the same period in 2014.

Cash from operating activities decreased to ($438,797) during the six months ended January 31, 2015, as compared to $(484,509) in the comparable period in 2014. The decrease was mostly due to changes in net income (loss), accounts receivable, inventory, unearned revenue, and accounts payable.

Cash from financing activities decreased to $470,728 during the six months ended January 31, 2015, as compared to $602,163 in the comparable period in 2014. The decrease was mostly due to decrease in borrowing of convertible notes coupled with a decrease in proceeds from related party notes payable and lines of credit.

Cash used in investing activities increased to $41,243 during the six months ended January 31, 2015, from $0 in the same period in 2014. The increase is due to acquiring Nutriband in 2015, while there were no acquisitions in 2014.

The future of the Company as an operating business will depend on its ability to obtain sufficient capital contributions and/or financing as may be required to sustain its operations. Management's plan to address these issues includes a continued exercise of cost controls to conserve cash and obtaining additional debt and/or equity financing.

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As we continue our business operations, we will continue to experience net negative cash flows from operations, pending receipt of significant revenues that generate a positive sales margin.

The Company expects that additional operating losses will occur until net margins gained from sales revenue is sufficient to offset the costs incurred for marketing, sales and product development. Until the Company has achieved a sales level sufficient to break even, it will not be self-sustaining or be competitive in the areas in which it intends to operate.

The Company's management team believes that its success depends on the Company's ability to raise additional capital and increase product sales. The Company is currently expanding into Southeast Asia and the European Union. By selling in multiple international markets, the Company believes that it will be able to successfully implement its business plan and achieve profitability.

As of January 31, 2015, the existing capital and anticipated funds from operations were not sufficient to sustain Company operations or the business plan over the next twelve months. We anticipate substantial increases in our cash requirements which will require additional capital to be generated from the sale of Common Stock, the sale of Preferred Stock, equipment financing, debt financing and bank borrowings, to the extent available, or other forms of financing to the extent necessary to augment our working capital. In the event we cannot obtain the necessary capital to pursue our strategic business plan, we may have to significantly curtail our operations. Failure to obtain additional financing would have a material adverse effect on our business operations.  There is no assurance that the Company will be able to obtain additional funding when needed, or that such funding, if available, can be obtained on terms acceptable to the Company.

Recent global events, as well as domestic economic factors, have limited the access of many companies to both debt and equity financing. As such, no assurance can be made that financing will be available or available on terms acceptable to the Company, and, if available, it may take the form of debt or equity. In either case, any financing will have a negative impact on our financial condition and may result in an immediate and substantial dilution to our existing stockholders.

Although the Company intends to engage in a subsequent equity offering of its securities to raise additional working capital for operations, the Company has no firm commitments for any additional equity funding at the present time. However, during the six months ended January 31, 2015, the Company obtained cash proceeds of $175,000 by issuing three convertible notes for $73,500, $59,000, and $65,000 in principal. Insufficient financial resources may require the Company to delay or eliminate all or some of its development, marketing and sales plans, which could have a material adverse effect on the Company's business, financial condition and results of operations. There is no certainty that the expenditures to be made by the Company will result in a profitable business proposed by the Company.

On February 9, 2015, KBM Worldwide, Inc. ("KBM") converted $11,455 of principal related to the March 19, 2014, convertible note, into 2,793,902 shares of the Company's common stock at $0.0041 per share. The remaining principal balance due after the conversion was $21,545.

On March 4, 2015, KBM converted an additional $9,055 of principal related to the March 19, 2014, convertible note, into 2,382,895 shares of the Company's common stock at $0.0038 per share. The remaining principal balance due after the conversion was $12,490.

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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 both of the Company's Current Reports on Form 8-K and Form 8-K/A filed on September 24, 2013 and December 12, 2013 respectively.  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 an effect on our results of operations, financial position or liquidity for the periods presented in this report.

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. As of July 31, 2013 and 2012, 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. 

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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 six months ended January 31, 2015, 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.

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.

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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