RESULTS OF OPERATIONS Forward Looking Statements This analysis of our results of operations should be read in conjunction with the accompanying financial statements, including notes thereto, contained in Item 8 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report. Revenues and Gross Profit Year ended September 30, $ % 2013 2012 Change Change Sales, net $ 486,763 $ 105,413 $ 381,350 362 % Cost of Sales 175,986 31,234 144,752 463 % Gross Margin $ 310,777 $ 74,179 $ 236,598 319 % Sales Net Sales were $486,763 for the year ended September 30, 2013 , as compared to $105,413 for the year ended September 30, 2012 . The increase in sales is due to the initial expansion of retail distribution nationally led by Walgreens, Discount Drug Mart , Golf Galaxy and others. Gross Profit Gross Profit for the twelve months ending September 30, 2013 was $ 310,777 compared to $74,179 for the twelve months ending September 30, 2012 . Sales for the twelve months ended September 30, 2013 consisted of Enerjel™, Powerfuse™ and Electrofuse™. This change is the result of a larger portion of sales being sold at wholesale pricing versus direct to consumer. Operating Costs and Expenses Year ended September 30, $ 2013 2012 Change General and administrative $ 6,398,060 $ 4,118,264 $ 2,279,796 Sales and Marketing 2,760,652 3,172,416 (411,764) Research and development 2,200 204,541 (202,341) $ 8,048,139 $ 7,495,221 $ 1,665,691 Our operating expenses were $8,048,139 and $7,495,221 for the years ended September 30, 2013 and 2012, respectively, an increase of $1,665,691 for 2012 to 2013, reflecting increased operations. In 2013, $approximately $4,800,000 was recorded for share-based compensation and amortization of deferred compensation. This compares with approximately $2,500,000 for share-based compensation and amortization of deferred compensation for the period ending September 30, 2012 . The deferred compensation expense in 2013 and 2012 represents the amortized fair value of stock and options issued for services to non-employees. The share-based compensation charges to operations in 2013 and 2012 were primarily for stock options granted under our 2012 Incentive Stock Plan to executive officers and were made so that their interests would be aligned with those of shareholders, providing incentive to improve Company performance on a long-term basis. Grants of stock options were also made to third parties for various services rendered and as additional compensation for financing agreements. Amortization of deferred compensation is recorded in general and administrative expenses. Share-based compensation expense is included in sales and marketing and general and administrative expenses. 12 General and Administrative Expenses For the years ended September 30, 2013 and 2012 general and administrative expenses were $6,398,060 and $4,118,264 , respectively. The increase of $2,279,796 is primarily composed of increases in non-cash stock-based compensation costs of $1,270,069 to consultants and $2,305,458 in compensation expenses to employees. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses. Year ended September 30, 2013 2012 Professional fees $ 2,643,265 $ 2,231,952 Salaries and benefits 3,296,409 1,542,848 Other general and administrative expense 458,486 343,464 $ 6,398,160 $ 4,118,264 Professional Fees Expense Professional fees expense increased by $411,313 for the year ended September 30, 2013 , from $2,231,952 for the year ended September 30, 2012 . This increase was due to the Company's requirements for legal, compliance, protection and accounting and consulting services related to the Company's ongoing day-to-day business dealings and execution of its business plan, including, accounting, financial reporting and SEC compliance. Professional fee expense increase includes $1,270,069 in non-cash compensation. Salary and Benefits Salary and benefits increased to $1,753,561 to $3,296,409 for the year ended September 30, 2013 from $1,542,848 for the year ended September 30, 2012 . The increase was due to an increase in personnel headcount. Prior to April 1, 2012 the Company limited payments to employees and consultants based on cash availability resulting in underpayment of salaries. During the second quarter of the fiscal year the Company hired additional personnel. The payroll increase includes $2,305,458 in non-cash compensation. Sales and Marketing For the years ended September 30, 2013 and 2012, sales and marketing expenses were $2,760,652 and $3,172,416 , respectively. The decrease of $411,764 is primarily due to the marketing efforts for Enerjel™ and our DROP under development, which were subsequently launched online in December 2012 . In February 2012 , the Company entered into a marketing and distribution agreement with Mission to market the Company's products through their distribution channels. This agreement included comprehensive marketing services and heavy commercialization efforts during the first ten (10) months. The Company paid Mission approximately $650,000 for these services, which is amortized over 10 months. Included in the increase in 2013 is amortization of deferred compensation (non-cash) of approximately $1,040,642 as of September 30, 2012 compared to $942,171 as of September 30, 2013 . The Company's products are endorsed by a number of professional athletes which are remunerated cash and non-cash payments. The increase in sales and marketing is also attributed to endorsement contracts with these professional athletes. Sales and marketing expenses consist primarily of compensation and support costs for sales and marketing personnel, professional services, promotional, marketing and related activities. Research and Development Included in our operating expenses for 2013 is approximately $2,200 for research and development expenses compared to $205,000 for 2012. Research and development expenses consist primarily of compensation for contractors engaged in internal research and product development activities, laboratory operations, and related expenses. The Company considers research and development of its technology and the science behind its products an important cornerstone of its continuing efforts. As the Company progresses it will continue to invest in research and development and anticipates increases year over year. 13 Other Income (Expense) Other income (expense) consists of the following: Year ended September 30, 2013 2012 Loss on issuance of warrant derivative liabilities $ (1,283,103) $ - Loss on change in warrant derivative liabilities (8,217,468) - Beneficial conversion feature of convertible notes payable - (821,746) Interest expense (2,967,647) (2,793,920) Other (50,000) (5,730) $ (12,518,218) $ (3,621,396) Interest Expense Interest expense is primarily attributable to convertible notes payable. During February of 2012, the Company issued $3,169,359 of convertible notes bearing interest of 9%. On March 7, 2013 , the Company issued similar notes with an aggregate face value of $2,050,000 bearing interest of 5%. Interest expense amounted to $2,967,647 for the twelve months ended September 30, 2013 , as compared to interest expense of approximately $2,793,920 for the twelve months ended September 30, 2012 . Also included in interest expense is amortization of financing fees relating to the notes and amortization of note discounts on the balance of the outstanding notes. Other Comprehensive Income (Loss) The Company had an unrealized gain from its available-for-sale securities of $2,892 in 2012 resulting in a comprehensive loss of $11,042,438 compared to $0 for the period ending September 30, 2013 . LIQUIDITY AND CAPITAL RESOURCES Liquidity The following table summarizes total current assets, liabilities and working capital at September 30, 2013 compared to September 30, 2012 . September 30, September 30, 2013 2012 Increase/(Decrease) Current Assets $ 1,423,730 $ 573,979 $ 849,751 Current Liabilities $ 2,055,136 $ 1,184,615 $ 870,521 Working Capital (Deficit) $ (631,406) $ (610,636) $ (20,770) As September 30, 2013 , we had a working capital deficit of $(631,406) , as compared to a working capital deficit of $(610,636) at September 30, 2012 , an increase of $20,770 . The increase is primarily attributable to the Company's issuance of $2,050,000 in convertible notes and the $2,587,892 raised from warrants exercised during the year. The Company continues to devote significant resources to aggressively pursue markets for its products, new product introductions, advancement of its intellectual property and build out of its infrastructure and team. 14 Net cash (used for) operating activities for the year ended September 30, 2013 and 2012 was $(5,053,007) and $(4,418,294) , respectively. The net loss for the year ended September 30, 2013 and 2012 was $(21,368,353) and $(11,042,438) , respectively. Net cash (used for) and provided by investing activities for the year ended September 30, 2013 and 2012 respectively, was $(66,067) and $(106,630) , respectively. The Company purchased computer equipment and invested in developing out its intellectual property during the year ended September 30, 2013 . Net cash obtained through all financing activities for the year ended September 30, 2013 was $5,086,454 , as compared to $4,439,068 which was used for the year ended September 30, 2012 . The increase of approximately $3,541,728 is primarily related to a March 2013 private placement of convertible notes and warrants for approximately $2.1 million and the subsequent exercise of a portion of such warrants which generated approximately $1.1 million . Our primary source of operating cash during fiscal 2013 has been through private placements of our securities, principally convertible notes and warrants and the subsequent exercise of certain of those warrants. Management estimates that it will need between $3,500,000 and $5,000,000 in capital during fiscal 2014 to continue to commercialize our products, license our technology and otherwise fully implement our business plan. We have no commitments to raise any such capital. If such capital is not available when needed on commercially reasonable terms or otherwise, we may have to scale down or delay implementation of our business plan in whole or in part and curtail its business activities, which would seriously harm the Company and its prospects. Going Concern The financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since its inception. At September 30, 2013 , the Company had cash of approximately $29,430 and a deficit in working capital deficit of $(631,406) . Further, at September 30, 2013 , the accumulated deficit amounted to $44,482,397 . As a result of the history of losses and unfavorable financial condition, there is substantial doubt about the ability of the Company to continue as a going concern. The Company will require additional funding of between $3,500,000 and $5,000,000 during 2014 to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In response to these problems, management has taken the following actions: · continue with the implementation of our business plan; · generate new sales from expanded retail distribution of EnerJel™, PowerFuse™ and ElectroFuse™; · seeking additional third party debt and/or equity financing; · continue facilitation of licensing efforts; and · allocate sufficient resources to continue with advertising and marketing efforts. A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company's planned expenses and achieving a level of revenues adequate to support the Company's cost structure. Management plans to finance future operations through the use of cash on hand, increased revenues and capital raised through equity or debt financing. We also expect to receive proceeds from stock warrant exercises from existing shareholders. As the Company's product continues to gain market acceptance, the Company expects sales in 2014 and beyond to substantially increase. There can be no assurances that the Company will be able to achieve its projected level of revenues in 2014 and beyond. If the Company is unable to achieve its projected revenues and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient its operations during 2013, which could have a material adverse effect on the Company's ability to achieve its business objectives and as a result may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions. Our future expenditures will depend on numerous factors, including: the rate at which we can introduce and sell products; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and market acceptance of our products and competing technological developments. We expect that we will incur between $3,500,000 and $5,000,000 in cash expenditures for our operating expenses during fiscal 2014. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we have achieved sustained revenue generation. 15 RECENT ACCOUNTING PRONOUNCEMENTS New Accounting Standards There are several new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company's financial position or operating results. Critical Accounting Policies The SEC issued "Cautionary Advice Regarding Disclosure about Critical Accounting Policies"; suggesting companies provide additional disclosure and commentary on their most critical accounting policies. The SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition our most critical accounting policies are in process of evolving while we move from the development stage to the operational stage of our business cycle. Off-Balance Sheet Arrangements None. Tabular Disclosure Of Contractual Obligations None.
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