ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Aristocrat Group Corp. was incorporated in Florida on July 20, 2011 to open Prenatal-Postpartum Supercare Centers (“Supercare Centers”) in target areas across the United States. Under the original business plan, the Supercare Centers will provide women who are planning to start a family, are pregnant or have recently had a baby, with a one-stop destination offering pregnancy, childbirth and parenting educational classes, nutritional counseling health and fitness classes and training and spa services, internet shopping for women’s and infant’s products related to pregnancy though the first year of the infant’s life. The Company has not yet implemented this business plan and is unsure when the business plan will be implemented.
The Board of Directors believed that to continue to protect and increase shareholder value, it would be to the advantage, welfare and best interests of the shareholders for the Company to consider alternative corporate strategies to generate new business revenue for the Company. Thus, the Board of Directors approved adding a second business to the Company’s business plan: Luxuria Brands, a focused brand management company. The Luxuria Brands and Supercare Centers business lines will be operated under two separate divisions of Aristocrat Group Corp. Although the Supercare Centers will continue to be a business line, the primary focus from this point forward will be on Luxuria Brands.
In connection with our Luxuria Brands business plan, on January 15, 2013, we formed Top Shelf Distributing, LLC (“Top Shelf”) as our wholly-owned subsidiary. Top Shelf will be focused on developing our distilled spirits line of business. During the three months ended October 31, 2013, we acquired inventory and began to generate modest revenues from the sales of vodka under the Luxuria Brands business line.
Plan of Operations
The new business line’s goal will be to identify and promote unique brands that have a mass market appeal across a diverse demographic. The approach by Luxuria Brands will be to select product opportunities that have the largest audience and broad market appeal.
Luxuria Brands will initially concentrate on the distilled spirits industries, with a focus on the vodka segment. As a core direction, alcohol beverage marketing can be used as a platform to promote other business segments of the Company, such as event promotion. Vodka accounts for almost one quarter of all distilled spirits sales and continues to grow. Selecting the distilled spirits sector enables Aristocrat to enter into a large diverse market with broad appeal and several similar supporting categories, such as the spirit industry and the music industry. These two sectors are easily linkable and present many original opportunities for partnership, sponsorship and brand awareness activities.
On November 1, 2013, the Company signed a joint venture agreement with Westcoast Spirits Company, Ltd. (“WSCL”). The purpose of the joint venture is to export and distribute the Company’s distilled spirits in Canada. Under the terms of the joint venture agreement, the Company will provide funding of up to $125,000 in monthly payments of $12,500. The Company will also provide oversight for the rollout of its products in Canada. WSCL will operate the joint venture and will take all steps necessary for the import and marketing of the Company’s products in Canada. Under the terms of the joint venture agreement, the Company will receive 15% of the profit of the joint venture.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with GAAP, which requires management to make certain estimates and apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed consolidated financial statements.
While we believe that the historical experience, current trends and other factors considered support the preparation of our condensed consolidated financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.
For a full description of our critical accounting policies, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended July 31, 2013 on Form 10-K.
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Results of Operations
Six months ended January 31, 2014 compared to the six months ended January 31, 2013.
Revenue
The Company earned revenue of $11,036 for the six months ended January 31, 2014, compared to $0 for the six months ended January 31, 2013. The Company began selling vodka during fiscal year 2014.
Cost of Goods Sold
Cost of goods sold was $7,132 for the six months ended January 31, 2014, compared to $0 for the comparable period in 2013, as the company began selling vodka during fiscal year 2014.
Gross Profit
Gross profit increased to $3,904 for the six months ended January 31, 2014, compared to $0 for the six months ended January 31, 2013 due to the launch of product sales.
General and Administrative Expenses
We recognized general and administrative expenses in the amount of $467,085 and $177,181 for the six months ended January 31, 2014 and 2013, respectively. The increase is mainly due to increased spending on advertising and promotion and higher professional fees.
Interest Expense
Interest expense increased from $0 for the six months ended January 31 2013 to $36,506 for the six months ended January 31, 2014. We issued interest bearing promissory notes, whereas we had none during the six months ended January 31, 2013.
Net Loss
We incurred a net loss of $499,687 for the six months ended January 31, 2014 as compared to a net loss of $177,181 for the comparable period of 2013. The increase in the net loss was primarily the result of the changes in general and administrative expenses and interest expense, as discussed above.
Three months ended January 31, 2014 compared to the three months ended January 31, 2013.
Revenue
Revenue increase to $7,592 for the three months ended January 31, 2014, compared to $0 for the three months ended January 31, 2013, as the Company began selling vodka during fiscal year 2014.
Cost of Goods Sold
Cost of goods sold increased to $4,841 for the three months ended January 31, 2014, compared to $0 for the comparable period in 2013, as the Company began selling vodka during fiscal year 2014.
Gross Profit
Gross profit was $2,751 for the three months ended January 31, 2014, compared to $0 for the three months ended January 31, 2013 as a result of beginning product sales earlier this year.
General and Administrative Expenses
We recognized general and administrative expenses in the amount of $255,502 and $127,310 for the three months ended January 31, 2014 and 2013, respectively. The increase is primarily due to higher advertising and promotional spending and higher professional fees.
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Interest Expense
Interest expense increased from $0 for the three months ended January 31 2013 to $11,239 for the three months ended January 31, 2014. We issued interest bearing promissory notes during 2014, whereas we had none during the three months ended January 31, 2013.
Net Loss
We incurred a net loss of $263,990 for the three months ended January 31, 2014 as compared to $127,310 for the comparable period of 2013. The increase in the net loss was primarily the result of increases in general and administrative expense and interest expense as noted above.
Liquidity and Capital Resources
At January 31, 2014, we had cash on hand of $22,639. The Company has negative working capital of $71,309. Net cash used in operating activities for the six months ended January 31, 2014 was $383,498. Cash on hand is adequate to fund our operations for less than one month. We do not expect to achieve positive cash flow from operating activities in the near future. We will require additional cash in order to fully implement our business plan. There is no guarantee that we will be able to attain fund when we need them or that funds will be available on terms that are acceptable to the Company. We have no material commitments for capital expenditures as of January 31, 2014.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as of January 31, 2014.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on Internal Control over Financial Reporting
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of January 31, 2014. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of January 31, 2014, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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As of January 31, 2014, we did not maintain effective controls over the control environment. Specifically, we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
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As of January 31, 2014, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.
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Our management, including our principal executive officer and principal financial officer, who is the same person, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
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Change in Internal Controls Over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.