UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

X . QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2012

or

 

. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

Commission file number: 333-48746

 

SURGLINE INTERNATIONAL, INC.

 

(Name of small business issuer as specified in its charter)

 

Nevada	87-0567853
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

 

319 Clematis Street – Suite 400, West Palm Beach, Florida 33401

(Address of principal executive offices)(Zip Code)

 

Issuer's telephone number, including area code: (561) 514-9042

 

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, and (2) has been subject to such filing requirements for the past 90 Days: Yes X . No .

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.

 

Large accelerated filer	.	Accelerated filer	.
Non-accelerated filer	. (Do not check if a smaller reporting company)	Smaller reporting company	X .

 

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

 

Number of shares of common stock outstanding at March 12, 2012 is 5,929,242,223

 

 

 

 

 

TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4T	Controls and Procedures	20
	PART II
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23

 

 

 

SURGLINE INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

Assets
					January 31, 2012		July 31, 2011
Current Assets
	Cash			$	9,447	$	49,011
	Accounts receivable				68,238		-
	Notes and interest receivable, other				36,276		-
	Inventory				116,005		-
	Debt issuance costs				6,161		-
	Prepaid assets and deposits				602		22,500
			Total current assets		236,729		71,511
Property, plant and equipment, net					2,129		704
			Total assets	$	238,858	$	73,215
Liabilities and Shareholders’ Deficit
Current liabilities:
	Accounts payable and accrued liabilities, related parties			$	341,478	$	20,007
	Accounts payable and accrued expenses				551,838		49,000
	Convertible debentures payable, net				154,664		-
	Derivative liability convertible debentures				290,667		-
	Notes payable				375,759		500
	Notes payable, related parties				46,543		-
			Total current liabilities		1,760,949		69,507
Long-term liabilities:
		Convertible debentures payable, net			—		—
			Total liabilities		1,760,949		69,507
Shareholders’ deficit:
	Preferred stock, 25,000,000 shares authorized Series A, 1,000,000 shares authorized; stated value $1.00 per share; 160,000 (January) issued and outstanding				160,000		—
	Series B, par value $0.001, 1,000,000 shares authorized; no shares  issued and outstanding				—		—
	Common stock, $.001 par value, 6,475,000,000 shares authorized; 5,896,646,179 (January), and 3,981,163,909 (July) shares issued and outstanding				5,896,646		3,981,164
	Additional paid-in capital				(4,568,604)		(3,278,584)
	Retained earnings				(3,010,133)		(699,871)
			Total shareholders' deficit		(1,522,091)		2,708
			Total liabilities and shareholders' deficit	$	238,858	$	72,215

 

See accompanying notes to financial statements

 

SURGLINE INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Operations

For the Three and Six Months Ended January 31, 2012

 

Three months ended             Six months ended

January 31, 2012               January 31, 2012

Revenues:
	Revenues		$	27,876		$	103,148
	Cost of revenues			21,977			61,401
		Gross profit		5,899			41,747
Operating costs and expenses:
	Selling, general and administrative
	Consulting fees			33,000			67,500
	Management and consulting fees, related parties			67,300			236,200
	Salaries including stock compensation cost			-			1,527,022
	Legal and accounting			34,002			47,750
	Other			22,016			52,600
		Total operating costs and expenses		156,318			1,931,072
		Operating loss		(150,419)			(1,889,325)
Other income (expenses)
	Interest expense, related parties			(1,046)			(1,909)
	Interest expense, other			(57,123)			(133,264)
	Beneficial conversion feature			(223,776)			(223,776)
	Fair value adjustment of derivative liabilities			(77,182)			(61,988)
		Total other income (expenses)		(359,127)			(420,937)
		Net income (loss)	$	(509,546)		$	(2,310,626)
Basic and diluted net income (loss)per common share			$	(0.01)		$	(0.01)
Basic and diluted weighted average common shares outstanding				5,818,131,679			5,408,486,495

 

See accompanying notes to financial statements

SURGLINE INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Shareholders' Deficit

 

	Common	Stock	Additional paid-in capital	Preferred stock	Accumulated (deficit) equity	Total stockholders' deficit
	Shares	Amount
Balances, July 31, 2011	3,981,163,909	$3,981,164	$(3,278,584)	-	$(699,871)	$2,709
Issuance of shares for reverse merger with SurgLine	863,107,522	863,108	(2,677,155)	199,473	-	(1,614,574)
Issuance of shares pursuant to consulting agreement	545,364,919	545,365	981,657			1,527,022
Issuance of shares upon conversion of subordinated debentures	233,280,233	233,280	(70,280)	-	-	163,000
Issuance of shares upon conversion of series A Preferred Stock	32,894,167	32,894	6,579	(39,473)	-	-
Issuance of shares pursuant to conversion of accounts payable	76,677,667	76,678	(33,671)	-	-	43,007
Issuance of shares of common stock for services	3,000,000	3,000	(1,500)			1,500
Issuance of shares of common stock pursuant to conversion of accrued interest	14,304,615	14,305	(2,684)			11,621
Issuance of common stock upon conversion of convertible notes	146,853,147	146,853	(46,853)			100,000
Beneficial conversion feature			223,776			223,776
Redemption of subordinated debentures			330,111			330,111
Net loss	-	-	-	-	(2,310,262)	(2,310,262)
Balances, January 31, 2012	5,896,646,179	$5,896,646	$(4,568,604)	$160,000	$(3,010,133)	$(1,522,091)

 

See accompanying notes to financial statements

SURGLINE INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows

For the Six Months Ended January 31, 2012

 

				2012
Cash flows from operating activities:
	Net income (loss)		$	(2,310,262)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
		Increase (decrease) in derivative liability		61,988
		Stock based compensation		1,527,022
		Common stock issued for services		1,500
		Cash acquired in merger		152
		Amortization of discount on debentures payable		99,986
		Amortization of debt issuance costs		9,258
		Beneficial conversion feature		223,7876
Change in operating assets and liabilities:
	Increase in accounts receivable			(68,238)
	Increase in inventory			(116,005)
	Decrease in prepaid expenses and other current assets			21,898
	Increase in accounts payable and accrued expenses			322,420
	Decrease in amounts due to related parties			(47,033)
Net cash used in operating activities				(273,539)
Cash flows from investing activities:
	Purchase of property and equipment			(1,425)
Net cash used in investing activities				(1,425)
Cash flows from financing activities:
	Proceeds from sale of common stock			-
	Proceeds from issuance of related party notes payable			10,400
	Proceeds from issuance of convertible notes payable			100,000
	Proceeds from debentures payable			133,000
	Placement fees paid			(7,500)
	Repayments of notes payable			(500)
Net cash provided by financing activities				235,400
Net increase (decrease) in cash and cash equivalents				(39,564)
Cash and cash equivalents, beginning of period				49,011
Cash and cash equivalents, end of period			$	9,447
Supplemental disclosures of cash flow information:
	Cash paid during the year for interest		$	2,837
	Cash paid during the year for taxes		$	-
Non-cash investing and financial activities:
	Fair value of options and shares issued for services		$	1,527,022
	Fair value of shares of common stock issued for debentures and accrued and unpaid interest		$	98,336
	Fair value of shares of common stock issued for account payable		$	43,007

 

See accompanying notes to financial statements

 

 

SURGLINE INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

THE THREE AND SIX MONTHS ENDED JANUARY 31, 2012

 

 

1.

Organization, basis of presentation and summary of significant accounting policies:

 

Organization

 

We were originally organized under the laws of the State of Nevada in 1996 as Zacman Enterprises, Inc. and subsequently changed our name to eNutrition, Inc.

 

On May 17, 2002, our stockholders approved our acquisition of all of the issued and outstanding securities of Torpedo Delaware in exchange for 8,000,000 shares of our common stock issued to the Torpedo USA stockholders.  

 

On February 1, 2005, we acquired all of the issued and outstanding common stock of Interactive Games, Inc. (“Interactive”).  In conjunction with the Interactive agreement, we changed our name to Interactive Games, Inc.

 

Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (“Nuvo”), we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary. Contemporaneously, we changed our name to “China Nuvo Solar Energy, Inc.”

 

Nuvo was formed on April 13, 2006 for the purpose of seeking a business opportunity in the alternate energy or “next-generation energy" sector. This industry sector encompasses non-hydro carbon based energy production and renewable energy technologies that are “net-zero" or emissions free.

 

SHARE EXCHANGE TRANSACTION WITH SURGLINE, INC.

 

On September 1, 2011, the Registrant entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the “Share Exchange Agreement”) with SurgLine, Inc., a Nevada corporation (“SurgLine”) and the shareholders of SurgLine. Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Registrant adopted the business plan of SurgLine.

 

Pursuant to the Agreement, the Registrant agreed to acquire all of the outstanding capital stock of SurgLine in exchange (the “Share Exchange”) for the original issuance of an aggregate of 857,143 shares (the “Exchange Shares”) of the Registrant’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). The Exchange Shares were issued on a pro rata basis, on the basis of the shares held by such security holders of SurgLine at the time of the Exchange. Further in accordance with the Agreement, and following an amendment of the Registrant’s Articles of Incorporation, the Exchange Shares were converted into 3,817,554,433 shares of the Registrant’s common stock, par value $0.001 per share. The shares of common stock issued to the SurgLine shareholders’ were equal to 70% of the issued and outstanding Common Stock of the Registrant, immediately after the Share Exchange. Additionally, pursuant to the provisions of the Share Exchange Agreement, the Company issued 163,609,476 newly issued shares of Common Stock to the SurgLine shareholders, in satisfaction of the anti dilution provisions in the Share Exchange Agreement. As a result of the Share Exchange, the Registrant issued a total of 3,981,163,909 shares of its common stock to the SurgLine shareholders and SurgLine became a wholly-owned subsidiary of the Registrant. The parties have taken the actions necessary to provide that the Exchange is treated as a “tax free exchange” under Section 368 of the Internal Revenue Code of 1986, as amended. The Agreement contains customary representations, warranties and covenants of the Registrant and SurgLine for like transactions. The Share Exchange was effective upon the completed filing of Articles of Exchange with the Secretary of State of Nevada. The foregoing descriptions of the above referenced agreements do not purport to be complete. For an understanding of their terms and provisions, reference should be made to the Agreement attached as Exhibit 10.1 to the Current Report on Form 8-K/A, filed on December 14, 2011.

 

Additionally, the Registrant issued 142,857 shares of its Series B Preferred Stock to Abod Partners, LLC. (“Abod”). Abod has acted as a consultant to the Registrant in facilitating the Agreement by and among the Registrant and SurgLine. Upon the effectiveness of the increase in the authorized shares of capital stock of the Registrant, the 142,857 shares of Series B Preferred Stock were exchanged for 545,364,919 shares of our Common Stock.

 

On September 1, 2011, as a covenant to the Agreement, holders of a majority of the Registrant’s outstanding Common Stock voted to amend the Registrant’s Articles of Incorporation to increase the number of its authorized shares of capital stock from 1,500,000,000 shares to 6,500,000,000 par value $0.001 shares (the “Amendment”) of which (a) 6,475,000,000 shares were designated as Common Stock and (b) 25,000,000 shares were designated as blank check preferred stock.

 

At the effective time of the Exchange, our board of directors and officers was reconstituted by the resignation of Henry Fong as President and Chief Executive Officer of the Registrant and the appointment of Thomas G. Toland as a member of the Registrant’s Board of Directors, President and Chief Executive Officer and Richard Dutch as Secretary and Chief Operating Officer of the Registrant.

 

On October 18, 2011 the Company filed with the Secretary of State of Nevada Amended and Restated Articles of Incorporation to change the name of Registrant to SurgLine International, Inc. The amendment was approved by a majority of the Company’s shareholders and the Company’s Board of Directors.

 

Going concern and management’s plans

 

The Company had a working capital deficit of approximately $1,524,220 at January 31, 2012. Additionally, the Company to date has generated minimal revenues. Accordingly, the Company has no ready source of working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. While management believes the Company may be able to raise funds through the issuance of debt or equity instruments, there is no assurance the Company will be able to raise sufficient funds to operate in the future. The debt financing may include loans from our officers and directors. Although our balance sheet includes current liabilities of approximately $1,761,000, a portion of this amount are in the form of a derivative liability of $290,667 and convertible notes and debentures of $530,423. These amounts, plus other related party loans of approximately $47,000 and accrued and unpaid interest may be converted to common stock, thereby reducing considerably our debt service obligations. Nevertheless, we will be required to raise funds in order to fund our operations and costs associated with being a public company.

 

On September 1, 2011 the Company completed the acquisition of 100% of the common stock of SurgLine. Pursuant to the terms of the Share Exchange Agreement (see above) SurgLine became a wholly owned subsidiary of China Nuvo. We will require additional capital for general corporate working capital to fund our day-to-day operations of SurgLine. We presently believe the source of funds will primarily consist of debt financing, which may include debt instruments that may include loans from our officers or directors, or the sale of our equity securities in private placements or other equity offerings or instruments.

 

Basis of presentation

 

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of SurgLine International, Inc. (the “Company”) contain all adjustments, which include normal recurring adjustments necessary to present fairly the financial position at January 31, 2012, the results of operations for the three and six months ended January 31, 2012 and cash flows for the six months ended January 31, 2012. The balance sheet as of July 31, 2011 is derived from SurgLine’s audited financial statements.

 

For SEC reporting purposes, SurgLine is treated as the continuing reporting entity that acquired China Nuvo (the historic registrant). The reports filed after the transaction have been prepared as if SurgLine (accounting acquirer) were the legal successor to China Nuvo’s reporting obligation as of the date of the acquisition. Therefore, all financial statements filed subsequent to the transaction reflect the historical financial condition, results of operations and cash flows of SurgLine, for all periods prior to the share exchange and consolidated with China Nuvo from the date of the share Exchange. SurgLine previously had a June 30 fiscal year end, but has now assumed the fiscal year end of China Nuvo, the legal acquirer. Accordingly, the financial statements presented herein are the unaudited financial statements for the three and six months ended January 31, 2012 are of SurgLine, Inc., and from September 1, 2011 are consolidated with SurgLine International, Inc., formerly China Nuvo. Since SurgLine was formed in March 2011, there are no comparative results for the three and six months ended January 31, 2011. All share and per share amounts of SurgLine have been retroactively adjusted to reflect the legal capital structure of China Nuvo pursuant to FASB ASC 805-40-45-1.

 

SurgLine, Inc. (“SurgLine”) was incorporated on March 15, 2011 under the laws of the state of Nevada. The Company provides its customers with the highest quality medical and surgical products at the lowest possible cost by eliminating the “historical brand premium.” The Company’s founders saw the need to help reduce costs in the acute care healthcare system, and particularly that of the Operating Rooms. The Company’s core business strategy is simply: Source and sell the highest quality medical and surgical products for substantially less, thereby reducing the “historical brand premium” that has historically been  absorbed  by healthcare end users, including hospitals, outpatient surgery centers, medical clinics, self-insured employers, managed care organizations, commercial insurance carriers and state and federal governmental payers.

 

On certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended July 31, 2011, as filed with the SEC on February 4, 2012, and the Company’s Current Report on Form 8-K/A, filed on February 13, 2012.

 

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, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates.

 

Significant accounting policies:

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results will differ from those estimates.

 

Intellectual Property

 

The Company records intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets deemed to have indefinite lives are not subject to annual amortization. Intangible assets which have finite lives are amortized on a straight line basis over their remaining useful life; they are also subject to annual impairment reviews.

 

Revenue recognition

 

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. This statement established that revenue can be recognized when persuasive evidence of an arrangement exists, the services have been delivered, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is reasonably assured.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

 

Inventory

 

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. At January 31, 2012, $116,005 of finished goods inventory was on hand.

 

Concentration on credit risks

 

The Company is subject to concentrations of credit risk primarily from cash and assets from discontinued operations.

 

The Company minimizes its credit risks associated with cash, including cash classified as assets from discontinued operations, by periodically evaluating the credit quality of its primary financial institutions.

 

Stock-based compensation

 

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (“SFAS No, 123R”). SFAS No. 123R establishes the financial accounting and reporting standards for stock-based compensation plans. As required by SFAS No. 123R, the Company will recognize the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements.

 

Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans (including shares issued under its stock option plans) in accordance with APB Opinion No. 25 and followed the pro forma net income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). There are 16,500,000 stock options outstanding at January 31, 2012.

 

Fair value of financial instruments

 

The carrying value of cash, assets of discontinued operations, accounts payable and accrued expenses approximate their fair value due to their short-term maturities. The carrying amount of the note payable and due to related parties approximate their fair value based on the Company's incremental borrowing rate.

 

Income taxes

 

Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or, all of the deferred tax asset will not be realized.

 

Loss per common share

 

Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants and common stock underlying convertible promissory notes at January 31, 2012 was 488,162,142 and are not considered in the calculation as the impact of the potential common shares would be to decrease loss per share and therefore no diluted loss per share figures are presented.

 

Accounting for obligations and instruments potentially settled in the Company’s common stock

 

In connection with any obligations and instruments potentially to be settled in the Company's stock, the Company accounts for the instruments in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock. This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.

 

Under EITF 00-19, contracts are initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date.

 

Derivative instruments

 

In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative instruments under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

 

Recent accounting pronouncements

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” The guidance improves the comparability of financial reporting and facilitates the convergence of U.S. GAAP and IFRS by amending the guidance in ASC 220, Comprehensive Income.  Under the amended guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This guidance is effective retrospectively for annual and interim periods beginning after December 15, 2011.  The adoption of the guidance is not expected to have a material impact on the Company's Consolidated Financial Statements or the Notes thereto.

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

2.

Accrued liabilities, related parties:

 

Accrued liabilities, related parties at January 31, 2012 are as follows:

 

		2012
Management fees	$	330,952
Accrued interest		6,292
Affiliated Companies		4,234
	$	341,478

 

3.

Convertible debentures payable:

 

Current Year Convertible Notes

 

On September 13, 2011, the Company entered into a note agreement with an institutional investor for the issuance of a convertible promissory note of $28,000. On November 25, 2011 and December 28, 2011 the Company entered into two additional notes with the same investor for $30,000 and $25,000 respectively (together referred to as the “CY Convertible Notes”).

 

Among other terms, the CY Convertible Notes matures on its’ nine month anniversary (the “Maturity Date”), unless prepayment of any of the CY Convertible Notes is required in certain events, as called for in the agreement.  The CY Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion.  In addition, the CY Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.

 

The CY Convertible Notes bears interest at eight percent (8%) per annum, payable in cash or shares of our common stock at the Conversion Price.  Upon the occurrence of an Event of Default (as defined in the CY Convertible Notes), the Company is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holders may at their option declare the CY Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable.

 

The Company may at its option prepay the CY Convertible Notes in full during the first ninety days following their issuance in an amount equal to 150% of the outstanding principal and interest, and during the 91^st to 180^th days following the Note in an amount equal to 175% of the outstanding principal and interest. Further terms call for the Company to maintain shares reserved for issuance as stated in the CY Convertible Note.

 

We received net proceeds from the CY Convertible Notes of $75,500 after debt issuance costs of $7,500 paid for lender legal fees.  These debt issuance costs will be amortized over the term of the CY Convertible Note or such shorter period as the CY Convertible Note may be outstanding.  Accordingly, as the CY Convertible Note is converted to common stock prior to their expiration date, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. For the three and six months ended January 31, 2012, $1,732 and $2,176 of these costs had been expensed as debt issuance costs.

 

We have determined that the conversion feature of the CY Convertible Notes represents an embedded derivative since the CY Convertible Note is convertible into a variable number of shares upon conversion. Accordingly, the CY Convertible Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives meet the criteria of ASC 815 (formerly SFAS 133 and EITF 00-19), and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the CY Convertible Notes. Such discount will be accreted from the date of issuance to the maturity dates of the CY Convertible Notes. The change in the fair value of the liability for derivative contracts will be credited to other income (expense) in the consolidated statements of operations at the end of each quarter. The $83,000 face amount of the CY Convertible Notes were stripped of its’ conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds to the conversion option attributed to the debt. The beneficial conversion feature (an embedded derivative) included in the CY Convertible Notes resulted in an initial debt discount of $83,000 and an initial loss on the valuation of derivative liabilities of $40,290 for a derivative liability balance of $123,290 at issuance.

 

The fair values of the CY Convertible Notes were calculated at issue date utilizing the following assumptions:

 

Issuance Date	Fair Value	Term	Assumed Conversion Price	Market Price on Issue Date	Volatility Percentage	Interest Rate
9/13/11	$46,667	9 months	$0.0012	$0.0026	187%	1.4%
11/25/11	40,909	9 months	0.00073	0.0015	193%	.02
12/28/11	35,714	9 months	0.0007	0.0014	194%	.02

 

At January 31, 2012, the Company revalued the derivative liability balance of the CY Convertible Notes; the change in the derivative liability increased by $42,710.

 

The fair value of the CY Convertible Note was calculated at January 31, 2012 utilizing the following assumptions:

 

Fair Value	Term	Assumed Conversion Price	Volatility Percentage	Interest Rate
$166,000	9 months	$0.0005	207%	.05%

 

 

Pursuant to the Share Exchange Agreement, the Company assumed a derivative liability of $253,333 related to the face value of $123,000 of Convertible Notes (the “Assumed Convertible Notes”). The Assumed Convertible Notes have terms similar to the CY Convertible Notes. Subsequent to the Share Exchange Agreement, the Company issued 182,671,002 shares of common stock upon the conversion of $113,000 face value of the Assumed Convertible Notes, $4,405 of accrued and unpaid interest and $1,500 of fees on the Assumed Convertible Notes. The Company reduced the derivative liability by $223,571 as a result of the redeemed Assumed Convertible Notes. The Company revalued the remaining face value of $10,000 of the Assumed Convertible Notes as of January 31, 2012 and recorded a credit to expense of $9,762 and reduced the derivative liability balance by $9,762; resulting in a derivative liability balance of $20,000 as of January 31, 2012 related to the Assumed Convertible Notes.

 

Also pursuant to the Share Exchange Agreement, the Company assumed $128,500 of face value of 2007 Debentures (the “2007 Debentures”) and a derivative liability of $222,456 associated with the 2007 Debentures. The 2007 Debentures are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Corporation’s common stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Debentures provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Corporation or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Corporation.

 

Subsequent to the Share Exchange Agreement, the Company issued 67,913,846 shares of common stock upon the conversion of $50,000 of face value of the 2007 Debentures and $7,216 of accrued and unpaid interest. The Company reduced the derivative liability of the 2007 Debenture by $70,175 as a result of the redeemed 2007 Debentures. The Company revalued the remaining face value of $78,500 of the 2007 Debentures as of January 31, 2012 and reduced the derivative liability of the 2007 Debentures by $11,251 and recorded a credit to expense of $11,251; resulting in a derivative liability balance of $104,667 as of January 31, 2012 related to the 2007 Debentures.

 

The following table summarizes the balance sheet amounts as of January 31, 2012, as well as the amounts included in the consolidated statement of operations for the six months ended January 31, 2012.

 

Balance Sheet

 

Debentures		Debt issuance costs		Derivative liability		Face value of Debentures		Discount on Debentures
2007 Debenture	$	-	$	104,667	$	78,500	$	-
CY Conv Note		5,325		166,000		83,000		58,504
Assumed Conv Note		836		20,000		10,000		8,333
	$	6,161	$	290,667	$	171,500	$	66,836

 

Operating Statement
Debentures		Debt issuance costs (interest expense)		Fair value adjustment of derivative liability
2007 Debenture	$	-	$	(11,251)
CY Conv Note		2,175		42,711
Assumed Conv Note		7,083		(9,762)
	$	9,258	$	21,698

 

4.

Convertible and other promissory notes and long-term debt, including related parties:

 

Convertible and other promissory notes and long-term debt, including related parties at January 31, 2012 consist of the following:

 

		2011
Notes payable	$	375,759
Notes payable, related parties [A]		46,543
Convertible debentures, net of discount of $66,836		154,664
		576,966
Less current portion		576,966
Long-term debt, net of current portion	$	-

 

A.     Includes notes of $8,500 due to Mr. Fong, a member of our Board of Directors, as well as $38,043 due to various companies that Mr. Fong is affiliated with.

 

5.

Stockholders’ deficit:

 

Preferred Stock

 

Series A Preferred Stock

 

As of January 31, 2012 there are 160,000 shares of Series A Preferred stock outstanding. Pursuant to the Certificate of Designation for Series A Preferred Stock, as amended, holders of the Series A Preferred Stock can convert the shares of preferred stock to common stock.  The conversion price is equal to 50% of the average of the three lowest closing bid prices of our common stock in the 10 days immediately preceding the conversion.  Additionally Series A holders are entitled to vote their stock on an as if converted to common stock basis on each matter submitted to vote at a meeting of stockholders. In the event of the Corporation’s liquidation, the Series A Preferred Stock shall rank senior to any class or series of the Corporation’s capital stock created after the Series A Preferred Stock; pari passu with any class or series of the Corporation’s capital stock created after the series A Preferred Stock that ranks on parity with the Series A Preferred Stock; and junior to any class or series of the Corporation’s capital stock created after the Series A Preferred Stock that ranks senior to the Series A Preferred Stock.  The Series A Preferred Stock shall be senior to the Corporation’s common stock. Stockholders do not have any preemptive rights or other similar rights to acquire additional shares of common stock or other securities.

 

Series B Preferred Stock

 

Pursuant to the Certificate of Designation for Series B Preferred Stock, shares issued and outstanding of the Series B Preferred Stock shall convert immediately to shares of common stock upon the Company filing and completing an increase in their authorized shares of common stock, whereby such increase will allow for the conversion of the Class B Preferred Stock. Each share of preferred stock will convert to an amount of shares of common stock that in their totality will equal eighty percent (80%) of the outstanding common stock, subsequent to its conversion; without exceeding the newly authorized common stock.  Additionally Series B holders are entitled to vote their stock on an as if converted to common stock basis on each matter submitted to vote at a meeting of stockholders. In the event of the Corporation’s liquidation, the Series B Preferred Stock shall rank senior to any class or series of the Corporation’s capital stock created after the Series B Preferred Stock; pari passu with any class or series of the Corporation’s capital stock created after the series B Preferred Stock that ranks on parity with the Series B Preferred Stock; and junior to any class or series of the Corporation’s capital stock created after the Series B Preferred Stock that ranks senior to the Series B Preferred Stock.  The Series B Preferred Stock shall be senior to the Corporation’s common stock. Stockholders do not have any preemptive rights or other similar rights to acquire additional shares of common stock or other securities.

 

Our Board of Directors, without further approval of our stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any additional series of preferred stock that may be created.

 

Pursuant to the Agreement, the Registrant agreed to acquire all of the outstanding capital stock of SurgLine in exchange (the “Share Exchange”) for the original issuance of an aggregate of 857,143 shares (the “Exchange Shares”) of the Registrant’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”).  The Exchange Shares were issued on a pro rata basis, on the basis of the shares held by such security holders of SurgLine at the time of the Exchange.  Further in accordance with the Agreement, and following an amendment of the Registrant’s Articles of Incorporation, the Exchange Shares were converted into 3,817,554,433 shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) equal to 70% of the issued and outstanding Common Stock of the Registrant.

 

Additionally, pursuant to the agreement, the Company issued 142,857 shares of its Series B Preferred Stock to Abod Partners, LLC. (“Abod”).  Abod has acted as a consultant in facilitating the Agreement by and among the Company and SurgLine. Upon the effectiveness of the increase in the authorized shares of capital stock of the Registrant, the 142,857 shares of Series B Preferred Stock were exchanged for 545,364,919 shares of our Common Stock. As of January 31, 2012 there were no shares of Series B Preferred Stock outstanding.

 

Common Stock

 

On September 1, 2011, as a covenant to the Agreement, holders of a majority of the Registrant’s outstanding Common Stock voted to amend the Registrant’s Articles of Incorporation to increase the number of its authorized shares of capital stock from 1,500,000,000 shares to 6,500,000,000 par value $0.001 shares (the “Amendment”) of which (a) 6,475,000,000 shares were designated as Common Stock and (b) 25,000,000 shares were designated as blank check preferred stock.

 

Shares issued for conversion of subordinated debentures, accrued interest and fees

 

From September 2, 2011 through January 31, 2012 the Company issued 233,280,233 shares of common stock upon the conversion of $163,000 of debentures. The Company issued 14,304,615 shares of common stock for $11,621 of unpaid interest on the debentures and also 3,000,000 shares of common stock for $1,500 of services. The shares were issued at an average price of approximately $0.0007 per share.

 

Shares issued for conversion of convertible notes

 

In November 2011, the Company issued $100,000 in convertible notes to seven investors. The notes convert at a discount equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion. Accordingly, in November 2011, upon the Company receiving Conversion Notices on the $100,000 convertible notes from the noteholders, the Company issued 146,853,147 shares of restricted common stock.

The shares were issued at $0.00068 per share. In connection with the issuance of common stock the Company realized a beneficial conversion expense of $223,776 for the three and six months ended January 31, 2012.

 

Shares issued for conversion of Series A Preferred Stock

 

On September 6, 2011 the Company issued 32,894,167 shares of common stock upon the conversion of $39,473 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.0012 per share.

 

Other issuance of shares of common stock

 

On October 20, 2011, the Company issued 76,677,667 shares of common stock pursuant to Debt Settlement and Release Agreements in exchange for the cancellation of $43,007 of accounts payable. The shares were issued at approximately $0.0006 per share.

 

Stock options and warrants

 

In March 2002, the Company adopted the 2002 Stock Option Plan, covering up to 1,000,000 shares of the Company's common stock, and in July 2003, the Company adopted the 2003 Stock Option Plan covering up to 2,500,000 shares of the Company's common stock. There are currently no options outstanding under the 2002 stock Option Plan and 300,000 under the 2003 Stock Option Plans. In August 2007, the Company adopted the 2007 Stock Option Plan covering up to 18,000,000 shares of the Company’s common stock. There are currently 10,000,000 shares of the Company’s common stock under the 2007 Plan. As of January 31, 2012 there were options to purchase 16,500,000 shares of the Company’s common stock outstanding under the 2007 Stock Option Plan.

 

A summary of the activity of the Company’s outstanding options and warrants during the six months ended January 31, 2012 is as follows:

 

		Options and warrants		Weighted average exercise price
Outstanding August 1, 2011		17,500,000	$	0.04
Granted		-		-
Exercised		-		-
Expired		1,000,000		0.12
Outstanding, January 31, 2012		16,500,000	$	0.03

 

Range of exercise prices	Warrants outstanding and exercisable	Weighted average remaining contractual life	Weighted average exercise price
$.01	10,000,000	4.56	$0.01
0.07	6,500,000	2.30	0.07

 

The weighted average remaining contractual life of the terms of the warrants and options is 6.9 years.

 

6. Income taxes:

 

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred taxes, as of January 31, 2012, are as follows:

 

Deferred tax assets:
Net operating loss carryforward	$	440,000
Less valuation allowance		(440,000)
Total net deferred tax assets		-

 

The Company may have had a change of ownership as defined by the Internal Revenue Code Section 382. As a result, a substantial annual limitation may be imposed upon the future utilization of its net operating loss carryforwards. At this point, the Company has not completed a change in ownership study and the exact impact of such limitations is unknown. The company has no accrued tax liability, as the income was derived from the sale of a subsidiary and the liabilities were alleviated through formal bankruptcy proceedings.

 

The federal statutory tax rate reconciled to the effective tax rate during the three months ended January 31, 2012, is as follows:

 

		2012
Tax at U.S. Statutory Rate		35.0%
State tax rate, net of federal benefits		5.0%
Change in valuation allowance		(40.0)
		0.0%

 

 

7. Subsequent events

 

Common Stock Issuances

 

On February 1, 2012 the Company issued 22,916,667 shares of common stock upon the conversion of $10,000 of the Assumed Convertible Notes and $1,000 of accrued and unpaid interest. The shares were issued at an average conversion price of $.00048 per share.

 

On February 7, 2012 the Company issued 24,689,393 shares of common stock upon the conversion of $13,000 of the 2007 Debentures and $3,295 of accrued and unpaid interest. The shares were issued at an average conversion price of $0.00066 per share.

 

Management performed an evaluation of the Company’s activity through the date these financials were issued to determine if they must be reported. The Management of the Company determined that there were no other reportable subsequent events to be disclosed.

 

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

 

THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS, FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE", "MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON THE VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

GENERAL

 

SurgLine International, Inc. (the “Company”) formerly, China Nuvo Solar Energy, Inc. was originally organized under the laws of the State of Nevada in 1996 as Zacman Enterprises, Inc.(“Zacman”) and Zacman subsequently changed its name to eNutrition, Inc.

 

On May 17, 2002, our stockholders approved our acquisition of all of the issued and outstanding securities of Torpedo Delaware in exchange for 8,000,000 shares of our common stock issued to the Torpedo USA stockholders.

 

On February 1, 2005, we acquired all of the issued and outstanding common stock of Interactive Games, Inc. (“Interactive”).  In conjunction with the Interactive agreement, we changed our name to Interactive Games, Inc.

 

Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (“Nuvo”), we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary. Contemporaneously, we changed our name to “China Nuvo Solar Energy, Inc.”

 

On September 1, 2011, the Registrant entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the “Share Exchange Agreement”) with SurgLine, Inc., a Nevada corporation (“SurgLine”) and the shareholders of SurgLine. Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Registrant adopted the business plan of SurgLine.

 

On September 1, 2011, as a covenant to the Agreement, holders of a majority of the Registrant’s outstanding Common Stock voted to amend the Registrant’s Articles of Incorporation to increase the number of its authorized shares of capital stock from 1,500,000,000 shares to 6,500,000,000 par value $0.001 shares (the “Amendment”) of which (a) 6,475,000,000 shares were designated as Common Stock and (b) 25,000,000 shares were designated as blank check preferred stock.

 

For SEC reporting purposes, SurgLine is treated as the continuing reporting entity that acquired China Nuvo (the historic registrant). The reports filed after the transaction have been prepared as if SurgLine (accounting acquirer) were the legal successor to China Nuvo’s reporting obligation as of the date of the acquisition. Therefore, all financial statements filed subsequent to the transaction reflect the historical financial condition, results of operations and cash flows of SurgLine, for all periods prior to the share exchange and consolidated with China Nuvo from the date of the share Exchange. SurgLine previously had a June 30 fiscal year end, but has now assumed the fiscal year end of the Registrant, the legal acquirer. Accordingly, the financial statements presented herein are the unaudited financial statements for the three and six months ended January 31, 2012 are of SurgLine, Inc., and from September 1, 2011 are consolidated with SurgLine International, Inc. Since SurgLine was not formed until March 2011, there are no comparative results for the period ending January 31, 2011. All share and per share amounts of SurgLine have been retroactively adjusted to reflect the legal capital structure of China Nuvo pursuant to FASB ASC 805-40-45-1.

 

SurgLine was incorporated on March 15, 2011 under the laws of the state of Nevada. The Company provides its customers with the highest quality medical and surgical products at the lowest possible cost by eliminating the “historical brand premium.” The Company’s founders saw the need to help reduce costs in the acute care healthcare system, and particularly that of the Operating Rooms. The Company’s core business strategy is simply: Source and sell the highest quality medical and surgical products for substantially less, thereby reducing the “historical brand premium” that has historically been  absorbed  by healthcare end users, including hospitals, outpatient surgery centers, medical clinics, self-insured employers, managed care organizations, commercial insurance carriers and state and federal governmental payers.

 

OVERVIEW

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto for the years ended July 31, 2011 and 2010, as well as the Company’s Current report on Form 8-K/A, filed with the SEC on February 24, 2012. The financial statements presented for the three and six months ended January 31, 2012 include the SurgLine and effective September 1, 2011 consolidated with SurgLine International, Inc.

 

In light of the foregoing, the historical data presented below is not indicative of future results. You should read this information in conjunction with the audited consolidated financial statements of the Company, including the notes to those statements and the following “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”.

 

The Company’s financial statements for the three and six months ended January 31, 2012 have been prepared on a going concern basis, which contemplates the realization of its remaining assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred losses since its inception and has a working capital deficit of approximately $1,524,000, and an accumulated shareholders’ deficit of approximately $1,522,000 as of January 31, 2012.

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that the Company will have adequate resources to fund future operations or that funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the six months ended January 31, 2012, net cash used in operating activities was $273,539. Net loss was $2,303,269 for the six months ended January 31, 2012. The loss included $1,527,022 of stock compensation cost related to the Share Exchange Agreement for 545,364,919 shares of common stock issued to a consultant who facilitated the transaction. The shares were valued at $0.0028, the market value of the common stock on the date of their issuance. Also included in the current period loss were non-cash expenses of $216,783 for the beneficial conversion feature related to the conversion of $100,000 of convertible notes, $109,244 for amortization regarding discount on debentures payable and amortization of deferred financing costs and $61,998 for the initial derivative liability on new convertible debentures issued this fiscal year ($40,290) and the fair market value change in derivative liabilities ($21,708).

 

Net cash provided by financing activities for the six months ended January 31, 2012 was $235,400. For the six months ended January 31, 2012, the Company received $133,000 on the issuance of convertible debentures, $100,000 on the issuance of convertible notes and $10,400 on the issuance of related notes payable. During the six months ended January 31, 2012 the Company paid $7,500 closing costs on newly issued convertible debentures and $500 repayment of notes payable.

 

For the six months ended January 31, 2012, cash and cash equivalents decreased by $39,564. Ending cash and cash equivalents was $9,447 as of January 31, 2012.

 

We will require substantial additional financing in order to execute our business plans and we may require additional financing in order to sustain substantial future business operations for an extended period of time. We currently do not have any firm arrangements for financing and we may not be able to obtain financing when required, in the amounts necessary to execute on our plans in full, or on terms which are economically feasible. If we are unable to obtain the necessary capital to pursue our strategic plan, we may have to reduce the planned future growth of our operations.

 

Pursuant to the Share Exchange Agreement we have assumed certain liabilities of the Registrant of approximately $1,659,000, as of September 1, 2011. As of January 31, 2012 our liabilities are approximately $1,761,000. Included in this amount is a derivative liability of $290,667 related to convertible notes and debentures that is subject to the change in market price of our common stock and ultimately will be satisfied upon the final conversion of the associated debt. Additionally we have face value convertible notes and debentures of approximately $221,500.  These amounts, plus other notes payable of $375,759 and related party loans of $46,543 and accrued and unpaid interest may be converted to common stock, thereby reducing considerably our debt service obligations.  Nevertheless, we will be required to raise funds in order to fund our operations and costs associated with being a public company. We estimate that amount to be $400,000, annually.

 

REVENUES

 

For the three and six months ended January 31, 2012 the Company had revenues of $27,876 and $103,148 consisting of sales to customers of the Company’s surgical implant products.

 

COSTS OF REVENUES

 

For the three and six months ended January 31, 2012 the Company had costs of revenues of $21,977 and $61,401 related to the costs of our surgical implant products sold during the respective periods.

 

OPERATING EXPENSES

 

Operating expenses for the three and six months ended January 31, 2012 was $156,318 and $1,931,072. The current year expenses includes $1,527,022 of costs related to issuance of 545,364,919 shares of common stock pursuant to a consulting agreement regarding the merger with SurgLine. Also included in the current six month expenses are management and consulting fees of $236,200 comprised of management fees to our executive staff. Additional operating costs include $60,000 for our FDA consultant and $7,500 to our Government Services consultant. Legal and accounting costs were $47,750 and $52,600 for general and administrative costs.

 

OTHER INCOME (EXPENSE)

 

Other expenses for the three and six months ended January 31, 2012 was $352,134 and $61,810 respectively and consisted primarily of the beneficial conversion feature expense of $216,783 related to the conversion of $100,000 of convertible promissory notes, interest expense of $58,169 (three months) and $135,173(six months), including $1,046 (three months) and $1,909 (six months) to related parties.

 

CONTRACTUAL OBLIGATIONS

 

No material changes outside the ordinary course of business during the quarter ended January 31, 2012.

 

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a smaller reporting company we are not required to provide the information required by this item.

 

 

ITEM 4T. DISCLOSURE CONTROLS AND PROCEDURES

 

A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the CEO and CFO have concluded that as of January 31, 2012 disclosure controls and procedures, were not effective to ensure that information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. The Company first intends to focus its’ efforts on stabilizing the business as a going concern, and secondly, designing and installing effective controls as soon as cash flow, and funding to do so become available.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

 

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
• Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.

 

Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system will be met. Also, 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.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may still occur.

 

There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

Item 1A. Risk Factors

 

As a smaller reporting company we are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

From September 2, 2011 through January 31, 2012 the Company issued 233,280,233 shares of common stock upon the conversion of $163,000 of debentures. The Company issued 14,304,615 shares of common stock for $11,621 of unpaid interest on the debentures and also 3,000,000 shares of common stock for $1,500 of services. The shares were issued at an average price of approximately $0.0007 per share.

 

In November 2011, the Company issued an aggregate of $100,000 in convertible notes (the “Notes”) to seven investors. The Notes are convertible into shares of Common Stock at a discount equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion. Accordingly, in November 2011, the investors elected to convert the Notes and the Company issued 146,853,147 shares of restricted Common Stock.

 

On September 6, 2011 the Company issued 32,894,167 shares of common stock upon the conversion of $39,473 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.0012 per share.

 

On October 20, 2011, the Company issued 76,677,667 shares of common stock pursuant to Debt Settlement and Release Agreements in exchange for the cancellation of $43,007 of accounts payable. The shares were issued at approximately $0.0006 per share.

 

The sales of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, we believe that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D. The agreements executed in connection with this sale contain representations to support the Company’s reasonable belief that the Investor had access to information concerning the Company’s operations and financial condition, the Investor acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the Investor are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). In addition, the issuances did not involve any public offering; the Company made no solicitation in connection with the sale other than communications with the Investor; the Company obtained representations from the Investor regarding their investment intent, experience and sophistication; and the Investor either received or had access to adequate information about the Company in order to make an informed investment decision. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.

 

 

Item 3. Defaults upon Senior Securities

 

None.

 

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

Item 5. Other Information

 

None.

 

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibit index

 

Exhibit
31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b) Reports on Form 8-K. During the fiscal quarter ended January 31, 2012, the Company filed the following reports:

 

Current Report on Form 8-K/A, on December 14, 2011

 

Current Report on Form 8-K/A, on February 24, 2012

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: March 12, 2012

 

SURGLINE INTERNATIONAL, INC.

 

 

By: /s/ Thomas G. Toland

Thomas G. Toland

President, Chief Executive Officer, Director

(Principal Executive Officer)

 

By: /s/ Barry S. Hollander

Barry S. Hollander

Chief Financial Officer

(Principal Financial Officer)