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MOUNT KNOWLEDGE HOLDINGS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. See "Cautionary Note Regarding Forward-Looking Statements." As used in this quarterly report, the terms "we," "us," "our," "the Company" "Successor Company" and "MKHD" mean Mount Knowledge Holdings, Inc., unless the context clearly requires otherwise. General The Company was incorporated as Auror Capital Corp. under the laws of the State of Nevada on March 16, 2006. The Company began as an exploration stage company engaged in the acquisition and exploration of mineral properties. On July 27, 2009, the Company changed its previous business plan to an educational software development and sales company. Today, we are a software development and sales company engaged in the business of acquiring innovative and selling unique technologies. We currently have no operating subsidiaries, however, we operate from 2 major cities in the US and Canada. On May 8, 2014, the Company executed a Marketing Affiliate agreement (the "MA Agreement") with Birch First Global Investments Inc. ("Birch First Global") for the further development, marketing and sales of the ECO learning technology (the "Technology") owned by Birch First Global as a result of a prior settlement with the Company on or about December 28, 2012 (the "Settlement Date"). This MA Agreement was executed to set forth in a formal agreement the prior verbal understanding between the parties, which had been in place since the Settlement Date. The terms and conditions of the MA Agreement offers the Company the exclusive right to resell the Technology worldwide, subject to certain pricing and sales quotas, from the date of execution until December 31, 2014, with a renewal provision for one successive one year period thereafter, and other standard customary representations and warranties. Previously, the Company, through our wholly owned subsidiary, Mount Knowledge Asia Ltd. ("MKA"), acquired and operated Language Key Asia Ltd. ("LKA") and the Language Key Group of companies ("LK Group") which included Language Key Corporate Training Solutions Ltd. (a Hong Kong corporation, and formerly The Language Key China Ltd., established on August 21, 2002, "LKCTS"), The Language Key Training Ltd. (a Hong Kong corporation established on March 21, 2003, "LKTR"), The Language Key China Ltd. (a Wholly Owned Foreign Enterprise registered in Shanghai, China established on October 11, 2002, "LKCH"), and Language Key Publishing Ltd. Each of the LK Group companies were a direct, wholly owned subsidiary of LKA, providing custom business English and communications skills courses, soft skills workshops, executive coaching and other related services to public and private sector clients, including government entities in Hong Kong and other Fortune 500 corporations. We acquired LKA on December 31, 2010 and, as a result, we were no longer considered a development stage enterprise under SFAS No. 7 "Accounting and Reporting by Development Stage Enterprises." October 24, 2011, MKA sold LKA and all of its subsidiaries, except for LKTR (the "LK Subsidiaries") to Software Sans Frontiere SA, a Belize corporation ("SSF"), for consideration representing the assumption of all of the liabilities of the LK Subsidiaries. Congruently, LKTR became a direct subsidiary of MKA. The Company's management made the decision to sell the LK Subsidiaries due to ongoing losses and failed restructuring efforts as a result of the lack of available financing for China based companies. 17 On February 24, 2012, we sold LKTR to SSF for consideration representing the assumption of all the liabilities of LKTR. In addition, the LK trademark and associated course training materials were returned to the original seller whose obligation was settled by the payment of $15,000 prior to disposition. Subsequently, on December 28, 2012, we sold MKA and our US subsidiary, Mount Knowledge USA, Inc. ("MTK USA"), to SSF for consideration representing the assumption of all the liabilities of both MKA and MTKUSA. On March 19, 2013, the Company entered into a Definitive Agreement with FRMB, pursuant to which the Company has agreed to purchase, from FRMB, 100% of the ownership interest in FM, in the form of a share exchange, in consideration for the issuance of common and preferred shares of the Company to FRMB, upon which FM will become a wholly owned subsidiary of the Company at closing. The primary terms and conditions of the Agreement are as follows: At closing, (i) FRMB will assign, transfer, convey and deliver the all of the outstanding shares of FM (the "FM Shares") to an escrow agent, and (ii) in consideration and exchange therefore the Company shall issue and deliver to FRMB, a number of shares of: A.) common stock, par value $0.0001 per share of the Company, equal to 4 shares of common stock of the Company, for 1 fully diluted share of common stock of the Company held by the existing stockholders of the Company immediately prior to the closing, and B.) Series A preferred stock, par value $0.0001 per share of the Company, equal to 4 shares of preferred stock of the Company, for every 1 fully diluted share of preferred stock held by the existing stockholders of the Company immediately prior to the closing, in such amounts to be determined at closing. Upon closing, FRMB will become the majority owner of the Company. The Agreement sets forth certain closing conditions, including, but not limited to: (a) interim financing, and (b) a certain number of shares of the Company held by the Company controlling shareholder, placed into escrow, subject to certain subsequent financings, and other provisions which will be determined prior to and disclosed upon a closing. There can be no guarantee that these conditions will be met and that the transaction described above will close. Due to unforeseen corporate changes with FRMB and its operations, the Company has decided to pursue other acquisition opportunities, and intends to formally withdraw from the contemplated transaction. Corporate Structure The Company is a platform company that was established for the purpose of acquiring and operating market-leading global technology development companies. As of June 30, 2014, the Company has no subsidiaries and operates its technology sale directly from the Company. Plan of Operations Over the 12-months of 2014, we must raise capital and complete certain milestones as described below. Milestones The Company anticipates identifying and completing one or more acquisitions and/or mergers over the next 6-12 months, beginning in the third quarter of 2014, for the purposes of obtaining operations and revenues. 18 Requirements and Utilization of Funds To implement our plan of operations, including some or all of the above described milestones (objectives), we anticipate the need to continue to raise capital ("equity") in an amount between $500K and $2.5 million in equity from restricted stock sales or other acceptable financing options over the remaining approximately 6 months of 2014 on terms and conditions to be determined. Management may elect to seek subsequent interim or "bridge" financing in the form of debt (corporate loans) as may be necessary. Proceed We foresee the proceeds from capital raised to be allocated as follows: (a) legal, audit, SEC filings and compliance fees; (b) working capital (general and administrative); (c) financing costs; (d) acquisition research and due diligence; (e) new business development and marketing; and (f) reserve capital for costs of acquisition and market expansion. Results of Operations Basis of Presentation For management discussion and analysis purposes, the operational data provided represents the financial results of the Company for the three months ended June 30, 2014 and 2013, respectively. The following table represents sales of our products and services for the three months ended June 30, 2014 and 2013 and for the development stage period from April 1, 2012 to June 30, 2014: For The Development Stage Three Months Ended Period, From April 1, 2012 To June 30 2014 2013 2013 Sales revenue $ $ $ - - - Cost of goods sold - - - Gross profit - - - Revenues Revenue for the three months ended June 30, 2014 was $0 compared to revenue for the three months ended June 30, 2013, due to lack of funding to support sales and marketing efforts. Cost of goods sold was primarily composed of the costs of the Company's trainers as well as materials and transportation expenses associated with delivering training courses. Cost of goods sold for the three months ended June 30, 2014 was $0, compared to cost of goods sold for the three months ended June 30, 2013 of $0. Gross profit is calculated by deducting cost of goods sold from revenues and ranges from 0% to 100%, depending on the nature of the specific courses sold and the contract terms negotiated. Gross profit for the three months ended June 30, 2014 was 0% compared to gross profit for the three months ended on June 30, 2013 of 0%. The following table represents operating costs and expenses for the three months ended June 30, 2014 and 2013 and for the development stage period from April 1, 2012 to June 30, 2014: 19 Three Months Ended June 30, 2014 and June 30, 2013 Operating expenses General and administrative expenses 65,180 39,915 Total operating expenses 65,180 39,915 Loss from operations (65,180) (39,915) Other income - - Interest expense (34,473) (25,735) Change in fair value of derivative liability 84,082 3,403,417 Gain on debt extinguishment - - $ $ Net (Loss) (15,571) 3,337,767 Comprehensive (Loss) $ $ Net (Loss) (15,571) 3,337,767 Foreign currency translation adjustments - - Comprehensive (Loss) Attributable To $ $ Common Shareholders (15,571) 3,337,767 Operating costs and expenses General and administrative expenses for the three months ended June 30, 2014 were $65,180, as compared to $39,915 for the three months ended June 30, 2013. This decrease was due to reduced operating costs. All of the general and administrative expenses for the three months ended June 30, 2014 were consulting fees to related parties. Interest Expense The Company incurred interest expense of $34,473 during the three months ended June 30, 2014 compared to $25,735 during the three months ended June 30, 2013. Change in fair value of derivative liability The Company incurred a loss from a change in fair value of derivative liability of $84,082 during the three months ended June 30, 2014. Results of Operations Basis of Presentation For management discussion and analysis purposes, the operational data provided represents the financial results of the Company for the six months ended June 30, 2014 and 2013, respectively. The following table represents sales of our products and services for the six months ended June 30, 2014 and 2013 and for the development stage period from April 1, 2012 to June 30, 2014: 20 For The Development Six Months Ended Stage Period, From April 1, 2012 To June 30 2014 2013 2013 Sales revenue $ $ $ - - - Cost of goods sold - - - Gross profit - - - Revenues Revenue for the six months ended June 30, 2014 was $0 compared to revenue for the six months ended June 30, 2013, due to lack of funding to support sales and marketing efforts. Cost of goods sold was primarily composed of the costs of the Company's trainers as well as materials and transportation expenses associated with delivering training courses. Cost of goods sold for the six months ended June 30, 2014 was $0, compared to cost of goods sold for the six months ended June 30, 2013 of $0. Gross profit is calculated by deducting cost of goods sold from revenues and ranges from 0% to 100%, depending on the nature of the specific courses sold and the contract terms negotiated. Gross profit for the six months ended June 30, 2014 was 0% compared to gross profit for the six months ended on June 30, 2013 of 0%. The following table represents operating costs and expenses for the six months ended June 30, 2014 and 2013 and for the development stage period from April 1, 2012 to June 30, 2014: Six Months Ended June 30, 2014 and June 30, 2013 Operating expenses General and administrative expenses 96,352 500,266 Total operating expenses 96,352 500,266 Loss from operations (96,352) (500,266) Other income - - Interest expense (71,541) (50,055) Change in fair value of derivative liability (55,262) (1,155,029) Gain on debt extinguishment - - $ $ Net (Loss) (223,155) (1,705,350) Comprehensive (Loss) $ $ Net (Loss) (223,155) (1,705,350) Foreign currency translation adjustments - - Comprehensive (Loss) Attributable To $ $ Common Shareholders (223,155) (1,705,350) Operating costs and expenses General and administrative expenses for the six months ended June 30, 2014 were $96,352, as compared to $500,266 for the six months ended June 30, 2013. This decrease was due to reduced operating costs. All of the general and administrative expenses for the six months ended June 30, 2014 were consulting fees to related parties. 21 Interest Expense The Company incurred interest expense of $71,541 during the six months ended June 30, 2014 compared to $50,055 during the six months ended June 30, 2013. Change in fair value of derivative liability The Company incurred a loss from a change in fair value of derivative liability of $55,262 during the six months ended June 30, 2014. Liquidity and Capital Resources As of June 30, 2014, we had $8 cash. We had limited operations and revenues during the six month period ended June 30, 2014. We are illiquid and need cash infusions from investors and/or current shareholders to support our proposed marketing and sales operations. Management believes this amount will not satisfy our cash requirements for the next 6 months and as such we will need to either raise additional proceeds and/or our officers and/or directors will need to make additional financial commitments to our company, neither of which is guaranteed. We plan to satisfy our future cash requirements, primarily the working capital required to execute on our objectives, including marketing and sales of our product, and to offset legal and accounting fees, through financial commitments from future debt/equity financings, if and when possible. Management believes that we may generate some revenues within the next six (6) months, from acquisitions, but that these sales revenues may not satisfy our cash requirements during that period. We have no committed source for funds as of this date. No representation is made that any funds will be available when needed. In the event that funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sales, and could fail to satisfy our future cash requirements as a result of these uncertainties. If we are unsuccessful in raising the additional proceeds from officers and/or directors, we may then have to seek additional funds through debt financing, which would be extremely difficult for an early stage company to secure and may not be available to us. However, if such financing is available, we would likely have to pay additional costs associated with high-risk loans and be subject to above market interest rates. At such time as these funds are required, management would evaluate the terms of such debt financing and determine whether the business could sustain operations and growth and manage the debt load. If we cannot raise additional proceeds via a private placement of our common stock or secure debt financing we would be required to cease business operations. As a result, investors in our common stock would lose all of their investment. The staged development of our business will continue over the next six months. Other than engaging and/or retaining independent consultants to assist the Company in various administrative and marketing related needs, we do not anticipate a significant change in the number of our employees, if any, unless we are able to obtain adequate financing. Our auditors have issued a "going concern" opinion. This means that there is substantial doubt that we can continue as an on-going business for the next 6 months unless we obtain additional capital to pay our expenses. This is because we have not generated any revenues and no substantial revenues are anticipated in the near-term. Accordingly, we must raise cash from sources other than from the sale of our products. 22 Cash Flows The following table summarizes the cash flows for the six month periods ended June 30, 2014 and 2013: SIX MONTHS ENDED JUNE 30 , 2014 2013 $ $ Net cash used in operating activities - (62,325) Net cash (used in) investing activities - 2,500 Net cash provided by financing activities - 80,000 Effect of exchange rate changes on cash - - $ $ Cash and Cash Equivalents, at end of period 8 20,408 We anticipate that we will incur a minimum of $50,000 for operating expenses in the next quarter. Accordingly, we will need to obtain additional financing in order to complete our business plan. Cash Used In Operating Activities We used cash in operating activities in the amount of $(0) during the six month period ended June 30, 2014 and $(62,325) during the six month period ended June 30, 2013. Cash used in operating activities was funded by cash from operating revenues and financing activities. Cash from Investing Activities We received cash in investment activities in the amount of $0 during the six month period ended June 30, 2014 and used $2,500 cash in investing activities during the six month period ended June 30, 2013. Cash from Financing Activities We generated $0 and $80,000 cash from financing activities during the six month period ended June 30, 2014 and June 30, 2013. For the period from January 1, 2009 through June 30, 2014, the Company incurred net losses aggregating $11,735,424. We do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should our company be unable to continue as a going concern. Due to the uncertainty of our ability to meet our future operating expenses and the capital expenses in the report on the financial statements for the year period ended December 31, 2013, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors. The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. 23 Future Financings We anticipate continuing to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned activities. There is no assurance that the Company will able to obtain financing to carry on our legal, accounting and reporting needs. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Application of Critical Accounting Estimates The financial statements of our company have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment. The financial statements have been prepared within the framework of the significant accounting policies summarized below: a) Exploration Stage Activities and Mineral Property Interests Until abandonment of its mineral property on January 23, 2009, the Company was an exploration stage mining company and had not realized any revenue from its operations. It was primarily engaged in the acquisition, exploration and development of mining properties. b) Financial Instruments and Concentration of Risk The fair value of financial instruments, which consist of cash, and accounts payable and accrued liabilities, were estimated to approximate their carrying values due to the immediate or relatively short maturity of these instruments. Unless otherwise noted, it is management's opinion that this Company is not exposed to significant interest or credit risks arising from these financial instruments. c) Basic and Diluted Loss per Share In accordance with ASC Topic 260, "Earnings Per Share" (formerly SFAS 128), the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings per share excludes all dilutive potential shares if their effect is anti-dilutive. 24 The Company accounts for common stock purchase warrants at fair value in accordance with EITF 00 - 19, "Accounting for Derivative Financial Instruments Indexed to and Practically Settled in, a Company's Own Stock", (codified in ASC 815, Derivatives and Hedging). The Black-Scholes option pricing valuation method is used to determine fair value of these warrants. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free rates. d) Foreign Currency Translation The Company's functional currency is now the U.S. dollar. While Language Key Asia Ltd. presents its consolidated financial results and accompanying notes in U.S. dollar terms, its functional currency for its operations in The People's Republic of China ("PRC") is the Chinese Renminbi, and its functional currency for its operations in Hong Kong is the Hong Kong dollar. Transactions in Renminbi and Hong Kong dollars are translated into U.S. dollars as follows: i) monetary items at the exchange rate prevailing at the balance sheet date; ii) non-monetary items at the historical exchange rate; iii) revenue and expense at the average rate in effect during the applicable accounting period. Translation adjustments resulting from this process are recorded in Stockholders' Equity as a component of Accumulated Other Comprehensive Income (Loss). Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are recorded in the Statement of Operations. e) Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Actual results may differ from the estimates. f) Impairment of Long-Lived Assets Impairment losses on long-lived assets used in operations are recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. In such cases, the amount of the impairment is determined based on the relative fair values of the impaired assets. g) Treasury Stock Common stock repurchases are recorded as treasury stock at cost. On forward stock split-ups, the number of all common shares disclosed in the financial statements is adjusted to give retroactive effect to such recapitalizations. Recent Accounting Pronouncements The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position, results of operations or cash flows. 25 |