UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended March 31, 2012

 

OR

 

¨

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

 

Commission file number: 000-53609

 

Davi Luxury Brand Group, Inc.

(Exact name of registrant as specified in its charter)

 

NEVADA	26-2463412
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

9426 Dayton Way

Beverly Hills, CA 90210

(Address of principal executive offices)

 

(310) 288-8393

(Registrant’s telephone number)

(Former Name or Former Address, if Changed Since Last Report

 

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

 

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

 

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

	Large accelerated filer	¨	Accelerated Filer	¨
	Non-accelerated filer	¨	Smaller reporting company	x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 14, 2012 the issuer had 7,604,000 shares of common stock issued and outstanding following the May 10, 2012 1-for-10 reverse stock split (the issuer had 76,040,000 shares outstanding prior to May 10, 2012).

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No x    

 

 

DAVI LUXURY BRAND GROUP, INC.

 

For the quarter ended March 31, 2012

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I	1
ITEM 1. FINANCIAL STATEMENTS.	1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	12
ITEM 4. CONTROLS AND PROCEDURES.	12
PART II	12
ITEM 1. LEGAL PROCEEDINGS.	12
ITEM 1A. RISK FACTORS.	12
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.	13
ITEM 4. MINE SAFETY DISCLOSURES.	13
ITEM 5. OTHER INFORMATION	13
ITEM 6. EXHIBITS	13

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS.

 

DAVI LUXURY BRAND GROUP, INC.

BALANCE SHEETS

 

		March 31, 2012				September 30, 2011
		(Unaudited)
ASSETS
Current assets:
Cash		$	107,662			$	121,193
Accounts receivable, net			65,268				113,249
Inventory, net			84,154				21,176
Prepaids			6,256				48,095
Total current assets			263,340				303,713
Fixed assets, net			23,425				31,784
Trademarks			50,000				50,000
Security deposit			21,600				21,600
Total assets		$	358,365			$	407,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	41,783			$	46,565
Accounts payable - related party			67,000				41,000
Deferred revenue			71,240				-
Derivative liability			39,970				39,900
Total current liabilities			219,993				127,465
Total liabilities			219,993				127,465
Commitments
Stockholders’ equity:
Common stock, $0.001 par value; 750,000,000 shares authorized; 76,040,000 shares and 75,090,000 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively			76,040				75,090
Additional paid-in capital			759,767				759,367
Accumulated deficit			(697,435	)			(554,825	)
Total stockholders’ equity			138,372				279,632
Total liabilities and stockholders’ equity		$	358,365			$	407,097

 

See accompanying notes to financial statements

 

 

DAVI LUXURY BRAND GROUP, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended March 31,								Six months ended March 31,
		2012				2011				2012				2011
Sales
Royalty revenues		$	63,939			$	16,327			$	165,785			$	16,327
Product sales			14,193				-				24,054				-
Total sales			78,132				16,327				189,839				16,327
Cost of goods sold			999				-				4,554				-
Gross profit			77,133				16,327				185,285				16,327
Costs and expenses:
Wages and professional fees			71,770				167,833				215,019				198,393
Product development			5,920				-				20,920				-
General and administrative			45,447				45,560				91,886				46,040
Total costs and expenses			123,137				213,393				327,825				244,433
Loss from operations			(46,004	)			(197,066	)			(142,540	)			(228,106	)
Other income (expense)
Derivative income (expense)			3,451				-				(70	)			-
Net loss		$	(42,553	)		$	(197,066	)		$	(142,610	)		$	(228,106	)
Weighted average number of common shares outstanding - basic and diluted			75,681,758				74,642,222				75,384,262				67,406,154
Net loss per share - basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)

 

See accompanying notes to financial statements

 

 

DAVI LUXURY BRAND GROUP, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended March 31,
		2012				2011
Cash flows from operating activities
Net loss		$	(142,610	)		$	(228,106	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			8,359				347
Stock based compensation			1,350				22,500
Derivative expense			70				-
Changes in operating assets and liabilities
Accounts receivable			47,981				(16,327	)
Inventory			(62,978	)			(4,760	)
Prepaids			41,839				(8,694	)
Accounts payable and accrued expenses			(4,782	)			2,682
Accounts payable - related parties			26,000				32,000
Deferred revenue			71,240				-
Net cash used in operating activities			(13,531	)			(200,358	)
Cash flows from investing activities
Payment of security deposit			-				(21,600	)
Purchase of property and equipment			-				(14,250	)
Net cash used in investing activities			-				(35,850	)
Cash flows from financing activities
Proceeds from sale of common stock and warrants			-				575,000
Contribution to capital			-				10,000
Net cash provided by financing activities			-				585,000
Net change in cash			(13,531	)			348,792
Cash, beginning of period			121,193				-
Cash, end of period		$	107,662			$	348,792
Supplemental disclosure of cash flow information:
Income taxes paid		$	-			$	-
Interest paid		$	-			$	-
Supplementary disclosure of  noncash financing activities:
Capital contributions - forgiveness of debt		$	-			$	49,202
Stock issued for trademark purchase		$	-			$	50,000

 

See accompanying notes to financial statements

 

 

DAVI LUXURY BRAND GROUP, INC.

NOTES TO THE FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

 

Note 1

ORGANIZATION AND NATURE OF OPERATIONS

 

Davi Luxury Brand Group, Inc. (the “Company”) was incorporated in the State of Nevada on July 26, 2007. The Company is a skin care/cosmetics business that offers a series of all-natural grape-based luxury branded skin care products marketed under the “Davi Skin” and “Davi” brand names. The Company’s business plan is to initially target high-end luxury hotels and resorts, and in-flight and duty-free shops in order to establish our brand as a luxury product used in first class locations. Thereafter, its goal is to expand its sales efforts to upscale department stores, specialty retailers, prestige hotels, salons and spas. A limited number of the Company’s products are also available for sale through the Company’s www.daviskin.com website.

 

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.  Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.  At March 31, 2012, the Company had not yet achieved profitable operations, has accumulated losses of $697,435 since its inception, has working capital of $43,347, and expects to incur further losses in the deployment of its business plan, all of which raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but believes that the Company will be able to obtain additional funds from continuing royalty revenues, from additional equity financings, and/or related party advances. However there is no assurance that additional funding will be available and that the Company will continue to operate.

 

Note 2

BASIS OF PRESENTATION

 

In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the Company’s financial position as of March 31, 2012, and the results of operations and cash flows for the three and six months ended March 31, 2012 and 2011. The adjustments made are of a normal recurring nature. The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The operating results for the six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements for the year ended September 30, 2011, which are included in our Annual Report on Form 10-K, and the risk factors contained therein.

 

Note 3

RELATED PARTY TRANSACTIONS

 

In order to preserve cash for other working capital needs, the Company’s Chief Executive Officer and the Company’s Chairman of the Board of Directors have agreed to accrue portions of the amounts owed to them under their employment and consulting agreements. As of March 31, 2012, the Company owed $67,000 for such accrued wages.

 

 

Note 4

EQUITY

 

Common Stock

 

During August 2011, the Company sold 700,000 shares (the “Shares”) and a one-year warrant to purchase up to 299,600 shares of our common stock (the “Warrant Shares”) to a single accredited investor for an aggregate purchase price of $52,500. The warrant is exercisable at a price of $0.15 per share. The Shares have a price protection feature that ensures the aggregate value of the Shares is equal to or greater than $52,500 on August 10, 2012. If exercised, the Warrant Shares will have a price protection feature that ensures the value of the Warrant Shares on the date that is one year after the date the Warrant Shares are purchased is equal to or greater than the aggregate price paid for the Warrant Shares. In connection with the sale of the Shares during the fiscal year ended September 30, 2011, the Company applied the guidance of FASB ASC Topic No. 815-40. Accordingly, the price protection features attached to the Shares are accounted for as derivative liabilities at the date of sale and adjusted to fair value through earnings at each reporting date. The resulting value was allocated to the proceeds received and applied as a discount to the stock payable account in paid-in capital on the balance sheet. At March 31, 2012, the approximate fair value of this derivative is $39,970, resulting in a derivative income of approximately $3,500 during the three months ended March 31, 2012 and derivative expense of approximately $70 during the six months ended March 31, 2012.

 

On February 15, 2011, the Company entered into a one year employment agreement with J. Bernard Rice as Chief Financial Officer of the Company (the “Rice Employment Agreement”). Effective February 15, 2012, Mr. Rice resigned as Chief Financial Officer and as a member of the Company’s Board of Directors. In accordance with the Rice Employment Agreement and as compensation for his board member services, Mr. Rice was to be granted a total of 300,000 shares of common stock of which 50,000 shares, valued at the then prevailing market rate, or $45,000, were issued during April 2011. Concurrent with his resignation, Mr. Rice was issued the remaining 250,000 shares of common stock for his services rendered as our Chief Financial Officer and as a member of the Board of Directors. These shares were earned over his service period. In the quarter ending March 31, 2012, $1,350 was recognized as an expense for this service.

 

Common Stock Warrants

 

A summary of the Company’s warrant activity and related information for the six months ended March 31, 2012 is provided below:

 

					Number of
		Exercise Price			Warrants
Outstanding and exercisable at September 30, 2011		$	0.15 – 0.60			1,449,600
Warrants exercised			-			-
Warrants granted			-			-
Warrants expired			-			-
Outstanding and exercisable at March 31, 2012		$	0.15 – 0.60			1,449,600

 

Stock Warrants as of March 31, 2012
Exercise				Warrants				Remaining				Warrants
Price				Granted				Life (Years)				Exercisable
$	0.60				1,150,000				.75				1,150,000
$	0.15				299,600				.36				299,600
					1,449,600								1,449,600

 

Share-Based Compensation Expense

Total non-cash compensation expense related to the issuance of stock for the six months ended March 31, 2012 and 2011 totaled $1,350 and $22,500, respectively. Total non-cash compensation expense related to the issuance of stock for the three months ended March 31, 2012 and 2011 totaled $825 and $22,500, respectively. There was no expense related to the issuance of warrants during the respective periods.

 

 

Note 5

COMMITMENTS

 

On November 28, 2011, the Company entered into a one-year agreement with a professional skincare formulator to improve and enhance its existing skin care products and to develop additional skin care products. In exchange for the services, the Company agreed to make twelve monthly payments of $15,000 each, with the last payment due on November 1, 2012. We have since redirected our focus on establishing our product line before moving forward with the skin care formulations. Accordingly, we have terminated the agreement with the skincare formulator and are using their services on an “as needed” basis.

 

From time to time, the Company may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect the Company’s financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. The Company expenses legal costs in the period incurred. No assurance can be given that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against the Company in the future, and these matters could relate to prior, current or future transactions or events. The Company is not currently a party to any litigation.

 

Note 6

SUBSEQUENT EVENTS

 

Effective May 10, 2012, our Articles of Incorporation were amended pursuant to a Certificate of Change Pursuant to Nevada Revised Statutes 78.209 (the “Certificate of Change”) filed with the Nevada Secretary of State. The Certificate of Change provided for both a reverse stock split of the outstanding shares of our common stock on a 1-for-10 basis (the “Stock Split”), and a corresponding decrease in the number of shares of our common stock that we are authorized to issue (the “Share Decrease”).

 

As a result of the Stock Split, our issued and outstanding shares of common stock decreased from 76,040,000 pre-Stock Split shares to 7,604,000 post-Stock Split shares. Pursuant to the Share Decrease, the number of authorized shares of our common stock has decreased from 750,000,000 to 75,000,000 shares of common stock. All amounts shown for common stock and additional paid in capital included in these financial statement are presented pre-Stock Split.

 

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

 

Forward-looking statements

 

This Quarterly Report, including any documents which may be incorporated by reference into this Report, contains “Forward-Looking Statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “Forward-Looking Statements” for purposes of these provisions, including our plans to develop, market and sell new skincare products, and implement our growth strategy, any projections of revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All Forward-Looking Statements included in this document are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any Forward-Looking Statement. In some cases, Forward-Looking Statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. These statements by their nature involve substantial risks and uncertainties, such as our ability to establish a new business and develop, market and sell new skincare products, and implement our growth strategy, certain of which are beyond our control.  Although we believe that the expectations reflected in the Forward-Looking Statements contained herein are reasonable, should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the Forward-Looking Statements. Future financial condition and results of operations, as well as any Forward-Looking Statements are subject to inherent risks and uncertainties, including any other factors referred to in our press releases and reports filed with the Securities and Exchange Commission. All subsequent Forward-Looking Statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are described under “Risk Factors” and elsewhere in this report.

 

 

Introductory Comment

 

Throughout this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “the Company,” and “our company” refer to Davi Luxury Brand Group, Inc., a Nevada corporation, formerly known as Dafoe Corp.

 

Organizational History

 

Davi Luxury Brand Group, Inc. was incorporated in the State of Nevada on July 26, 2007 under the name “Dafoe Corp.”  Until September 2010, we were engaged in the acquisition and exploration of mineral properties. During the fiscal year ended September 30, 2010, the Company lost all of the mineral rights that it owned. In November 2010, our Board became aware of the availability of the “Davi Skin” skin care brand and certain related intellectual properties that were used by a luxury brand skin care company that had ceased operations. Upon completion of our research and analysis, we decided to change our line of business and enter into the luxury brand skin care business based on the “Davi Skin” brand.

 

On December 22, 2010, we acquired certain trade names and trademarks, an Internet address, and logos that were previously used by Davi Skin, Inc. in connection with a line of luxury branded skincare products for men and women distributed by Davi Skin, Inc. As a result, we now own all of the rights to the “Davi Skin” brand, logo, website address and other marketing rights.

 

During January 2011, this company changed its name to “Davi Luxury Brand Group, Inc.” and moved its executive offices from Carson City, Nevada, to Beverly Hills, California.

 

Plan of Operation and Current Business

 

Our goal is to develop a skin care/cosmetics business based on a series of grape and botanical-based luxury branded skin care products marketed under the “Davi Skin” and “Davi” brand names. We intend to develop, manufacture and market a line of high quality skin care products that are sold as prestige products principally through limited distribution channels to complement the images associated with the “Davi Skin” and “Davi” brands. Our business plan is to initially target high-end luxury hotels and resorts, and in-flight and duty-free shops in order to establish our brand as a luxury product used in first class locations. Thereafter, our goal is to expand the targeted scope of our sales efforts to upscale department stores, specialty retailers, prestige hotels, salons and spas. In addition, we have made the Le Grand Cru Face Cream available for sale through our www.daviskin.com website and plan to offer more of our products online as demand increases.

 

Current Operations and Business Arrangements.

 

Since having initiated our new business in January 2011, and in accordance with our business plan, we have commenced selling DAVI branded luxury skin care products through the following arrangements:

 

Peninsula Hotels. In January 2011, we entered into an agreement with Gilchrist & Soames to provide Peninsula Hotels with our “DAVI” and “DAVI SKIN” branded in-room skin care and related amenities. The Peninsula Hotel chain purchases our “DAVI” and “DAVI SKIN” branded products directly from our manufacturer and pays us a fee for each product purchased. The DAVI and DAVI SKIN products are provided by all of the Peninsula Hotels to their hotel clients as in-room amenities. The Peninsula Hotel chain currently uses these products at all of their nine existing Peninsula Hotels worldwide. We anticipate that this arrangement will continue through 2012.

 

 

Korean Air—In Flight Amenities. In January 2011, we also entered into a multi-year agreement with Korean Air to be the exclusive First Class and Business Class in-flight amenity provider for all Korean Air flights worldwide. Korean Air commenced providing DAVI branded amenity travel bags that contain DAVI skin care products to its First and Business Class passengers in May 2011. These products are currently available on all Korean Air flights. Korean Air purchases the DAVI amenity products directly from our manufacturer and we receive a royalty fee for those products.

 

Korean Air—Direct Product Sales. In November 2011, we launched a new sales program to sell our Le Grand Cru face cream directly to Korean Air’s passengers. Korean Air has added our Davi Le Grand Cru luxury face cream to the products that it offers for sale on board its flights. In addition, Korean Air has also included our Davi Le Grand Cru luxury face cream in the SKY SHOP Magazine that is distributed to all passengers on its flights, and now offers our Davi Le Grand Cru face cream for sale on Korean Air’s on-line shop (www.cyberskyshop.com). Korean Air purchases these products directly from us.

 

On-Line Sales. We currently maintain our corporate website at www.daviskin.com. We have recently launched our e-commerce initiative on that website by offering for sale our Davi Le Grand Cru luxury face cream. We are in the process of developing other DAVI branded skin care products that we intend to market and sell. We anticipate that we will include some of these other products on our website during 2012.

 

Results of Operations

 

Three Months Ended March 31, 2012 (“Q2 2012”) vs. Three Months Ended March 31, 2011 (“Q2 2011”)

 

Sales

Revenues generated during Q2 2012 were primarily the result of royalty agreements we entered into during early 2011 for the sale of “DAVI” branded skin care products to Peninsula Hotels for use as amenities to the hotel’s guests and to Korean Air as on-board amenities for use by Korean Air’s first class and business class passengers. During Q2 2012 we generated approximately $64,000 of royalty revenues from Davi Skin branded products provided to the Peninsula Hotels and Korean Air. Additionally, we recognized revenues, which had previously been deferred, related to the sale of Le Grand Cru Face Cream to Korean Air for re-sale on-board and through its Skyshop Magazine totaling $11,765 during Q2 2012. As such, at March 31, 2012 we had Deferred Revenue of $71,240 relating to unsold inventory held by Korean Air for the ultimate sale of Le Grand Cru to its customers. We also had some minor sales of our Le Grand Cru skin crème through our on-line store. The on-line store did not operate through most of fiscal 2011, and offered only the Le Grand Cru Face Cream. We intend to offer additional products on that site during 2012.

 

In the second quarter of fiscal 2012, we generated approximately $16,000 of revenues. All of the revenues generated during Q2 2011 resulted from the royalty agreement for the use of our products in Peninsula Hotels.

 

Cost of Goods Sold

Cost of goods sold during Q2 2012 totaled approximately $1,000 and consisted primarily of the cost of skin care products sold by Korean Air in their Skyshop Magazine and on-line shop. Since both Peninsula Hotels and Korean Air purchase the DAVI branded hotel room amenities and skin care products directly from our manufacturer, we do not have any cost of goods sold relating to royalty payments made to us under our Peninsula Hotel and Korean Air agreements.

 

Wages and Professional Fees

Wages and professional fees for Q2 2012 and Q2 2011 totaled approximately $72,000 and $168,000, respectively. Such fees included costs related to employment and consulting agreements with our Chief Executive Officer, our former Chief Financial Officer, and our former Chairman of the Board totaling approximately $49,000 and $71,000 during Q2 2012 and Q2 2011, respectively. The remainder of the expenses during Q2 2012 related primarily to accounting and legal fees incurred in connection with the preparation and filing with the Securities and Exchange Commission of our public company reports. Additional expenses incurred during Q2 2011 included approximately $41,000 of investor relations and marketing costs, as well as $56,000 in legal and accounting fees.

 

 

Our Chief Financial Officer, Mr. J. Bernard Rice, resigned on February 15, 2012, concurrent with the end of his one-year employment agreement. Our Chief Executive Officer, Mr. Parrish Medley, is acting as our interim principal accounting officer. We have hired a third party consulting firm to perform the accounting and SEC financial reporting functions.

 

We anticipate that we will have to hire additional employees and contractors as our company grows and as we continue to incur marketing fees related to the launch of our new skin care products.

 

Product Development

Product development for Q2 2012 totaled approximately $6,000 and related primarily to services provided by a professional skincare formulator to improve and enhance our existing skin care products and to develop additional skin care products. In exchange for the services, we agreed to make twelve monthly payments of $15,000 each, with the last payment due on November 1, 2012. We have since redirected our focus on establishing our product line before moving forward with the skin care formulations. Accordingly, we have terminated the agreement with the skincare formulator and are using their services on an “as needed” basis. No product development costs were incurred during Q2 2011.

 

General and Administrative Expenses

General and administrative expenses totaled approximately $45,000 during both Q2 2012 and Q2 2011. Such costs during Q2 2012 consisted primarily of our office rent expense of approximately $17,000, various office expenses of $10,000, storage costs of $4,000, depreciation, corporate and travel expenses. During Q2 2011, along with rent expense of $11,000, we incurred travel costs of approximately $19,000 resulting primarily from trips to Korea, and approximately $5,000 of various office expenses.

 

Other Income (Expense)

Other income during Q2 2012 totaled approximately $3,000 and is the result of a price protection feature included on 700,000 shares of common stock sold for $52,500 during August 2011. The price protection features attached to the shares are accounted for as derivative liabilities at the date of sale and adjusted to fair value through earnings at each reporting date. At December 31, 2011, the approximate fair value of this derivative was $43,000. At March 31, 2012, the approximate fair value of this derivative is $39,970, resulting in derivative income of approximately $3,000.

 

Net Loss

Our net loss for Q2 2012 and Q2 2011 totaled approximately $43,000 and $197,000, respectively. We expect to continue incurring losses through 2012 as we continue expanding our skin care line.

 

Six Months Ended March 31, 2012 vs. Six Months Ended March 31, 2011

 

Sales

Revenues generated during the six months ended March 31, 2012 were primarily the result of royalty agreements we entered into during early 2011 for the sale of “DAVI” branded skin care products to Peninsula Hotels for use as amenities to the hotel’s guests, and to Korean Air as on-board amenities for use by Korean Air’s first class and business class passengers. During the six months ended March 31, 2012 we generated approximately $166,000 of royalty revenues from Davi Skin branded products provided to the Peninsula Hotels and Korean Air. Additionally, we recognized revenues, which had previously been deferred, related to the sale of Le Grand Cru Face Cream to Korean Air for re-sale on-board and through its Skyshop Magazine totaling $19,760 during the six months ended March 31, 2012. We also had some minor sales of our Le Grand Cru skin crème through our on-line store. The on-line store did not operate through most of fiscal 2011, and offered only the Le Grand Cru Face Cream. We intend to offer additional products on that site during 2012.

 

During the six months ended March 31, 2011, we generated approximately $16,000 of revenues. All of the revenues generated during the six months ended March 31, 2011 resulted from the royalty agreement for the use of our products in Peninsula Hotels.

 

 

Cost of Goods Sold

Cost of goods sold during the six months ended March 31, 2012 totaled approximately $4,600 and consisted primarily of the cost of skin care products sold to Korean Air for direct sales in their Skyshop Magazine and on-line shop. Since both Peninsula Hotels and Korean Air purchase the DAVI branded hotel room amenities and skin care products directly from our manufacturer, we do not have any cost of goods sold relating to royalty payments made to us under our Peninsula Hotel and Korean Air agreements.

 

Wages and Professional Fees

Wages and professional fees for the six months ended March 31, 2012 and 2011 totaled approximately $215,000 and $198,000, respectively. Such fees included costs related to employment and consulting agreements with our Chief Executive Officer, our former Chief Financial Officer, and our former Chairman of the Board totaling approximately $98,000 and $71,000 during the six months ended March 31, 2012 and 2011, respectively. The remainder of the expenses during both periods related primarily to accounting and legal fees incurred in connection with the preparation and filing with the Securities and Exchange Commission of our public company reports, as wells as, amounts paid for investor relations and marketing costs.

 

As noted previously, our Chief Financial Officer resigned effective February 15, 2012. We anticipate that we will have to hire additional employees and contractors as our company grows and as we continue to incur marketing fees related to the launch of our new skin care products.

 

Product Development

Product development for the six months ended March 31, 2012 totaled approximately $21,000 and related primarily to services provided by a professional skincare formulator to improve and enhance our existing skin care products and to develop additional skin care products. In exchange for these services, beginning in November 2011, we agreed to make twelve monthly payments of $15,000 each. We have since redirected our focus on establishing our product line before moving forward with the skin care formulations. Accordingly, we have terminated the agreement with the skincare formulator and are using their services on an “as needed” basis. No product development costs were incurred during the six months ended March 31, 2011.

 

General and Administrative Expenses

General and administrative expenses totaled approximately $92,000 and $46,000 during the six months ended March 31, 2012 and 2011. Such costs incurred during 2012 consisted primarily of our office rent expense of approximately $33,000, various office expenses of $23,000, storage costs of $8,000, depreciation, corporate and travel expenses. During the six months ended March 31, 2011, along with rent expense of $11,000, we incurred travel costs of approximately $19,000, primarily for trips to Korea, and approximately $6,000 for various office expenses.

 

Other Income (Expense)

Other expense during the six months ended March 31, 2012 totaled $70 and is the result of a price protection feature included on 700,000 shares of common stock sold for $52,500 during August 2011. The price protection features attached to the shares are accounted for as derivative liabilities at the date of sale and adjusted to fair value through earnings at each reporting date. At September 30, 2011, the approximate fair value of this derivative was $39,900. At March 31, 2012, the approximate fair value of this derivative is $39,970, resulting in derivative expense of $70.

 

Net Loss

Our net loss for the six months ended March 31, 2012 and 2011 totaled approximately $143,000 and $228,000, respectively. We expect to continue incurring losses through 2012 as we continue expanding our skin care line.

 

Liquidity and Capital Resources

 

As of March 31, 2012, we had approximately $263,000 of current assets and working capital of approximately $43,000. To date, our operating activities have been primarily financed from the sales of our securities, stockholder advances, contributed capital and royalty payments received from sales of our skin care products to an international airline and a luxury hotel chain.

 

 

Cash used in operating activities of approximately $14,000 during the six months ended March 31, 2012 was primarily attributable to the net loss of $143,000 adjusted for certain non-cash items including stock-based compensation and depreciation. Additionally, net cash used in operating activities included a decrease in accounts receivable resulting from the net receipt of payments from customers of $48,000, the utilization of prepaid assets of $42,000 and the accrual of $26,000 relating to portions of wages owed to our Chief Executive Officer and former Chairman of the Board of Directors which have been deferred until sufficient working capital is available, offset by the purchase of product inventory totaling $63,000.

 

Cash used in operating activities of approximately $200,000 during the six months ended March 31, 2011 was primarily attributable to the net loss of $228,000 adjusted for certain non-cash items including stock-based compensation and depreciation. Additionally, net cash used in operating activities included an increase in accounts payable to related parties of $32,000 relating to portions of wages owed to our Chief Executive Officer and former Chairman of the Board of Directors which have been deferred until sufficient working capital is available, offset by an increase in accounts receivable of $16,000 and the payment of prepaid assets of $9,000.

 

The Company had no investing activities during the six months ended March 31, 2012. Net cash used in investing activities during the six months ended March 31, 2011 was approximately $36,000 and consisted of the payment of the security deposit on the new office lease, as well as various leasehold improvements to the office.

 

The Company had no financing activities during the six months ended March 31, 2012. Net cash provided by financing activities during the six months ended March 31, 2011 was approximately $585,000 and consisted primarily of funds raised during January 2011 from the sale of 1,150,000 units at $0.50 per unit, each unit consisting of one share of common stock and one warrant to two foreign investors. Each warrant may be exercised for the purchase of one share of the Company’s common stock at a price of $0.60 per share and expires on December 31, 2012. The warrants are redeemable by the Company at any time commencing June 30, 2011, upon 30 days’ notice, at a price of $0.05 per warrant, provided that for the 20 trading days prior to the day on which the Company gives notice, the average closing “bid” price of our common stock has been at least $3.00.

 

We also raised $52,500 in August 2011 from the sale to an accredited investor of 700,000 shares of our common stock at a price of $0.075 per share and a warrant to purchase up to 299,600 shares of our common stock at an exercise price of $0.15 per share. The warrant expires on August 10, 2012.

 

The royalty revenues we expect to receive from Korean Air and the Peninsula Hotel chain, and other anticipated future revenues we expect to generate from sales of our skin care products through on-board/duty free airline sales and other channels are not expected to be sufficient to fund both our working capital needs for the next twelve months and our necessary growth and business plan expenditures. Accordingly, we will have to raise additional financing to fund all of our expected additional product manufacturing costs and other anticipated expenditures related to the roll-out of our retail products. In addition, we will have to purchase additional inventories of bottles and other supplies in connection with the on-board/duty free, retail and internet sales of skin care products. Our business plan also calls for us to market our products through other distribution channels, which will require us to incur additional marketing expenses. Because we have limited cash reserves, and because our projected revenues from existing arrangements are not anticipated to be sufficient, we will have to raise additional funds to fund our operations in 2012, including our new retail sales and online marketing initiatives and our other distribution activities.

 

We presently do not have any available credit, bank financing or other external sources of liquidity. Currently, our only significant source of revenues is derived from the agreements that we have entered into with the foregoing international airline and luxury hotel chain. Sales of our skincare products to the international airline and the luxury hotel chain since the inception of the agreements in January 2011 through March 31, 2012 resulted in approximately $363,000 of royalty revenue. Although we anticipate the royalty revenues and direct product sales to continue and we expect to generate additional revenues from sales through our website of our Davi Le Grand Cru Luxury face cream and other skin care products we expect to release, our general and administrative expenses are expected to increase, and we will have to incur additional product branding and marketing expenses. As a result, despite our sale of an aggregate of $627,500 of common stock as of March 31, 2012, we believe that we will have to obtain additional capital from the sale of additional securities or by borrowing funds from private lenders. There is no assurance that we will be successful in obtaining additional funding.

 

 

Our current status as a micro-cap company that has limited operations is expected to make it difficult to obtain financing through the issuance of equity or debt securities. If we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.  If additional financing is not available or is not available on acceptable terms, we will have to curtail or cease our operations. No assurance can be given that we will be able to obtain sufficient capital to meet our requirements.

 

Inflation and changing prices have had no effect on our continuing operations over our two most recent fiscal years.

 

Off-balance sheet arrangements

 

We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

 

Critical accounting policies and estimates

 

There are no material changes to the critical accounting policies and estimates described in the section entitled “Critical Accounting Policies and Estimates” under Item 7 in our Annual Report on Form 10-K for the year ended September 30, 2011.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with, or submit to, the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our chief executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive and financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.

 

Based on that evaluation, our chief executive and financial officers concluded that our disclosure controls and procedures have not been effective as a result of a weakness in the design of internal controls over financial reporting during the three months ended March 31, 2012. Such internal control weaknesses, in the aggregate, represent material weaknesses, including: (i) lack of segregation of incompatible duties; and (ii) insufficient Board of Directors representation

 

These weaknesses are due to our inadequate staffing during the period covered by this report and our lack of working capital to hire additional staff. Although management will periodically re-evaluate this situation, at this point it considers that the risk associated with such lack of segregation of duties and the potential benefits of adding employees to segregate such duties are not cost justified. We intend to hire additional accounting personnel to assist with financial reporting as soon as our finances will allow.

  

There have not been any changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS.

 

Not applicable.

 

ITEM 1A. RISK FACTORS.

 

Information regarding risk factors appears under “Risk Factors” included in Item 1A, Part I, and under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended September 30, 2011.

 

 

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

 

On January 25, 2012, we issued 250,000 shares of common stock to our former Chief Financial Officer, J. Bernard Rice, as payment of employee and board member compensation for the period from April 1, 2011 through February 15, 2012. The stock was valued at prices ranging from $0.185 to $0.008 per share and totaled an aggregate of approximately $15,525. The foregoing shares were issued in reliance upon an exemption from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

Effective May 4, 2012, Carlo Mondavi resigned as a director of the Company. Mr. Mondavi's resignation is not the result of a disagreement with the Company on any matter relating to the Company's operations, policies or practices. Mr. Mondavi will continue to perform public relations and marketing services relating to our products.

 

Effective May 10, 2012, our Articles of Incorporation were amended pursuant to a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) 78.209 (the “Certificate of Change”) filed with the Nevada Secretary of State. The Certificate of Change provided for both a reverse stock split of the outstanding shares of our common stock on a 1-for-10 basis (the “Stock Split”), and a corresponding decrease in the number of shares of our common stock that we are authorized to issue (the “Share Decrease”).

 

As a result of the Stock Split, our issued and outstanding shares of common stock decreased from 76,040,000 pre-Stock Split shares to 7,604,000 post-Stock Split shares. Pursuant to the Share Decrease, the number of authorized shares of our common stock has decreased from 750,000,000 to 75,000,000 shares of common stock. All amounts shown for common stock and additional paid in capital included in these financial statement are presented pre-Stock Split.

 

ITEM 6. EXHIBITS

 

3.1		Certificate of Change Pursuant to NRS 78.209
31.1		Certification of Principal Executive Officer/Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Principal Executive Officer/Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation
101.LAB		XBRL Taxonomy Extension Label
101.PRE		XBRL Taxonomy Extension Presentation

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	DAVI LUXURY BRAND GROUP, INC.
Dated:     May 14, 2012	By:	/s/ PARRISH MEDLEY
		Parrish Medley
		Chief Executive Officer and interim Chief
		Financial Officer (Principal Executive Officer and
		Principal Financial Officer)