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LOTE > SEC Filings for LOTE > Form 10-Q on 20-May-2014All Recent SEC Filings

Show all filings for LOT78, INC.

Form 10-Q for LOT78, INC.


20-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

Lot78, Inc. (the "Company") designs, markets, distributes, and sells apparel under the brand name "Lot78" to fashion-conscious consumers on four continents, including North America, Europe, Asia, and South America. We seek to be a trend setting leader in the design, marketing, distribution and sale of luxury street apparel. Our current collection is a full men's and women's contemporary ready-to-wear line which includes leather jackets, t-shirts, sweats, knitwear, accessories, jeans, chinos, and wool coats. We operate in three distinct but integrated segments: Wholesale, Consumer Direct and Core Services. Our Wholesale segment sells our products to industry-leading high-end global department stores, specialty retailers and boutiques; our Consumer Direct segment consists of e-commerce sales through our branded website located at www.lot78.com; and our Core Services segment provides product design, distribution, marketing and other overhead resources to the other segments.

Executive Summary

Our results for the current quarter has seen a record jump in revenues to $704,244 which has been due to taking on new customers for the Spring/Summer 14 season. Our distribution has increased with Zalando and Beymen in Europe and with Harvey Nichols in UAE and UK together with general increases within our core customers in the US and UK.

Our main revenues are generated in the second and fourth quarters of the year which co-incide with the Spring/Summer and Fall/Winter seasons.

We are heavily reliant on re-orders and online sales for revenues generated in the first and third quarters of our financial year and are in the process of looking to have pre seasonal deliveries to our customers which if successful will generate greater revenues in our first and third quarters.

Plan of Operation

As of March 31, 2014, we had $58,868 of cash on hand. We incurred operating expenses in the amount of $450,519 during the three months ended March 31, 2014. These operating expenses were comprised of general and administrative expenses, professional fees, directors' and consulting fees, and other miscellaneous expenses.

Our current cash holdings will not satisfy our liquidity requirements and we will require additional financing to pursue our planned business activities. We are in the process of seeking equity and or debt financing to fund our operations over the next 12 months.

If we cannot generate sufficient revenues to continue operations, we will suspend or cease our operations.

We do not expect the purchase or sale of any significant equipment and have no current material commitments.

Management believes that if subsequent placements are successful, we will generate sufficient sales revenue to cover our operating costs within the following twelve months thereof. However, additional equity and or debt financing may not be available to us on acceptable terms or at all, and thus we could fail to satisfy our future cash requirements.

Results of Operations for the Three and Six Months Ended March 31, 2014 and 2013

Revenues

We earned revenues of $704,244 for the three months ended March 31, 2014 compared to revenues of $150,759 for the three months March 31, 2013 an increase of 367%. For the six month period ended March 31, 2014 we earned revenues of $759,974 compared to $209,454 for the corresponding period in 2013 an increase of 263%. Increased revenues in the six month and three month period ended March 31, 2014 can be attributed to an increased customer base as a result of taking on Archetype Showroom as an agent for our US market and Four Marketing UK and Four Marketing International for our existing and new UK, European and Rest of the World market.

Our core customers revenue for the periods have been steadily increasing across all markets together with new customers coming onto our books for the current quarter.

Cost of Goods Sold

Cost of goods sold for the three months ended March 31, 2014 were $443,496 compared to $101,774 for the three months ended March 31, 2013. Cost of goods sold represented 63% of sales for the three months ended March 31, 2014 as compared to 68% for the three months ended March 31, 2013. This decrease in COGS as a percentage of sales for the three months ended March 31, 2014 can be attributed to better prices being negotiated with our factories.

For the six months ended March 31, 2014, cost of goods sold were $512,905 compared to $177,157 for the corresponding period in 2013. Cost of goods sold represented 67% of sales for the six months ended March 31, 2014 as compared to 85% for the six months ended March 31, 2013. The decrease in COGS for the six months ended 31 March 2014 as compared to the same corresponding period for 2013, can be attributed to write offs of obsolete inventory and sales of overstock inventory at discounted prices during the quarter ended December 31, 2012. During the quarter ended December 31, 2012, the Company sold many of the goods from prior seasons to a discount retailer for cost value or minimal margins. In addition, the Company held a pre-Christmas 2012 discount sale, where prior season merchandise was sold at depressed margins which has a negative impact on the gross margins achieved for that period.

Expenses

Expenses for the three months ended March 31, 2014, expenses were $450,519, compared to $266,291 for the three month ended March 31, 2013 an increase of 69%. This increase is mainly attributable to increased professional fees related to the share exchange agreements, larger sample costs due to an increasing expansive collection, the cost of employing a CFO, increased personnel due to the expansion of operations and commissions payable to Four Marketing and Archetype Showrooms.

For the six months ended March 31, 2014 expenses were $725,626, compared to $391,675 for the corresponding period in 2013 an increase of 85%. This increase can be attributed to increased professional fees related to the share exchange agreement, larger sample costs due to an increasing expansive collection, increased travel costs for Spring/Summer 2014 and Autumn/Winter 2014 sales, and increased personnel due to the expansion of operations.

Liquidity and Financial Condition



Working Capital
                            At                At
                        March 31,        September 30,
                           2014              2013            Difference
Current Assets        $    536,588     $       531,929     $      4,659
Current Liabilities   $  1,600,117     $     1,358,481     $   (241,636 )
Working Capital       $ (1,063,529 )   $      (826,552 )   $   (236,977 )

Cash Flows
                                                              Six                  Six
                                                            Months               Months
                                                             Ended                Ended
                                                           March 31,            March 31,
                                                             2014                 2013
Net Cash (Used) Provided by Operating Activities         $  (600,221 )        $  (177,697 )
Net Cash (Used) Provided by Investing Activities         $        -           $   (28,964 )
Net Cash (Used) Provided by Financing Activities         $   363,986          $   149,423
Net Effect of Foreign Currency Translation               $    20,791          $      (550 )
Net (Decrease) Increase in Cash During the Period        $  (215,444 )        $       140

For the period ended March 31, 2014, net cash used in operating activities was $600,221 as result of changes in our working capital, a net loss of $228,117 and a non cash derivative gain of $284,474.

For the period ended March 31, 2014, net cash provided by financing activities was $363,986 as a result of proceeds from debt of $209,459, repayment of convertible debt of $41,018 and change in our factoring facility with our factoring company of $195,545.

We will require additional funds to fund our budgeted expenses in the future. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. For the period ended March 31, 2014 we have managed to raise $209,459 through debt financing. There is no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on their investment in our common stock. Furthermore, we may continue to be unprofitable. We will need to raise additional funds in the future in order to proceed with our budgeted expenses. Additionally, there is no assurance that any party will advance additional funds to us in order to enable us to sustain our plan of operations or to repay our liabilities.

Liquidity and Capital Resources

Growth of our operations will be based on our ability to internally finance from operating cash flows, and the ability to raise funds through equity and/or debt financing to increase sales and production. Our primary sources of liquidity are: (i) cash from sales of our products; and (ii) financing activities. Our cash balance as of March 31, 2014 is $58,868.

Our Company has funded some of its operations through debt financing with related party transactions.

Inflation

The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.

Going Concern

For the three months ended March 31, 2014, our Company has a comprehensive loss of $178,722 and an accumulated deficit of $2,499,789. Our Company intends to fund operations through operational cash flow and equity/debt financing arrangements. These sources may be insufficient to fund its capital expenditures, working capital and other cash requirements for the future. In response to these problems, management intends to raise additional funds through public or private placement offerings. These factors, among others, raise substantial doubt about our Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

As of March 31, 2014, we had no off balance sheet transactions that have had, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare for financial statements. A complete summary of these policies is included in the notes to our financial statements. In general management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company 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.

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