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EX-31 - RULE 13(A)-14(A)/15(D)-14(A) CERTIFICATION - Rainbow Coral Corp.ex_31-2.htm
EX-31 - RULE 13(A)-14(A)/15(D)-14(A) CERTIFICATION - Rainbow Coral Corp.ex_31-1.htm
EX-32 - SECTION 1350 CERTIFICATION - Rainbow Coral Corp.ex_32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(MARK ONE)


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2012


OR


[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE TRANSITION PERIOD FROM _________ TO _________


COMMISSION FILE NUMBER: 333-169554


RAINBOW CORAL CORP.

(Exact name of registrant as specified in its charter)


Florida

 

27-3247562

(State or other jurisdiction of

 

(I.R.S. Employer

Incorporation or organization)

 

Identification Number)

 

 

 

495 Grand Blvd., Suite 206

 

 

Miramar Beach, Florida

 

32550

(Address of principal executive offices)

 

(Zip Code)


Registrant’s telephone number, including area code: (850) 269-7230


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [   ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]  No [X]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


 

Large accelerated filer

[   ]

Accelerated filer

[   ]

 

Non-accelerated filer

[   ]

Smaller reporting company

[X]

 

(Do not check if smaller reporting company)

 

 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes [   ]  No [X]


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 11,407,328 shares of common stock are issued and outstanding as of February 15, 2013.




TABLE OF CONTENTS


 

 

 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Stockholders’ Equity (Deficit)

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

14

Item 4.

Controls and Procedures

14

 

 

 

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

15

Item 1A.

Risk Factors

15

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

Item 3.

Defaults Upon Senior Securities

15

Item 4.

Mine Safety Disclosures

16

Item 5.

Other Information

16

Item 6.

Exhibits

16


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


Certain statements in this report contain or may contain forward-looking statements. These statements, identified by words such as “plan”, “anticipate”, “believe”, “estimate”, “should”, “expect” and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward - looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to secure suitable financing to continue with our existing business or change our business and conclude a merger, acquisition or combination with a business prospect, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this report in its entirety, including but not limited to our financial statements and the notes thereto and the risks described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012. We advise you to carefully review the reports and documents we file from time to time with the Securities and Exchange Commission (the “SEC”), particularly our quarterly reports on Form 10-Q and our current reports on Form 8-K. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.


OTHER PERTINENT INFORMATION


When used in this report, the terms, “we,” the “Company,” “our,” and “us” refers to Rainbow Coral Corp. a Florida corporation.


- 2 -



RAINBOW CORAL CORP.

Consolidated Balance Sheets


 

 

December 31,
2012

 

March 31,
2012

 

 

 

(Unaudited)

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,075

 

$

20,219

 

Prepaid expenses

 

 

350

 

 

350

 

Inventory

 

 

29,020

 

 

28,253

 

Total current assets

 

 

46,445

 

 

48,822

 

 

 

 

 

 

 

 

 

Fixed assets, net of accumulated depreciation of $1,438 and $-, respectively

 

 

5,750

 

 

6,460

 

Goodwill

 

 

27,868

 

 

27,868

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

80,063

 

$

83,150

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

32,470

 

$

30,848

 

Advances payable

 

 

101,333

 

 

182,751

 

Total current liabilities

 

 

133,803

 

 

213,599

 

 

 

 

 

 

 

 

 

Convertible note payable, net of discount of $108,779

 

 

30,581

 

 

 

Note payable

 

 

1,686

 

 

21,476

 

Notes payable to related party

 

 

74,635

 

 

31,299

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

240,705

 

 

266,374

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ (DEFICIT)

 

 

 

 

 

 

 

Preferred Stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2012 and March 31, 2012.

 

 

 

 

 

Common Stock, $0.0001 par value; 250,000,000 shares authorized; 10,968,682 shares and 575,000 shares issued and outstanding at December 31, 2012 and March 31, 2012, respectively.

 

 

1,097

 

 

58

 

Additional paid-in capital

 

 

1,405,565

 

 

388,942

 

Accumulated Deficit

 

 

(1,567,304

)

 

(572,224

)

Total stockholders’ equity (deficit)

 

 

(160,642

)

 

(183,224

)

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)

 

$

80,063

 

$

83,150

 


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


- 3 -



RAINBOW CORAL CORP.

Consolidated Statements of Operations

(Unaudited)


 

 

Nine months ended
December 31,

 

Three months ended
December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

$

76,808

 

$

57,180

 

$

24,852

 

$

22,490

 

COST OF GOODS SOLD

 

 

52,569

 

 

37,213

 

 

24,912

 

 

11,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

24,239

 

 

19,967

 

 

(60

)

 

11,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

813,391

 

 

120,221

 

 

63,689

 

 

69,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

 

(789,152

)

 

(100,254

)

 

(63,749

)

 

(58,575

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(205,928

)

 

(1,156

)

 

(118,601

)

 

(425

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(995,080

)

$

(101,410

)

$

(182,350

)

$

(59,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE –
Basic and fully diluted

 

$

(0.18

)

$

(0.18

)

$

(0.02

)

$

(0.11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

 

5,392,082

 

 

550,000

 

 

9,442,595

 

 

550,000

 


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


- 4 -



RAINBOW CORAL CORP.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)


 

 

 

 

Additional

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, MARCH 31, 2012

 

575,000

 

$

58

 

$

388,942

 

$

(572,224

)

$

(183,224

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

80,000

 

 

8

 

 

541,992

 

 

 

 

542,000

 

Conversion of notes payable

 

10,313,598

 

 

1,031

 

 

174,105

 

 

 

 

175,136

 

Rounding as a result of reverse split

 

84

 

 

 

 

 

 

 

 

 

Discount on issuance of convertible notes payable

 

 

 

 

 

300,526

 

 

 

 

300,526

 

Net loss

 

 

 

 

 

 

 

(995,080

)

 

(995,080

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2012

 

10,968,682

 

$

1,097

 

$

1,405,565

 

$

(1,567,304

)

$

(461,168

)


On June 28, 2012, the Company effected a one-for-20 reverse stock split. All share and per share amounts have been retroactively restated to reflect the reverse stock split.


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


- 5 -



RAINBOW CORAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)


 

Nine months ended December 31,

 

 

2012

 

2011

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

$

(995,080

)

$

(101,410

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Stock based compensation

 

542,000

 

 

 

Amortization of discount on convertible notes payable

 

191,747

 

 

 

Depreciation

 

1,438

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Inventory

 

(767

)

 

(16,697

)

Prepaid expenses

 

 

 

(350

)

Accounts payable and accrued liabilities

 

1,622

 

 

20,823

 

Accrued interest payable

 

13,970

 

 

 

NET CASH (USED IN) OPERATING ACTIVITIES

 

(245,070

)

 

(97,634

)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Acquisition of Father Fish, net of cash acquired

 

 

 

6,229

 

Purchase of fixed assets

 

(728

)

 

(4,460

)

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

 

(728

)

 

1,769

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from issuance of stock

 

 

 

13,474

 

Proceeds from advances

 

219,108

 

 

88,236

 

Proceeds from issuance of loans to related parties

 

43,336

 

 

 

Repayments of notes payable to related parties

 

(19,790

)

 

(11,344

)

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

242,654

 

 

90,366

 

 

 

 

 

 

 

 

NET (DECREASE) IN CASH

 

(3,144

)

 

(5,499

)

CASH, at the beginning of the period

 

20,219

 

 

20,019

 

 

 

 

 

 

 

 

CASH, at the end of the period

$

17,075

 

$

14,520

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

$

 

$

 

Taxes

$

 

$

 

 

 

 

 

 

 

 

Noncash investing and financing transactions:

 

 

 

 

 

 

Acquisition of Father Fish for note payable

$

 

$

40,000

 

Refinance of advances into convertible notes payable

$

300,526

 

$

 

Discount on convertible notes payable

$

300,526

 

$

 

Issuance of common stock for convertible notes payable

$

175,136

 

$

 


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


- 6 -



RAINBOW CORAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012


NOTE 1. GENERAL ORGANIZATION AND BUSINESS


RAINBOW CORAL CORP. (the “Company”), a Florida corporation, was formed to build a coral farm facility to develop and propagate (or grow) live coral, independent of the oceans, as a future farm reserve against the decline of natural wild reefs. We intend to grow, harvest and distribute as many varieties of hard and soft sizes as possible of captive-bred corals that are attractive, to as many consumers as possible who can maintain them in a healthy ecosystem aquarium. We believe that coral and other marine aquarium livestock should be supplied by farms or captive breeders, rather than removed from the natural reefs. The additional uses for coral as a source of potential leading edge medical discoveries are an attractive opportunity for the Company’s coral farming activity. We believe that the world of bio-research is a natural continuation of our core coral propagation business. Accordingly on October 23, 2011, the Company formed a subsidiary, Rainbow Biosciences, LLC to look into the opportunities within the bioscience market. Rainbow Biosciences, LLC will continue to research opportunities into the bioscience markets.


The Company was incorporated on August 13, 2010 with its corporate headquarters located in Nokomis, Florida. Through Board resolution, the Company’s fiscal year has been changed from August 31 to March 31.


NOTE 2. GOING CONCERN


The Company incurred a net loss of $995,080 during the nine months ended December 31, 2012 and had negative cash flow from operating activities of $245,070 for the same period. The Company does not expect to generate positive net income or generate positive cash flow from operating activities in the coming year. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. These matters, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.


NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Interim Financial Statements


The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, these condensed financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the financial statements for the year ended March 31, 2012 and notes thereto and other pertinent information contained in our Form 10-K the Company has filed with the Securities and Exchange Commission (the “SEC”).


The results of operations for the nine month period ended December 31, 2012 are not necessarily indicative of the results for the full fiscal year ending March 31, 2013.


Basis of Presentation


The Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the SEC.  The Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States (See Note 2 regarding the assumption that the Company is a “going concern”).


Principles of Consolidation


The consolidated financial statements include the accounts of Rainbow Coral Corp. and its wholly-owned subsidiaries, Rainbow Biosciences, LLC and Father Fish Aquarium, Inc.  All material intercompany accounts and transactions are eliminated in consolidation. The year end for the Company and its subsidiaries is March 31.


- 7 -



Use of Estimates


The preparation of financial statements in conformity with GAAP in the United States of America 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. Actual results could differ from those estimates.


Cash and Cash Equivalents


For the purpose of the financial statements cash equivalents include all highly liquid investments with maturity of three months or less. Cash and cash equivalents were $17,075 and $20,019 at December 31, 2012 and March 31, 2012, respectively.


Inventory


The Company follows ASC 330, Inventory. Inventory represents live coral and other items valued at the lower of cost or net realizable value determined using the weighted average cost method, and with market defined as the lower of replacement cost or realizable value. The cost of inventory includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventory to its present location and condition. The cost of conversion of living coral inventory includes the cost of maintenance through the balance sheet date. Inventory is reduced for the estimated losses due to obsolescence.


Goodwill


Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets of businesses acquired. We evaluate goodwill for impairment utilizing undiscounted projected cash flows in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles — Goodwill and Other” (“ASC Topic 350”). The Company has determined that there was no impairment of goodwill during the three months ended December 31, 2012.


Deferred Income Taxes and Valuation Allowance


The Company accounts for income taxes under ASC 740 Income Taxes.  Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs.  A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.  No deferred tax assets or liabilities were recognized as of December 31 or March 31, 2012.


Revenue and Cost Recognition


In accordance with ASC 605, Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue is generated from the sales of live coral and other related products in a retail setting. Revenue is recognized net of sales returns and allowances.


Share-based Expense


The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, Equity – Based Payments to Non-Employees.  Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable:  (a) the goods or services received; or (b) the equity instruments issued.  The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.


Share-based expense for the nine months ended December 31, 2012 and 2011 was $542,000 and $0, respectively.


- 8 -



Earnings (Loss) per Share


The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, Earnings per Share. Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.  For the nine month and three month periods ended December 31, 2012 and 2011, the effect of common stock equivalents has been excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.


Financial Instruments


The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.


ASC 820, Fair Value Measurements and Disclosures, defines fair value 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. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:


 

·

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities

 

 

 

 

·

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

 

 

 

·

Level 3 - Inputs that are both significant to the fair value measurement and unobservable.


Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2012. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.


Related Parties


The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.  Related party transactions for the periods ending December 31 and March 31, 2012 totaled $74,635 and $31,299, respectively and were comprised of notes payable.


Commitments and Contingencies


The Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies.  Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  There were no commitments or contingencies as of December 31 and March 31, 2012.


- 9 -



Recently Issued Accounting Pronouncements


We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.


NOTE 4. CONVERTIBLE NOTES PAYABLE


During the nine months ended December 31, 2012, the Company entered into Convertible Promissory Notes which refinance non-interest bearing advances. The Convertible Promissory Notes entered into had the following terms:


Effective Date

 

Maturity Date

 

Interest Rate

 

Conversion Rate

 

Loan Amount

 

November 30, 2011

 

July 20, 2013

 

10%

 

$0.01 per share

 

$    69,586

 

December 31, 2011

 

July 20, 2013

 

10%

 

$0.01 per share

 

$    18,650

 

March 31, 2012

 

March 31, 2014

 

10%

 

$0.05 per share

 

$    94,515

 

June 30, 2012

 

June 30, 2014

 

10%

 

$0.04 per share

 

$  117,775

 


All principal along with accrued interest is payable on the maturity date. The notes are convertible into common stock at the option of the holder.


Convertible notes payable consist of the following as of December 31, 2012:


Convertible note payable effective December 31, 2011 due July 20, 2013, bearing interest at 10% per year, convertible into common stock at a rate of $0.01 per share

 

$

3,100

 

Convertible note payable effective March 31, 2012 due March 31, 2014, bearing interest at 10% per year, convertible into common stock at a rate of $0.05 per share

 

 

4,515

 

Convertible note payable effective June 30, 2012 due June 30, 2014, bearing interest at 10% per year, convertible into common stock at a rate of $0.04 per share

 

 

117,775

 

Total convertible notes payable

 

 

125,390

 

Add: Accrued interest payable

 

 

13,970

 

Less: Discounts on convertible notes payable

 

 

(108,779

)

Convertible notes payable

 

$

30,581

 


There were no convertible notes payable outstanding as of March 31, 2012.


The Company evaluated the application of ASC 470-50-40/55, Debtor’s Accounting for a Modification or Exchange of Debt Instrument as it applies to the notes listed above and concluded that the revised terms constituted a debt modification rather than a debt extinguishment because the present value of the cash flow under the terms of each of the new instruments was less than 10% from the present value of the remaining cash flows under the terms of the original notes. No gain or loss on the modifications was required to be recognized.


The Company evaluated the terms of these notes in accordance with ASC Topic No. 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined that the underlying common stock is indexed to the Company’s common stock. The Company determined that the conversion features did not meet the definition of a liability and therefore did not bifurcate the conversion features and account for them as a separate derivative liabilities. The Company evaluated the conversion features for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of underlying common stock at the inception of the note. Therefore, the Company recognized beneficial conversion features in the amounts of $69,586, $18,650, $94,515 and $117,775 on the date the note was signed. The beneficial conversion features were recorded as an increase in additional paid-in capital and a discount to the Convertible Notes Payable. The discounts to the Convertible Notes Payable will be amortized to interest expense over the life of the respective notes.


On August 1, 2012, the holder of the Convertible Promissory Note in the original amount of $69,586 elected to the convert the note into 6,958,598 shares of common stock. These shares were issued to Glendive Investments, a significant shareholder of the Company. As a result of the conversion on August 1, 2012, the remaining unamortized discount of $69,586 was immediately amortized to interest expense.


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On August 2, 2012, the holders of Convertible Promissory Notes in the original amount of $18,650 elected to convert principal in the amount of $11,250 into 1,125,000 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $9,270 was immediately amortized to interest expense.


On August 30, 2012, the holder of the Convertible Promissory Note in the original amount of $18,650 elected to convert principal in the amount of $4,300 into 430,000 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $3,536 was immediately amortized to interest expense.


On December 17, 2012, the holders of the Convertible Promissory Note in the original amount of $94,515 elected to convert principal in the amount of $90,000 into 1,800,000 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $75,594 was immediately amortized to interest expense.


NOTE 5. STOCKHOLDERS’ EQUITY


On April 13, 2012, the Company issued 20,000 shares of common stock to a third party for services. The shares were valued at $200,000 based on the market value of the stock on the date of issuance.


On April 30, 2012, the Company issued 30,000 shares of common stock to a third party for services. The shares were valued at $216,000 based on the market value of the stock on the date of issuance.


On May 31, 2012, the Company issued 30,000 shares of common stock to a third party for services. The shares were valued at $126,000 based on the market value of the stock on the date of issuance.


On August 1, 2012, the Company issued 6,958,596 shares of common stock as a result of conversion of a Convertible Note Payable in the amount of $69,586.


On August 2, 2012, the Company issued 1,125,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $11,250.


On August 30, 2012, the Company issued 430,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $4,300.


On December 17, 2012, the Company issued 1,800,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $90,000.


NOTE 6. SUBSEQUENT EVENTS


Management has evaluated subsequent events through the date these consolidated financial statements were issued. Based on our evaluation, only the event described below requires disclosure.


On February 4, 2013, the holder of the Convertible Promissory Note in the original amount of $18,650 elected to convert the remaining principal in the amount of $3,100 and accrued interest in the amount of $1,286 into 438,646 shares of common stock. As a result of this conversion, the remaining unamortized discount related to the converted principal in the amount of $1,697 was immediately amortized to interest expense.


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


Overview


Rainbow Coral Corp. (“we”, “us”, “our”, “RBCC”, or the “Company”) was incorporated in the State of Florida on August 13, 2010. On June 13, 2011 we acquired all of the assets and the business of Father Fish Aquarium, Inc, (“Father Fish”) for $50,000. We plan to continue the business of Father Fish under the name of Rainbow Coral Corp. The Company was formed to build a coral farm facility to develop and propagate (or grow) live coral, independent of oceans, as a future farm reserve against the decline of natural wild reefs. We intend to grow, harvest and distribute as many varieties of hard and soft sizes as possible for use by consumers and as a source for advances in bio-research. The uses for coral as a source of potential leading edge medical discoveries are an attractive opportunity for the Company’s coral farming activity. We believe that the world of bio-research is a natural continuation of our core coral propagation business. Accordingly on October 23, 2011, the Company formed a subsidiary, Rainbow Biosciences, LLC to look into the opportunities within the bioscience market. On March 13, 2012, we entered into a stock purchase agreement (“N3D Stock Purchase Agreement”) with Nano3D Biosciences, Inc. (“N3D”), a Texas corporation that has developed a unique concept in three dimensional cell research tools. Under the terms of the N3D Stock Purchase Agreement, we have agreed to acquire 604 shares of common stock of N3D, representing approximately 5% of the outstanding shares on the date of the agreement, for a price of $413.62. The total purchase price of $249,826 will be paid by making weekly payments of $5,000 until fully paid. We may discontinue payment of the purchase price at any time by providing written notice to N3D. This would result in our owning fewer than 604 shares. Rainbow Biosciences, LLC will continue to research opportunities into the bioscience markets.


The Company was incorporated on August 13, 2010 with its corporate headquarters located in Nokomis, Florida. Through Board resolution, the Company’s fiscal year has been changed from August 31 to March 31.


We were a development stage entity until June 13, 2011 when we acquired Father Fish Aquarium, Inc.


Results of Operations


The following discussion should be read in conjunction with the consolidated financial statements for the year ended March 31, 2012 included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”). Results of interim periods may not be indicative of results for the full year.


Nine months ended December 31, 2012 compared to the nine months ended December 31, 2011


Revenue


Revenue increased to $76,808 for the nine months ended December 31, 2012 compared to $57,180 for the nine months ended December 31, 2011. The Company has been able to increase sales due to increased marketing efforts.


Cost of Goods Sold


Cost of goods sold increased to $52,569 for the nine months ended December 31, 2012 compared to $37,213 for the comparable period of 2011. The increase in cost of goods sold was greater than the increase in revenue since the Company made more sales at discounted prices.


Gross Profit


Gross profit increased from $19,967 for the nine months ended December 31, 2011 to $24,239 for the nine months ended December 31, 2012. The increase in gross profit was a result of increased revenues as discussed above partially offset by a lower profitability rate on sales during the nine months ended December 31, 2012.


General and administrative expenses


We recognized general and administrative expenses in the amount of $813,391 and $120,221 for the nine months ended December 31, 2012 and 2011, respectively. During the nine months ended December 31, 2012, we issued stock for services resulting in general and administrative expense of $542,000. The remaining increase in general and administrative expenses was the result of the increased operations of the Company as a result of the acquisition of Father Fish and exploring other business opportunities.


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Interest Expense


Interest expense increased from $1,156 for the nine months ended December 31, 2011 to $205,928 for the nine months ended December 31, 2012. Interest expense for the nine months ended December 31, 2012 included amortization of discount on convertible notes payable in the amount of $191,747. The remaining increase is the result of the Company entering into interest-bearing convertible notes payable.


Net Loss


We incurred a net loss of $995,080 for the nine months ended December 31, 2012 as compared to $101,410 for the comparable period of 2011. The increase in the net loss was primarily the result of the increase in the general and administrative expense and interest expense as discussed above.


Three months ended December 31, 2012 compared to the three months ended December 31, 2011


Revenue


Revenue increased slightly to $24,852 for the three months ended December 31, 2012 compared to $22,490 for the three months ended December 31, 2011. The slight increase in revenue was the result in increased sales quantities partially offset by lower sales prices.


Cost of Goods Sold


Cost of goods sold increased to $24,912 for the three months ended December 31, 2012 compared to $11,245 for the comparable period of 2011. The increase in cost of goods sold was the result of increased sales quantities, although more sales were made at a discounted price.


Gross Profit


Gross profit decreased from $11,245 for the three months ended December 31, 2011 to a loss of $60 for the three months ended December 31, 2012. The decrease in gross profit was a result of a decreased profitability rate during the three months ended December 31, 2012.


General and administrative expenses


We recognized general and administrative expenses in the amount of $63,689 and $69,820 for the three months ended December 31, 2012 and for the three months ended December 31, 2011, respectively. The slight decrease was the result of lower expense related to business development during 2012.


Interest Expense


Interest expense increased from $425 for the three months ended December 31, 2011 to $118,601 for the three months ended December 31, 2012. Interest expense for the three months ended December 31, 2012 includes amortization of discount on convertible notes payable in the amount of $105,810. The remaining increase is the result of the Company entering into interest-bearing convertible notes payable.


Net Loss


We incurred a net loss of $182,350 for the three months ended December 31, 2012 as compared to $59,000 for the comparable period of 2011. The increase in the net loss was primarily the result of the increase in interest expense as discussed above.


Going Concern


We incurred a net loss of $995,080 for the nine months ended December 31, 2012. Net cash used by operations for the nine months ended December 31, 2012 was $245,070. We do not anticipate having positive net income in the immediate future. These conditions create an uncertainty as to our ability to continue as a going concern.


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We will need to obtain loans or other financing in order to fund operating shortfalls and do not foresee a change in this situation in the immediate future. There can be no assurance that we will be able to obtain these loans or that they will be available to us on terms that are acceptable to the Company. We will not be able to continue operations without them. We are pursuing alternate sources of financing, but there is no assurance that additional capital will be available to the Company when needed or on acceptable terms.


Liquidity and Capital Resources


At December 31, 2012, we had cash on hand of $17,075 and negative working capital of $87,358.


Net cash used in operating activities for the nine months ended December 31, 2012 was $245,070. We do not expect to achieve positive cash flow from operating activities in the near future. We will require additional cash in order to fully implement our business plan. There is no guarantee that we will be able funds when we need them or that funds will be available on terms that are acceptable to the Company.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


As smaller reporting company, this information is not applicable.


ITEM 4. CONTROLS AND PROCEDURES


Management’s Report On Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:


 

·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

 

 

 

 

·

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

 

 

 

 

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.


As of December 31, 2012, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.


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The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of December 31, 2012.


Management believes that the material weaknesses set forth in items (2) and (3) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.


Management’s Remediation Initiatives


In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:


We will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. And, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.


Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.


We will work as quickly as possible to implement these initiatives; however, the lack of adequate working capital and positive cash flow from operations will likely slow this implementation.


Changes in internal controls over financial reporting


There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS.


None.


ITEM 1A. RISK FACTORS.


Not applicable to a smaller reporting company.


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


On December 17, 2012, we issued 1,800,000 shares of common stock as a result of the conversion of a Convertible Note Payable in the amount of $90,000.


An exemption under Section 4(1) of the Securities Act is claimed for the common stock issued in the above conversions since the criteria of Rule 144 were satisfied.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES.


None.


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ITEM 4. MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5. OTHER INFORMATION.


None.


ITEM 6. EXHIBITS.


2.1

Stock Purchase Agreement, dated as of June 13, 2011, by and among Rainbow Coral Corporation and Father Fish Aquarium, Inc. (1)

 

 

2.2

Membership Interest Purchase Agreement, dated as of June 13, 2011 by and among Father Fish Aquarium, Inc. and Father Fish Aquarium, LLC. (1)

 

 

3.1

Articles of Incorporation of Rainbow Coral Corp. (2)

 

 

3.2

Articles of Amendment of Rainbow Coral Corp. (1)

 

 

3.3

Articles of Amendment of Rainbow Coral Corp. (3)

 

 

3.4

Bylaws of Rainbow Coral Corp. (2)

 

 

3.5

Articles of Incorporation of Father Fish Aquarium, Inc. (1)

 

 

3.6

Articles of Amendment of Father Fish Aquarium, Inc. (1)

 

 

3.7

Bylaws of Father Fish Aquarium, Inc. (1)

 

 

3.8

Articles of Organization of Father Fish Aquarium, LLC (1)

 

 

3.9

Articles of Amendment of Father Fish Aquarium, LLC (1)

 

 

3.10

Bylaws of Father Fish Aquarium, LLC (1)

 

 

10.1

Note from Rainbow Coral Corp. to Louis Foxwell (1)

 

 

31.1 *

Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer

 

 

31.2 *

Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial and accounting officer

 

 

32.1 *

Section 1350 Certification of principal executive officer and principal financial and accounting officer

 

 

101 **

XBRL Interactive Data


* Filed or furnished herewith


** To be submitted by amendment.


(1) Incorporated by reference to the comparable exhibit filed with our Form 8-K filed on June 13, 2011

(2) Incorporated by reference to the comparable exhibit filed with our Registration Statement on Form S-1

(3) Incorporated by reference to the Registrant’s Form 10-K for the year ended March 31, 2012.


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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

RAINBOW CORAL CORP.

 

 

 

 

BY:

/s/ Patrick Brown

 

 

Patrick Brown

 

 

President, Secretary, Treasurer,

 

 

Principal Executive Officer,

 

 

Principal Financial and Accounting

 

 

Officer and Sole Director

 

 

 

 

Dated: February 19, 2013


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