Commission File No. 333-154989
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,” “non-accelerated filer,”
and “smaller reporting company” in R
ule 12b-2 of the Exchange Act.
As of June 26, 2013 there were 539,129,405
shares of common stock were issued and outstanding.
Notes
to Consolidated Financial Statements
As
of February 28, 2013
NOTE 1. BASIS OF
PRESENTATION
The
interim financial statements included herein, presented in accordance with United States generally accepted accounting principles
and stated in US dollars, have been prepared by Entest BioMedical, Inc. (“the Company”), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted accounting principles 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.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein. It is suggested that these condensed consolidated interim financial
statements be read in conjunction with the financial statements of the Company for the period ended August 31, 2012 and notes thereto
included in the Company's 10-K annual report. The Company follows the same accounting policies in the preparation of interim
reports.
Results
of operations for the interim periods are not indicative of annual results.
NOTE 2. ORGANIZATION
AND DESCRIPTION OF BUSINESS
The
Company was incorporated in the State of Nevada on September 24, 2008 as JB Clothing Corporation. Until July 10, 2009, the
Company’s principal business objective was the offering of active/leisure fashion design clothing.
On
July 10, 2009 the Company abandoned its efforts in the field of active/leisure fashion design clothing when it acquired 100% of
the share capital of Entest BioMedical, Inc., a California corporation, (“Entest CA”).
The
Company’s current business consists of the development and commercialization of immunotherapeutic therapies for the veterinary
market as well as the acquisition and operation of veterinary hospitals.
NOTE 3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
The
financial statements have been prepared using the basis of accounting generally accepted in the United States of America. Under
this basis of accounting, revenues are recorded as earned and expenses are recorded at the time liabilities are incurred. The Company
has adopted an August 31 fiscal year-end.
The
Company recognizes revenue from services and product sales when the following four revenue recognition criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable,
and collectability is reasonably assured. Product sales and service revenues are recorded when the products are delivered and title
passes to customers. The customer’s credit card is authorized and charged, or checks/cash are received at the time the services
are rendered, thereby providing reasonable assurance of collectability.
B.
PRINCIPLES OF CONSOLIDATION
The
consolidated financial statements include the accounts of Entest CA, the Company’s wholly owned subsidiary. Significant inter-company
transactions have been eliminated.
C.
USE OF ESTIMATES
The
preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results
could differ from those estimates.
D.
CASH EQUIVALENTS
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
E.
PROPERTY AND EQUIPMENT
As
of February 28, 2013 Property and Equipment consists of $1,919 of Computer equipment. No depreciation expense has been recorded
with regards to this equipment as it has yet to be put into service
F. FAIR VALUE OF FINANCIAL
INSTRUMENTS
Fair
value is the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants on the measurement date. A fair value hierarchy
requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs
required by the standard that the Company uses to measure fair value:
Level
1: Quoted prices in active markets for identical assets or liabilities
Level
2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the related assets or liabilities.
Level
3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
The
Company’s financial instruments as of February 28, 2013 consisted of $213,680, of Notes Payable, $119,000 of Convertible
Notes payable (net of discount), $8,000 due to TheraCyte, Inc. and $34,895 due from an affiliate. The fair value of all of the
Company’s financial instruments as of February 28, 2013 were valued according to the Level 3 input. The carrying amount of
the financial instruments is equal to the fair value as determined by the Company.
The Company has determined that there
are no Level 1 or Level 2 inputs for determining the fair value of the Company’s financial instruments. Fair value was determined
by the Company utilizing its own assumptions and estimation. There were no transfers between levels for the period presented.
G. INCOME TAXES
The
Company accounts for income taxes using the liability method prescribed by ASC 740, “
Income Taxes.
” Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse.
The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates
is recognized as income or loss in the period that includes the enactment date.
The
Company applied the provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods
remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of
limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such
adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part,
upon the results of operations for the given period. As of August 31, 2011 and February 28, 2013 the Company had no uncertain tax
positions, and will continue to evaluate for uncertain positions in the future.
The
Company generated a deferred tax credit through net operating loss carry forward. However, a valuation allowance of 100%
has been established.
Interest
and penalties on tax deficiencies recognized in accordance with ACS accounting standards are classified as income taxes in accordance
with ASC Topic 740-10-50-19.
H.
BASIC EARNINGS (LOSS) PER SHARE
The
Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 260, "Earnings Per Share",
which specifies the computation, presentation and disclosure requirements for earnings (loss) per share for entities with publicly
held common stock. ASC 260 requires the presentation of basic earnings (loss) per share and diluted earnings (loss) per share.
The Company has adopted the provisions of ASC 260 effective from inception. Basic net loss per share amounts is computed by dividing
the net income by the weighted average number of common shares outstanding. All convertible debt has an anti-dilutive effect on
the EPS, therefore Diluted earnings per share are the same as basic earnings per share.
NOTE 4. RECENT
ACCOUNTING PRONOUNCEMENTS
On May 2011, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, "Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs." The amendments in this update generally represent clarifications of Topic
820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information
about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and
for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. The amendments in this update are
to be applied prospectively. The amendments are effective for interim and annual periods beginning after December 15, 2011. Early
application is not permitted. The Company does not expect this guidance to have a significant impact on its consolidated financial
position, results of operations or cash flows.
In June 2011, the FASB issued ASU No.
2011-05, "Presentation of Comprehensive Income." This update was amended in December 2011 by ASU No. 2011-12, "Deferral
of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income
in Accounting Standards Update No. 2011-05." This update defers only those changes in update 2011-05 that relate to the presentation
of reclassification adjustments. All other requirements in update 2011-05 are not affected by this update, including the requirement
to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.
ASU No. 2011-05 and 2011-12 are effective for fiscal years (including interim periods) beginning after December 15, 2011. The Company
does not expect this guidance to have a significant impact on its consolidated financial position, results of operations or cash
flows.
In December 2011, the FASB issued ASU
No. 2011-11, "Disclosures about Offsetting Assets and Liabilities." The amendments in this update require enhanced disclosures
around financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC
815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset
in accordance with either ASC 210-20-45 or ASC 815-10-45. An entity should provide the disclosures required by those amendments
retrospectively for all comparative periods presented. The amendments are effective during interim and annual periods beginning
on or after January 1, 2013. The Company does not expect this guidance to have any impact on its consolidated financial position,
results of operations or cash flows.
A variety of proposed or otherwise potential
accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, the Company’s management has not determined whether implementation
of such standards would be material to its financial statements.
NOTE 5. GOING CONCERN
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company generated
net losses of $4,517,149 during the period from August 22, 2008 (inception) through February 28, 2013. This condition raises substantial
doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent on
its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management
plans to raise additional funds primarily by offering securities for cash. The Company has also raised $51,192 from borrowings
during the three months ended February 28, 2013.
On June 1, 2012 the Company entered
into an Equity Purchase Agreement (the "June Purchase Agreement") with Southridge Partners II, LP, a Delaware limited
partnership ("Southridge").
Under the terms of the June Purchase
Agreement, Southridge will purchase, at the Company's election, up to $10,000,000 of the Company's registered common stock (the
"Shares"). During the term of the Purchase Agreement, the Company may at any time deliver a "put notice" to
Southridge thereby requiring Southridge to purchase a certain dollar amount of the Shares. Simultaneous with the delivery of such
Shares, Southridge shall deliver payment for the Shares. Subject to certain restrictions, the purchase price for the Shares shall
be equal to 91% of the average of the two lowest Closing Prices during the Valuation Period as such capitalized terms are defined
in the Agreement.
The number of Shares sold to Southridge
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. Additionally,
Southridge may not execute any short sales of the Company's common stock.
Any sale of Shares pursuant to the June
Agreement is subject to a Registration Statement filed under the Securities Act of 1933 remaining effective for the sale by Southridge
of those Shares.
June Agreement shall terminate (i) on
the date on which Southridge shall have purchased Shares pursuant to this Agreement for an aggregate Purchase Price of $10,000,000,
or (ii) on the date occurring 24 months from the date on which the June Agreement was executed and delivered by the Company and
Southridge.
The Company has also agreed to pay the
following to Capital Path Securities LLC for acting as the Company’s exclusive advisor and placement agent in connection
with the June Purchase Agreement a cash placement fee of 5% of funds received by the Company through the sale of Shares to
Southridge as such funds are received by the Company.
On June 12, 2012 a registration statement
on form S-1 was filed with the United States Securities and Exchange Commission registering 46,238,705 shares of the Company’s
common stock that will be put to Southridge pursuant to the June Agreement which was declared effective by the United
States Securities and Exchange Commission on August 27, 2012.
During the quarter ended November 30,
2012 the Company sold 37,640, 604 common shares for total consideration of $64,300 pursuant to the June Agreement.
NOTE 6. NOTES
PAYABLE
As of February 28,
2013
Notes Payable:
Bio Technology Partners Business Trust
|
|
$
|
13,550
|
|
The Sherman Family Trust
|
|
$
|
98,200
|
|
Officer Loans (Note 7)
|
|
$
|
63,772
|
|
Venture Bridge Advisors
|
|
$
|
32,458
|
|
Southridge Partners II LLP
|
|
$
|
5,700
|
|
Total
|
|
$
|
213,680
|
|
Convertible Notes Payable
8% Convertible Notes Payable (Note 14) $126,000
Both
of Bio Technology Partners Business Trust and Venture Bridge Advisors have provided lines of credit to the Company in the amount
of $200,000 each or so much thereof as may be disbursed to, or for the benefit of the Company by Lender in Lender's sole and absolute
discretion.
The unpaid principal of these lines of credit bear simple interest
at the rate of ten percent per annum. Interest is calculated based on the principal balance as may be adjusted from time to time
to reflect additional advances or payments made hereunder. Principal balance and accrued interest shall become due and payable
in whole or in part at the demand of the Lender. The Sherman Family Trust has provided a line of credit to the Company in the amount
of $700,000 or so much thereof as may be disbursed to, or for the benefit of the Company by Lender in Lender's sole and absolute
discretion. The unpaid principal of this line of credit bears simple interest at the rate of ten percent per annum. Interest is
calculated based on the principal balance as may be adjusted from time to time to reflect additional advances or payments made
hereunder. Principal balance and accrued interest shall become due and payable in whole or in part at the demand of the Lender.
$5,700 owed by the Company to
Southridge Partners II LLP bears no stated interest rate and is payable at the demand of Southridge
Partners II LLP.
NOTE 7. RELATED
PARTY TRANSACTIONS
During the quarter ended February 28,
2013 David Koos made loans to the Company totaling $31,992. These loans are due and payable at the demand of David Koos and
bear simple interest at a rate of 15% per annum.
As
of February 28, 2013 the Company remains indebted to David R. Koos in the principal amount of $63,772
due and payable
at the demand of David Koos and bearing simple interest at a rate of 15% per annum
As of August 31 , 2012 Bio-Matrix Scientific
Group, Inc. (“BMSN”) , a major shareholder of the Company, is indebted to the Company in the amount of $34,895. This
amount is non interest bearing and is due at the demand of the Company.
NOTE 8. INCOME
TAXES
|
|
|
As of February 28, 2013
|
|
|
Deferred tax assets:
|
|
|
|
|
Net operating tax carry forwards
|
|
$
|
1,540,471
|
|
Other
|
|
|
-0-
|
|
Gross deferred tax assets
|
|
|
1,540,471
|
|
Valuation allowance
|
|
|
(1,540,471
|
)
|
Net deferred tax assets
|
|
$
|
-0-
|
|
As
of February 28,2013 the Company has a Deferred Tax Asset of $1,540,471 completely attributable to net operating loss
carry forwards of approximately $4,530,796 (which expire 20 years from the date the loss was incurred) consisting of:
(a) $
13,647 of Net Operating Loss carry forwards acquired in the reverse acquisition of Entest BioMedical, Inc., a California corporation,
and
(b) $
4,517,149 of Net Operating Loss carry forwards attributable to Entest BioMedical, Inc.
Realization
of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences
and carry forwards are expected to be available to reduce taxable income. A valuation allowance is recorded when it is “more
likely-than-not” that a deferred tax asset will not be realized. In addition, the reverse acquisition in which Entest BioMedical,
Inc. was involved in 2009 has resulted in a change of control. Internal Revenue Code Sec 382 limits the amount of income
that may be offset by net operating loss (NOL) carryovers after an ownership change. As a result, the Company has recorded a valuation
allowance reducing all deferred tax assets to $ -0-.
Income tax is calculated
at the 34% Federal Corporate Rate.
NOTE 9. ACQUISITION
OF ENTEST CA
On
July 10, 2009 the Company acquired 100% of Entest CA, a California corporation and wholly owned subsidiary of the Company, from
BMSN for consideration consisting of (a) the issuance to BMSN of 10,000,000 newly issued common shares of Entest and (b) the return
by Mr. Rick Plote of 10,000,000 shares of Entest’s common stock previously issued to him by Entest for cancellation.
NOTE 10. ACQUISITION
OF THE ASSETS OF PET POINTERS, INC.
On
January 4, 2011Entest CA acquired from Pet Pointers, Inc., a California corporation doing business as McDonald Animal Hospital
(“Seller”), and Dr. Gregory McDonald DVM (“McDonald”) all the goodwill from McDonald and assets of Seller
except cash and accounts receivables used in connection with the operation of a veterinary medical clinic located at 225 S. Milpas
Street, Santa Barbara, CA 93103 (the "Business").
Consideration
for the acquisition consisted of:
I.
$70,000 in cash
II.
$210,000 of the Company’s common shares valued at the closing price per share as of January 4, 2011
III.
Payment of no more than $78,000 to a creditor of the Seller to be paid in monthly installments of $1,500 per month
IV.
Payment of no more than $25,000 to additional creditors of the Seller to be paid in monthly installments of $825 per month
V.
Payment of $50,000 to McDonald on the first business day of the fourth month following the closing of the acquisition (“Closing”).
NOTE
11. DISPOSITION OF THE ASSETS OF PET POINTERS, INC.
On November 28, 2012 the “Company
executed an agreement (“Agreement”) with Gregory McDonald ("McDonald"), Pet Pointers, Inc. ("Pet Pointer")
whereby Mc Donald and Pet Pointer would acquire from the Company all assets ( with the exception of cash and accounts receivable)
utilized by the Company in the operation of the McDonald Animal Hospital, a full service veterinary clinic owned and operated by
the Company and located in Santa Barbara, California (“McDonald Asset Sale”).
On October 10, 2012 a Complaint
(“Complaint”) was filed in the Superior Court of the State of California against the Company and David Koos by McDonald,
a former employee of the Company, alleging breach of contract and breach of the covenant of good faith and dealing in connection
with the assumption of lease obligations by the Company in connection with the acquisition of the assets of Pet Pointers, Inc breach
of contract and breach of the covenant of good faith and dealing in connection with an employment agreement enters into with McDonald
inc connection with the Acquisition, breach of contract in connection with the Acquisition purchase agreement, breach of the covenant
of good faith and dealing in connection with the Acquisition purchase agreement, implied indemnity in connection to amounts owed
by McDonald to Anthony and Judi Marinelli, the Internal Revenue Service, and the California Franchise Tax Board, intentional misrepresentation,
negligent misrepresentation , failure to pay wages and violations of Sections 2802, 203, and 2806 of the California Labor Code.
The Complaint sought judgment for nominal damages, actual damages, compensatory damages, lost wages, compensation, expenses wage
benefits and penalties pursuant to California Labor Code Sections 203 et al, 2802 and 2806, indemnification, accrued interest,
punitive damages, costs of suit and attorney’s fees.
As consideration to the Company
for the assets acquired, McDonald and Pet Pointers provided to the Company a General release whereby McDonald and Pet Pointer waive,
release and discharge the Company and their respective assignees, officers, directors, shareholders, boards, owners, employees,
attorneys, agents, trustors, trustees, beneficiaries, heirs, successors, and representatives from all known and unknown claims,
demands, causes of action, attorney's fees, costs, or expenses including:
(1) All claims relating to the Complaint.
(2) Those owed by McDonald to
Anthony and Judi Marinelli which the Company became obligated to pay on McDonald’s behalf pursuant to the asset purchase
agreement entered into between the Company and Gregory McDonald and Pet Pointers, Inc on January 4, 2011.
(3) Those amounts owed by McDonald
to the Internal Revenue Service which the Company became obligated to pay on McDonald’s behalf pursuant to the asset purchase
agreement entered into between the Company and Gregory McDonald and Pet Pointers, Inc on January 4, 2011.
(4) Those amounts owed by McDonald
to the California Franchise Tax Board which the Company became obligated to pay on McDonald’s behalf pursuant to the asset
purchase agreement entered into between the Company and Gregory McDonald and Pet Pointers, Inc on January 4, 2011.
Assets disposed of pursuant to
the Agreement include approximately $4,840 of Property Plant and Equipment net of accumulated depreciation as well as all inventory
held at the McDonald Animal Hospital.
Assets disposed of pursuant to
the Agreement also include
(i) essentially all intellectual
property, including computer software, utilized in connection with the operation of the McDonald Animal Hospital
(ii) All telephone
numbers, fax numbers, service marks, trademarks, trade names, fictitious business names, websites, business email addresses, vendor
lists, promotional materials, vendor records and any and all business records including, but not limited to, such items stored
in computer memories, microfiche, paper record or by any other means relevant to the operation of the McDonald Animal Hospital.
(iii) All
customer lists, customer contacts, and any and all customer records that are related to the McDonald Animal Hospital.
As a result of the agreement,
the Company recorded a non-cash pre-tax charge for the impairment of goodwill recorded in connection with the acquisition of the
McDonald Animal Hospital of approximately $405,000 for the quarter ended November 30, 2012.
Pursuant to the Agreement, the
Company is obligated to make payment of $13,000 within five days of the Closing of the Agreement as such term is defined in the
Agreement.
Pursuant to the Agreement, the Company
agrees to waive, release and discharge McDonald and Pet Pointer from all known and unknown claims, demands, causes of action, attorney's
fees, costs, or expenses.
NOTE 12. COMMITMENTS AND CONTINGECIES
On
November 1, 2011, the Company entered into an agreement to lease approximately 2,320 square feet of office space beginning December
1, 2011 for a period of five years.
Rent
to be charged to the Company pursuant to the lease is as follows:
$2,996
per month for the period beginning December 1, 2011 and ending November 30, 2012
$3,116
per month for the period beginning December 1, 2012 and ending November 30, 2013
$3,241
per month for the period beginning December 1, 2013 and ending November 30, 2014
$3,371
per month for the period beginning December 1, 2014 and ending November 30, 2015
$3,506
per month for the period beginning December 1, 2015 and ending November 30, 2016
This
property is utilized as office space. The Company believes that the foregoing property is adequate to meet its current needs. While
it is anticipated that the Company will require access to laboratory facilities in the future, the Company believes that access
to such facilities are available from a variety of sources.
On
February 3, 2011, a Complaint (“Complaint”) was filed in the U.S. District Court Middle District of the State of Pennsylvania
against the Company, the Company’s Chairman and BMSN by 18KT.TV LLC (“Plaintiffs”) seeking to recover general
damages from the Company. in excess of $125,000. The Complaint alleges breach of contract and unjust enrichment relating to an
investor relations contract executed by the Company and Craig Fischer (on behalf of 18KT.TV LLC). The Complaint also seeks similar
damages from BMSN. The Company believes that the allegations in the complaint are without merit and intends to vigorously defend
its interests in this matter. At this time, it is not possible to predict the ultimate outcome of these matters.
On March 1, 2013 a SETTLEMENT AGREEMENT
AND MUTUAL GENERAL RELEASE (“Agreement”) was entered into by and between the Plaintiffs and the Company.
Pursuant to the Agreement:
(a) The Plaintiffs irrevocably release and forever unconditionally
discharge the Company of and from any and all actions, causes of action, suits, claims, debts, dues, accounts, bonds, covenants,
charges, complaints, contracts, agreements, promises, judgments and demands whatsoever, in law or in equity.
(b) The Company irrevocably releases
and forever unconditionally discharges the Plaintiffs of and from any and all actions, causes of action, suits, claims, debts,
dues, accounts, bonds, covenants, charges, complaints, contracts, agreements, promises, judgments and demands whatsoever, in law
or in equity.
(c) The Company shall cause to be issued
to 18KT.TV LLC 41,000,000 of the Company’s newly issued restricted common shares.
On May 24, 2012, a Complaint (“Complaint”)
was filed in the U.S. Bankruptcy Court for the District of Oregon against the Company by Titterington Veterinary Services Inc.
(“TVS”). The Complaint is an adversary proceeding filed by TVS arising from TVS’s bankruptcy case currently pending
in U.S. Bankruptcy Court for the District of Oregon. The Complaint alleges Breach of Contract resulting from the Company’s
alleged failure to pay certain expenses the Company was required to pay pursuant to an agreement with TVS, Dr. Ronald Titterington,
DVM and Dr. Kathy Snell, DVM (“TVS Agreement”). TVS is seeking a judgment and money award against the Company in an
amount to be proven at trial which TVS estimates in the Complaint to be up to $50,000. TVS is also seeking a judgment and order
against the Company to provide an accounting of all revenues received by the Company pursuant to the TVS Agreement, all expenses
paid, unpaid, and due and owing pursuant to the TVS Agreement as well as a revenue share which TVS claims is due them pursuant
to the TVS Agreement. TVS is also seeking a judgment requiring the Company to turn over a sum of money equal to expenses the Company
was obligated to pay pursuant to the TVS Agreement. TVS is also seeking attorney’s fees and expenses. The Company believes
that the allegations in the complaint are without merit and intends to vigorously defend its interests in this matter. At this
time, it is not possible to predict the ultimate outcome of these matters and an outcome unfavorable to the Company may have a
material adverse effect on the Company. On September 19, 2012 the Plaintiff’s Claim for Relief for turnover and an accounting
under 11 U.S.C. § 542 and the Plaintiff's Claim for Relief for attorney fees were dismissed with prejudice and , as per the
claim of breach of contract, the proceeding was transferred to the United States Bankruptcy Court for the District of Southern
California for all further proceedings.
There
were no other legal proceedings against the Company with respect to matters arising in the ordinary course of business. The Company
is not involved in any other litigation either as plaintiffs or defendants, and has no knowledge of any threatened or pending litigation
against the Company.
On June 1, 2012 the Company entered
into an Equity Purchase Agreement (the "June Purchase Agreement") with Southridge Partners II, LP, a Delaware limited
partnership ("Southridge").
Under the terms of the June Purchase
Agreement, Southridge will purchase, at the Company's election, up to $10,000,000 of the Company's registered common stock (the
"Shares"). During the term of the Purchase Agreement, the Company may at any time deliver a "put notice" to
Southridge thereby requiring Southridge to purchase a certain dollar amount of the Shares. Simultaneous with the delivery of such
Shares, Southridge shall deliver payment for the Shares. Subject to certain restrictions, the purchase price for the Shares shall
be equal to 91% of the average of the two lowest Closing Prices during the Valuation Period as such capitalized terms are defined
in the Agreement.
The number of Shares sold to Southridge
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. Additionally,
Southridge may not execute any short sales of the Company's common stock.
Any sale of Shares pursuant to the June
Agreement is subject to a Registration Statement filed under the Securities Act of 1933 remaining effective for the sale by Southridge
of those Shares.
June Agreement shall terminate (i) on
the date on which Southridge shall have purchased Shares pursuant to this Agreement for an aggregate Purchase Price of $10,000,000,
or (ii) on the date occurring 24 months from the date on which the June Agreement was executed and delivered by the Company and
Southridge.
The Company has also agreed to pay the
following to Capital Path Securities LLC for acting as the Company’s exclusive advisor and placement agent in connection
with the June Purchase Agreement a cash placement fee of 5% of funds received by the Company through the sale of Shares to
Southridge as such funds are received by the Company.
NOTE 13. STOCKHOLDERS EQUITY
The
stockholders' equity section of the Company contains the following classes of capital stock as of February 28, 2013:
Common
Stock:
$0.001
par value, 2,000,000,000 shares authorized 450,321,089 shares issued and outstanding as of February 28, 2013.
Preferred
Stock:
$0.001
par value 5,000,000 shares authorized of 100,000 shares authorized is authorized as Series AA Preferred Stock , $.001 par value
of which 5,000 shares are issued and outstanding as of February 28, 2013 and 4,400,000 is authorized as Series
B Preferred Stock of which 3,201,397 shares are issued and outstanding as of February 28, 2013.
Upon
any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary (collectively, a “Liquidation”),
before any distribution or payment shall be made to any of the holders of Common Stock or any other series of preferred stock,
the holders of Series B Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are
capital, surplus or earnings, an amount equal to $0.10 per share of Series B Preferred Stock (the “Liquidation Amount”)
plus all declared and unpaid dividends thereon, for each share of Series B Preferred Stock held by them.
If,
upon any Liquidation, the assets of the Company shall be insufficient to pay the Liquidation Amount, together with declared and
unpaid dividends thereon, in full to all holders of Series B Preferred Stock, then the entire net assets of the Company shall be
distributed among the holders of the Series B Preferred Stock, ratably in proportion to the full amounts to which they would otherwise
be respectively entitled and such distributions may be made in cash or in property taken at its fair value (as determined in good
faith by the Board), or both, at the election of the Board..
Non Voting Convertible Preferred Stock
having a $1.00 par value:
200,000 shares authorized of which 51,400
shares are issued and outstanding as of February 28
, 2013.
Non Voting Convertible Preferred Stock
shall convert at the option of the holder into shares of the corporation’s common stock at a conversion price equal to seventy
percent (70%) of the lowest Closing Price for the five (5) trading days immediately preceding written receipt by the corporation
of the holder’s intent to convert.
“CLOSING PRICE" shall mean
the closing bid price for the corporation’s common stock on the Principal Market on a Trading Day as reported by Bloomberg
Finance L.P.
“PRINCIPAL MARKET" shall
mean the principal trading exchange or market for the corporation’s common stock.
“TRADING DAY” shall mean
a day on which the Principal Market shall be open for business.
NOTE 14. CONVERTIBLE DEBENTURES
As of February 28, 2013 the Company
has outstanding $126,000 in convertible notes payable bearing simple interest at 8% per annum.
On July 26, 2012, the Company issued
a convertible note in the principal amount of $63,000 to Asher Enterprises, Inc. The Note bears interest at the rate of 8% per
annum and matures on April 30, 2013. The Note is convertible any time during the period beginning on the date which is one hundred
eighty (180) days following the date of the Note into common stock of the Company, at Asher’s option, at a 39% discount to
the average of the three lowest closing bid prices of the common stock during the 10 Trading Day period prior to conversion as
Trading Day is defined in the Note.
The issuance of the note amounted in a beneficial
conversion feature of $63,000 which is amortized under the Interest Method.
On September 20, 2012 the
Company
issued a convertible promissory note in the amount of $63,000 cash from which was received September 27, 2012. The note bears an
interest rate of eight percent (8%), matures on June 25, 2013. and may be converted after 180 days from execution of this note
for shares of the Company’s common stock. The note may be converted at a thirty nine percent (39%) discount to the average
of the lowest 3 closing bid prices of the common stock during the 10 trading days prior to the conversion date. The issuance of
the note amounted in a beneficial conversion feature of $63,000 which is amortized under the Interest Method.
NOTE 15. STOCK TRANSACTIONS
During three months ended November 30, 2012
the Company issued 149,458,892 Common Shares in satisfaction of $101,500 in convertible debt.
During three months ended November 30, 2012
the Company issued 3,035,894 Common Shares in satisfaction of $1,700 in Accrued Interest.
During the three months ended
November 30, 2012 the Company issued 37,640,314 Common Shares pursuant to the June Purchase Agreement for consideration of $64,300.
During three months ended February 28,
2013 the Company issued 6,043,651 Common Shares pursuant to contractual obligations incurred as a result of the issuance of certain
convertible notes payable.
During three months ended February 28,
2013 the Company issued 30,649,351 Common Shares pursuant to a conversion of $23,600 of Non Voting Convertible Preferred Shares
NOTE 16. SUBSEQUENT EVENTS
On March 12, 2013 41,000,000 Common
Shares were issued to 18KT.TV LLC pursuant to SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE (Note 12).
On March 13, 2013 the Company issued
3,011,583 Common Shares pursuant to a conversion of $7,800 of Non Voting Convertible Preferred Shares.
The terms and conditions of $126,000 of convertible debentures
issued by the Company (“ENTB Convertible Notes”) (Note 14) defined “Event of Default” as follows:
The Borrower fails to pay the principal hereof or interest
thereon when due on the Note, whether at maturity, upon acceleration or otherwise.
The Borrower fails to issue shares of Common Stock to
the Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of
the conversion rights of the Holder in accordance with the terms of the Note,
The Borrower breaches any material covenant or other
material term or condition contained in the Note and any collateral documents including and such breach continues for a period
of ten (10) days after written notice thereof to the Borrower from the Holder.
Any representation or warranty of
the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection with
the Note shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time
will have) a material adverse effect on the rights of the Holder with respect to the Note.
The Borrower or any subsidiary of the Borrower shall
make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or
for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.
Any money judgment, writ or similar
process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any of its property or other assets
for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented
to by the Holder, which consent will not be unreasonably withheld.
Bankruptcy. Bankruptcy, insolvency, reorganization
or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower.
The Borrower shall fail to maintain the listing of
the Common Stock on at least one of the OTCQB or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap
Market, the New York Stock Exchange, or the American Stock Exchange.
The Borrower shall fail to comply with the reporting
requirements of the Securities and Exchange Act of 1934; and/or the Borrower shall cease to be subject to the reporting requirements
of the Securities and Exchange Act of 1934.
Any dissolution, liquidation, or
winding up of Borrower or any substantial portion of the Borrower’s business.
Any cessation of operations by Borrower or Borrower
admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the
Borrower’s ability to continue as a “going concern” shall not be an admission that the Borrower cannot pay its
debts as they become due.
The failure by Borrower to maintain any material intellectual
property rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future).
The restatement of any financial statements filed by
the Borrower with the SEC for any date or period from two years prior to the Issue Date of the Note and until the Note is no longer
outstanding, if the result of such restatement would, by comparison to the unrestated financial statement, have constituted a
material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
The Borrower effectuates a reverse split of its Common
Stock without twenty (20) days prior written notice to the Holder.
In the event that the Borrower proposes to replace
its transfer agent, the Borrower fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable
Transfer Agent Instructions in a form as initially delivered pursuant to the Purchase Agreement (including but not limited to
the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to
Borrower and the Borrower.
The Company’s failure to file timely quarterly
and annual reports required under the Securities and Exchange Act of 1934 constituted an Event of Default. In an Event of Default
occurring as a result of failure to comply with the reporting requirements of the Securities and Exchange Act of 1934 , the Notes
shall become immediately due and payable (“Mandatory Prepayment Date”) and the Borrower shall pay to the Holder, in
full satisfaction of its obligations hereunder, an amount equal to the greater of
(A)
(i) 150% times the sum of the then outstanding principal
amount of the Note plus accrued and unpaid interest on the unpaid principal amount of the Note to the date of payment plus
(ii) Default Interest at the rate of 22% per annum
or
(B)
“Parity Value” of the
Default Sum to be prepaid, where parity value means the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such Default Sum treating the Trading Day immediately preceding the Mandatory Prepayment Date as the “Conversion
Date” for purposes of determining the lowest applicable Conversion Price.
In the event that the Borrower fails to pay the Default
Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall have the right
at any time, so long as the Borrower remains in default (and so long and to the extent that there are sufficient authorized shares),
to require the Borrower, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common
Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect.
The Company had obtained a waiver from the holder of
the ENTB Convertible Notes whereby , in the event that the Company would have become current in its reporting obligations under
the Securities and Exchange Act of 1934 (“Exchange Act”) by March 22, 2013, the abovementioned penalties would not
be applied to the Company by the Holder of the ENTB Convertible Notes. As the Company failed to file all reports required by March
22, 2013 the abovementioned penalties may be applied by the Holder of the ENTB Convertible Notes.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
CERTAIN FORWARD-LOOKING INFORMATION
Information provided in this Quarterly
report on Form 10Q may contain forward-looking statements within the meaning of Section 21E or Securities Exchange Act of 1934
that are not historical facts and information. These statements represent the Company's expectations or beliefs, including, but
not limited to, statements concerning future and operating results, statements concerning industry performance, the Company's operations,
economic performance, financial conditions, margins and growth in sales of the Company's products, capital expenditures, financing
needs, as well assumptions related to the forgoing. For this purpose, any statements contained in this Quarterly Report that are
not statement of historical fact may be deemed to be forward-looking statements. These forward-looking statements are based on
current expectations and involve various risks and uncertainties that could cause actual results and outcomes for future periods
to differ materially from any forward-looking statement or views expressed herein. The Company's financial performance and the
forward-looking statements contained herein are further qualified by other risks including those set forth from time to time in
the documents filed by the Company with the Securities and Exchange Commission, including the Company's most recent Form 10K for
the year ended August 31, 2012. All references to” We”, “Us”, “Company” or the “Company”
refer to Entest BioMedical, Inc.
Material Changes in Financial Condition
As of February 28, 2013, we had Cash
on Hand of $5,221 and as of August 31, 2012 we had Cash on Hand of $42,737.
The decrease in Cash on Hand of approximately
87 % is primarily attributable to expenses incurred by the Company in the operation of its business primarily offset
by funds received by the Company as a result of net borrowings.
As of February
28, 2013, we had Trade Accounts Receivable of $0 and as of August 31, 2012 we had Trade Accounts Receivable of $2,268.
The decrease in Trade Accounts Receivable
of 100% is attributable to the disposition as of November 30, 2012 of certain assets related to the McDonald Animal Hospital
As of February 28, 2013, we had Inventory
of $0 and as of August 31, 2012 we had Inventory of $10,298.
The decrease in Inventory of 100% is
attributable to the disposition as of November 30, 2012 of certain assets related to the McDonald Animal Hospital
As of February 28, 2013 we had Due from
an Affiliate of $34,895 and as of August 31, 2012 we had Due from an Affiliate of $39,140.
The decrease in Due from an Affiliate
of approximately 11% is attributable to the payment of $5,000 to the Company by Bio Matrix Scientific Group, Inc offset by the
payment by the Company of $755 in expenses on behalf of Bio Matrix Scientific Group, Inc during the period
As of February 28, 2013 we had an Employee
Receivable of $0 and as of August 31, 2012 we had an Employee Receivable of $4,349.
The decrease in Employee Receivable
of 100% is attributable to the disposition as of November 30, 2012 of certain assets related to the McDonald Animal Hospital
As of February 28, 2013 we had Property
& Equipment (Net of Accumulated Depreciation) of $1,919 and as of August 31, 2012 we had Property & Equipment (Net of Accumulated
Depreciation) of $ 8,832.
The decrease in Property & Equipment
(Net of Accumulated Depreciation) of approximately 78% was primarily attributable to the disposition as of November 30, 2012 of
certain assets related to the McDonald Animal Hospital.
As of February 28, 2013 we had a Goodwill
of $0 and as of August 31, 2012 we had an Goodwill of $405,000.
The decrease in Goodwill of 100% is
attributable to the disposition as of November 30, 2012 of certain assets related to the McDonald Animal Hospital
As of February 28, 2013 we had Intangible
Assets of $654 and as of August 31, 2012 we had Intangible Assets of $1,052.
The decrease in Intangible Assets of approximately 39% is primarily attributable to the disposition as of November 30, 2012 of
certain assets related to the McDonald Animal Hospital as well as the recognition of depreciation expense.
As of February 28, 2013 we had Deposits
of $0 and as of August 31, 2012 we had Deposits of $1,151 .
The decrease in Deposits of 100% is primarily attributable to the disposition as of November 30, 2012 of certain assets related
to the McDonald Animal Hospital
As of February 28, 2013 we had Accounts
Payable of $90,774 and as of August 31, 2012 we had Accounts Payable of $74,574.
The increase in Accounts Payable of
approximately 21% is primarily attributable to increases in outstanding obligations of the Company incurred in the course of business.
As of February 28, 2012 we had Notes
Payable of $213,680 and as of August 31, 2012 we had Notes Payable (Including Long Term Portion of Notes payable) of $261,831.
The decrease in Notes Payable of approximately
5% is primarily attributable to the elimination of certain obligations pursuant to the disposition as of November 30, 2012 of certain
assets related to the McDonald Animal Hospital offset by loans to the Company during the six months ended February 28, 2013 totaling
$52,792.
As of February 38, 2012 we had Convertible
Notes Payable (net of unamortized discount) of $119,000 and as of August 31, 2012 we had Convertible Notes Payable (net of
unamortized discount) of $121,495.
This decrease of approximately 39% is
primarily attributable to:
|
(a)
|
Settlement of $101,500 of Convertible Debt through the issuance of common stock offset by
|
|
(b)
|
The issuance on September 20, 2012 of a convertible note in the amount of $63,000
|
|
(c)
|
The recognition of $99,004 Interest Expense attributable to amortization of discount
|
As of February
28, 2013 we had Accrued Expenses of $180,394 and as of August 31, 2012 we had Accrued Expenses of $119,726.
The increase in Accrued Expenses of
approximately 51% is primarily attributable to:
|
(a)
|
Accrual of $45,500 in salary owed to the Company’s CEO over the course of the six months
|
|
(b)
|
Accrual of $71,315 of interest expense incurred over the course of the six months
|
Offset by:
Satisfaction of $1,700 of accrued interest
through the issuance of the Company’s common stock.
Net reductions in accrued payroll tax
expenses of $537
Material Changes in Results of Operations
Revenues from continuing operations
were $0 for the three months ended February 28, 2013 and -0- for the three months ended February 29, 2012. Net losses from
continuing operations were $163,725 for the three months ended February 28, 2013 and $887,373 for the same period ended 2012.
The decrease in Net Losses from continuing
operations of approximately 81% is primarily attributable to :
|
(a)
|
Decreases in rental expenses of approximately 72%
|
|
(b)
|
Decreases in General and Administrative expenses of approximately
23%
|
|
(c)
|
Decreases in consulting expenses of approximately 77%
|
|
(d)
|
The recognition of $130, 054 during the quarter ended February 29,
2012 of expenses incurred pursuant to that agreement entered into by and between the Company and Titterington Veterinary Services,
Inc, Dr. Ronald Titterington and Dr. Kathy Snell.
|
|
(e)
|
The recognition of a loss on impairment of intangible assets during
the quarter ended February 29, 2012 of $683,333 resulting from the termination of that agreement entered into by and between
the Company and Titterington Veterinary Services, Inc, Dr. Ronald Titterington and Dr. Kathy Snell.
|
|
(f)
|
Decreases in interest expenses of approximately 9%
|
|
(g)
|
Decreases in interest expenses attributable to amortization of discount
attributable to Beneficial Conversion Features of approximately 69%
|
|
(h)
|
Other Income of $86,750 resulting from the cancellation of securities
issued as compensation during the three months ended February 29, 2012.
|
|
(i)
|
$187,699 of income recognized during the quarter ended February 29,
2012 pursuant to that agreement entered into by and between the Company and Titterington Veterinary Services, Inc, Dr. Ronald Titterington
and Dr. Kathy Snell
|
Offset by:
|
(a)
|
$187,699 of income recognized during the quarter ended February 29,
2012 pursuant to that agreement entered into by and between the Company and Titterington Veterinary Services, Inc, Dr. Ronald Titterington
and Dr. Kathy Snell .
|
|
(b)
|
$7,049 of expenses incurred as a result of issuance of securities
below par value during the quarter ended February 28, 2013
|
|
(c)
|
$6,043 of expenses incurred during the quarter ended February 28,
2013 resulting from common shares issued pursuant to contractual obligations contained in certain convertible notes outstanding.
|
Revenues from
continuing operations were $0 for the six months ended February 28, 2013 and -0- for the three months ended February 29, 2012.
Net losses from continuing operations were $818,293 for the six months ended February 28, 2013 and $1,088,505 for the six
months ended February 29, 2012.
The
decrease in Net Losses from continuing operations of approximately 25% is primarily attributable to :
|
(a)
|
Research and Development expenses incurred during the six months
ended February 29, 2012 of $5,798
|
|
(b)
|
Decreases in rental expenses of approximately 61%
|
|
(c)
|
The recognition of $130, 054 during the quarter ended February 29,
2012 of expenses incurred pursuant to that agreement entered into by and between the Company and Titterington Veterinary Services,
Inc, Dr. Ronald Titterington and Dr. Kathy Snell.
|
|
(d)
|
The recognition of a loss on impairment of intangible assets during
the quarter ended February 29, 2012 of $683,333 resulting from the termination of that agreement entered into by and between
the Company and Titterington Veterinary Services, Inc, Dr. Ronald Titterington and Dr. Kathy Snell.
|
|
(e)
|
Decreases in interest expenses attributable to amortization of discount
attributable to Beneficial Conversion Features of approximately 69%
|
|
(f)
|
A onetime gain of $61,168 attributable to liabilities derecognized
in the disposition of the McDonald Animal Hospital recognized during the quarter ended November 30, 2012.
|
|
(g)
|
Other Income of $86,750 resulting from the cancellation of securities
issued as compensation during the three months ended February 29, 2012.
|
Offset by:
|
(a)
|
$187,699 of income recognized during the quarter ended February 29,
2012 pursuant to that agreement entered into by and between the Company and Titterington Veterinary Services, Inc, Dr. Ronald Titterington
and Dr. Kathy Snell .
|
|
(b)
|
$56,343 of expenses incurred as a result of issuance of securities
below par value during the six months ended February 28, 2013
|
|
(c)
|
$6,043 of expenses incurred during the quarter ended February 28,
2013 resulting from common shares issued pursuant to contractual obligations contained in certain convertible notes outstanding.
|
|
(d)
|
Other Income of $86,750 resulting from the cancellation of securities
issued as compensation during the three months ended February 29, 2012.
|
|
(e)
|
Recognition of a $22,906 one time loss on assets disposed of in the
disposition of the McDonald Animal Hospital during the quarter ended November 30, 2012.
|
|
(f)
|
Recognition of a Goodwill impairment charge of $405,000 attributable
to the disposition as of November 30, 2012 of certain assets related to the McDonald Animal Hospital
|
Liquidity and Capital Resources
As of February 28, 2012 we had
$5,221 cash on hand and current liabilities of $611,848 (exclusive of convertible debt discount attributable to a beneficial
conversion feature) such liabilities consisting of Accounts Payable, Notes Payable, Convertible Notes Payable, Amounts due to Affiliates
/ Others and Accrued Expenses.
We feel we will not be able to satisfy
its cash requirements over the next twelve months and shall be required to seek additional financing.
We currently plan to raise additional
funds primarily by obtaining governmental and non-governmental grants , offering securities for cash and acquiring existing veterinary
clinics with the ability to generate cash flow to fund operations.
We have yet to decide what type of offering we will use or how much capital we will raise. There is no guarantee that we will
be able to raise any capital through any type of offerings. We can give no assurance that any governmental or non-governmental
grant will be obtained by us despite our best efforts. We cannot assure that we will be successful in obtaining additional financing
necessary to implement our business plan. We have not received any commitment or expression of interest from any financing
source that has given us any assurance that we will obtain the amount of additional financing in the future that we currently
anticipate. For these and other reasons, we are not able to assure that we will obtain any additional financing or, if we
are successful, that we can obtain any such financing on terms that may be reasonable in light of our current circumstances.
On June 1, 2012 the Company entered
into an Equity Purchase Agreement (the "June Purchase Agreement") with Southridge Partners II, LP, a Delaware limited
partnership ("Southridge").
Under the terms of the June Purchase
Agreement, Southridge will purchase, at the Company's election, up to $10,000,000 of the Company's registered common stock (the
"Shares"). During the term of the Purchase Agreement, the Company may at any time deliver a "put notice" to
Southridge thereby requiring Southridge to purchase a certain dollar amount of the Shares. Simultaneous with the delivery of such
Shares, Southridge shall deliver payment for the Shares. Subject to certain restrictions, the purchase price for the Shares shall
be equal to 91% of the average of the two lowest Closing Prices during the Valuation Period as such capitalized terms are defined
in the Agreement.
The number of Shares sold to Southridge
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. Additionally,
Southridge may not execute any short sales of the Company's common stock.
Any sale of Shares pursuant to the June
Agreement is subject to a Registration Statement filed under the Securities Act of 1933 remaining effective for the sale by Southridge
of those Shares.
June Agreement shall terminate (i) on
the date on which Southridge shall have purchased Shares pursuant to this Agreement for an aggregate Purchase Price of $10,000,000,
or (ii) on the date occurring 24 months from the date on which the June Agreement was executed and delivered by the Company and
Southridge.
The Company has also agreed to pay the
following to Capital Path Securities LLC for acting as the Company’s exclusive advisor and placement agent in connection
with the June Purchase Agreement a cash placement fee of 5% of funds received by the Company through the sale of Shares to
Southridge as such funds are received by the Company.
On June 12, 2012 a registration statement
on form S-1 was filed with the United States Securities and Exchange Commission registering 46,238,705 shares of the Company’s
common stock that will be put to Southridge pursuant to the June Agreement which was declared effective by the United
States Securities and Exchange Commission on August 27, 2012.
During the quarter ended November 30,
2012 the Company sold 37,640, 604 common shares for total consideration of $64,300 pursuant to the June Agreement.
On September 20, 2012 the Company issued
a convertible promissory note in the amount of $63,000 cash from which was received September 27, 2012. The note bears an interest
rate of eight percent (8%), matures on June 25, 2013. and may be converted after 180 days from execution of this note for shares
of the Company’s common stock. The note may be converted at a thirty nine percent (39%) discount to the average of the lowest
3 closing bid prices of the common stock during the 10 trading days prior to the conversion date.
We were not party to any material
commitments for capital expenditures as of the end of the quarter ended February 28, 2013.