MDAV Davi Luxury Brand Group Inc New (CE)

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 Quarterly 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 our 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 (the "SEC"). 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 included in our Annual Report on Form 10-K, and the "risk factors" described therein, and elsewhere in this Quarterly 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.

Organizational History

Davi Luxury Brand Group, Inc. was incorporated in the State of Nevada on July 26, 2007 under the name “Dafoe Corp.” In 2011, we changed our name to “Davi Luxury Brand Group, Inc.” and moved our executive offices from Carson City, Nevada, to Beverly Hills, California, and commenced our skin care business.

On May 10, 2012, we effected a reverse stock split of our outstanding shares of common stock on a 1-for-10 basis (the "Reverse Split") and a corresponding decrease in the number of shares of our common stock that we are authorized to issue. All common stock and per share information (other than par value) contained in this Quarterly Report has been adjusted to reflected the foregoing stock split.

Current Business

We are in the prestige skin care line/cosmetics business. We generate revenues from a full line of grape-vineyard, botanical based luxury branded skin care products marketed under the “DAVI ^® ”, “DAVI NAPA ^® ” and “DAVI SKIN ^® ” brand names. Directly, or through our licensees, we have developed and are currently marketing a line of high quality skin care products that are sold as prestige products principally through high-end distribution channels to complement the prestige images associated with the DAVI, DAVI NAPA and DAVI SKIN brands. We are currently targeting high-end retail stores, luxury hotels, and in-flight and duty-free shops of global, luxury airlines in order to establish our brand as a luxury product used in first class locations. Our goal is to expand the targeted scope of our sales efforts with respect to upscale department stores and specialty retailers. In addition, we are currently developing our first retail store in Beverly Hills, California. We currently have more than 20 products available for sale on our www.daviskin.com website, including our Le Grand Cru collection of products, and we expect to offer additional products online through out fiscal 2014.

Current Operations and Business Arrangements

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

LGHH License Agreement. On September 4, 2012, we entered into a Brand and Trademark License Agreement (the “LGHH License Agreement”) with LG Household and Health Care, Ltd. (“LGHH”). Korea-based LGHH is a global leader in the manufacture and distribution of skin care products, cosmetics, personal care product, health products and related goods. Under the LGHH License Agreement, we granted LGHH an exclusive license to manufacture, sell, market and distribute in Korea, Japan, China and certain other Asian markets DAVI branded skin care, cosmetics, hair care and other products, including the right to develop retail outlets and other commercial ventures in the Asian-Pacific region. Under the 10-year LGHH License Agreement, LGHH has agreed to pay us a royalty based on the DAVI branded products that it sells in the licensed territory. During the past year, we have collaborated with LGHH's research and development team to create a new skincare product line utilizing LGHH's advanced technology along with our exclusive Meritage™ Blend and the patented Phytosphere technology - "Phyto-Meritage™" that we use for our products. A full line of these skin care products, consisting of over 30 SKUs, has now been developed and commercially released in Asia.

LGHH commenced sales of DAVI products in the third quarter of 2013 with the opening of four new DAVI retail stores in Seoul, Korea that are dedicated to the sale of DAVI branded skincare and cosmetic products.  These DAVI retail stores are currently operating in two of Seoul's most prestigious Luxury Department store chains, the Lotte and Galleria department stores.  Additional new DAVI stores in high-level luxury department stores are expected to open in Korea in 2014. LGHH also plans to launch additional DAVI branded stores through high-level department stores in other Asian-Pacific territories such as Japan, China, Hong Kong and Singapore in 2014.  

Korean Air--In Flight Amenities . In January 2011, we entered into an agreement to be the exclusive First Class and Business Class in-flight amenity provider for all Korean Air flights worldwide. Korean Air commenced providing DAVI and DAVI NAPA 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 and DAVI NAPA 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 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 has previously purchased these products directly from us. However, beginning July 1, 2013, Korean Air began purchasing the Davi Le Grand Cru face creams from LGHH, and we receive royalties from these purchases in accordance with the LGHH License Agreement.

Peninsula Hotels—In Room Amenities. From January 2011 until September 30, 2013, we provided the chain of Peninsula Hotels with our DAVI, DAVI SKIN and DAVI NAPA branded in-room skin care and related amenities. The Peninsula Hotel chain purchased our DAVI, DAVI SKIN and DAVI NAPA branded products directly from our manufacturer and paid us a fee for each product purchased. The DAVI, DAVI SKIN and DAVI NAPA products were provided by all of the Peninsula Hotels to their hotel clients as in-room amenities. Effective October 1, 2013, the agreement to provide such products to the Peninsula Hotels was terminated.

On-Line Sales . Our products are also available for purchase on our corporate website at www.daviskin.com. We currently offer more than 20 products for sale on our website and expect to offer additional products online in 2014.

U.S. and Retail Sales Initiatives . Now that we have a full line of high quality skin care products available, our goal is to launch the DAVI branded products in the North American retail market in 2014 through the sale of DAVI branded products in U.S. specialty and high-end luxury department stores. We also are developing our own boutique retail store in Beverly Hills, California.

Results of Operations

Three Months Ended December 31, 2013 (“Q1 2014”) vs. Three Months Ended December 31, 2012 (“Q1 2013”)

The following table represents our statements of operations for the three months ended December 31, 2013 and 2012:

Sales

Royalty revenues generated during Q1 2014 and 2013 were primarily from the sale of DAVI branded skin care products to Korean Air as on-board amenities for use by Korean Air’s First Class and Business Class passengers. In addition, in Q1 2014 we recognized royalty revenues from DAVI branded products sold by LGHH under the LGHH License Agreement. These sales were made primarily at the four retail locations in Asia and, to a lesser extent, by LGHH’s sale of Davi branded products to Korean Air for re-sale on-board Korean Air flights and through its Skyshop Magazine. Royalty revenues in Q1 2013 also included approximately $18,000 of revenues from the sale of DAVI branded skin care products to Peninsula Hotels for use by their hotel guests as in room amenities. Since our agreement with the Peninsula Hotels was no longer in effect in Q1 2014, we did not receive any royalties from the Peninsula Hotels during this period. We also earned a royalty on all sales of DAVI branded products sold by LGHH under the LGHH License Agreement as LGHH commercially released the first DAVI products during the third quarter of fiscal 2013. Because the LGHH DAVI products were only recently released, royalties earned under the LGHH License Agreement have been minimal to date. Additionally, during Q1 2013 we were informed that we were underpaid approximately $29,000 for royalty revenues related to our skin care products provided as in-flight amenities on Korean Air flights. Such royalty revenues should have been received during the previous two years. This payment of approximately $29,000 of additional royalty revenue was recognized in Q1 2013 and increased our revenues compared to Q1 2014.

Product sales in Q1 2013 consisted primarily of sales of our Le Grand Cru face creams for re-sale on-board Korean Air flights and through its Skyshop Magazine. On July 1, 2013, Korean Air began purchasing the Le Grand Cru face creams and other Davi branded products for its on-board sales and for its Skyshop Magazine sales directly from LGHH. Accordingly, no such revenues were earned in Q1 2014, resulting in a 87% decrease in product sales when comparing Q1 2014 to Q1 2013. However, since Korean Air now purchases DAVI products from LGHH, our licensee, we will receive royalties from LGHH as a result of these purchases in accordance with the LGHH License Agreement. We expect that our royalty revenue will increase in future periods as LGHH continues to roll out DAVI branded products in other retail stores in Seoul, Korea, and in retail stores expected to open in other Asian-Pacific territories in 2014. The remaining amount of product sales in both Q1 2013 and Q1 2014 represents sales made through our corporate website. Now that we have increased the number of products we have available for sale on our website, we expect our product sales to increase in future periods as we sell these newly developed DAVI products through our website.

Cost of Goods Sold

Cost of goods sold during Q1 2014 consists primarily of the cost of selling our luxury skin care products directly through our website, www.daviskin.com. Cost of goods sold during Q1 2013 included commissions paid on the sale of our Le Grand Cru Face cream, as well as, the cost of our skin care products sold by Korean Air to its passengers through the Skyshop Magazine and its on-line shop. Korean Air began purchasing the Le Grand Cru face creams for its on-board sales and for its Skyshop Magazine sales directly from LGHH on July 1, 2013. Accordingly, we no longer incur costs associated with such on-board and Skyshop Magazine sales. Since both Peninsula Hotels and Korean Air purchased the DAVI branded hotel room amenities and skin care products directly from our manufacturer, we did not have any cost of goods sold relating to royalty payments made to us under our Peninsula Hotel and Korean Air agreements. Likewise, since we are paid a royalty from sales made by LGHH under the LGHH License Agreement, we do not incur any cost of goods sold as a result of those sales.

Wages and Professional Fees

Wages and professional fees increased 94% in Q1 2014 in comparison to Q1 2013 due primarily to the retention of a consultant for business development, the hiring of a public relations firm, an increase in accounting and legal fees due to new agreements, the hiring of two part-time contractors performing administrative services in our offices and an increase in executive compensation. These increases totaled approximately $70,000 which had not been incurred in Q1 2013. Additionally, we recognized stock based compensation expense related to stock options totaling approximately $29,000. We anticipate that wages and professional fees will continue to increase as our company grows.

Product Development

Product development costs incurred during Q1 2013 totaled approximately $2,000 and related to formulation costs associated with our luxury skin care line. In fiscal 2013, we redirected our focus on establishing our product line and, in collaboration with LGHH's research and development team, created a new DAVI skincare product line. However, all product development costs associated with the development of the new skincare product line were incurred by LGHH under the LGHH License Agreement.  

General and Administrative Expenses

General and administrative expenses remained relatively consistent in Q1 2014 when compared to Q1 2013. Such costs consist primarily of our office rent expense, depreciation, insurance, travel and various corporate and general office expenses.

Other Expenses

Other expenses for Q1 2013 totaled approximately $5,400 and consist primarily of the amortization of the beneficial conversion feature recognized on $20,000 of convertible debt and related warrants of the Company. On March 25 2013, the debt and all accrued interest were converted into 211,800 shares of common stock.

Net Loss

Our net loss in Q1 2014 and Q1 2013 totaled approximately $184,000 and $33,000, respectively. The increase in our net loss was primarily the result of a decrease in royalty revenues as well as an increase in professional fees. We expect our royalty revenues to increase in the near term as LGHH continues to promote and sell the DAVI branded skin care products throughout Asia. Additionally, professional fees are expected to remain at or above their current levels as we continue to develop the Company’s business and promote the DAVI, DAVI NAPA and DAVI SKIN luxury skin care products. Accordingly, we expect to continue to incur losses throughout the remainder of 2014 as we expand our business operations in the U.S. and increase our marketing activities.

Liquidity and Capital Resources

As of December 31, 2013, we had approximately $530,000 in cash, $113,000 of other current assets and working capital of $251,000, compared to approximately $654,000 in cash, $86,000 of other current assets and working capital of $315,000 as of September 30, 2013. To date, our operating activities have been primarily financed from the sales of our securities and royalty payments received (i) from sales of our skin care products to Korean Air and the Peninsula Hotel chain, and (ii) as an advance against future royalties under the LGHH License Agreement.

Our net loss during Q1 2014 and Q1 2013 was approximately $184,000 and $33,000, respectively. We had negative cash flow from our operating activities of approximately $112,000 during Q1 2014, compared to net cash provided by operating activities of approximately $44,000 during Q1 2013. A significant reason for the fluctuation in cash used/provided in operating activities relates to the timing of our collections of accounts receivable and our payments of accounts payable. Also, the decrease in the net cash provided by operating activities resulted primarily from the increase in cash payments we made in fiscal 2013 relating to expenses incurred in connection with our growing business.

Net cash used in investing activities in Q1 2014 and Q1 2013 was approximately $13,000 and $9,000, respectively and consisted primarily of payments for computer equipment, office furniture and leasehold improvements to our office space.

The Company had no financing activities during Q1 2014 or Q1 2013.

As of December 31, 2013, we have a working capital surplus of approximately $251,000 and the amount of cash we currently have on hand, together with the royalty and product sales revenues we received and expect to receive from Korean Air, LGHH, and other future revenues we expect to generate from sales of our skin care products through other channels, are expected to be sufficient to fund our anticipated working capital needs for the next twelve months. However, unless revenues increase rapidly, we expect that we will need additional capital to enable us to further implement our business plan and to otherwise continue to grow. Accordingly, we may have to raise additional financing to fund additional product manufacturing costs and other anticipated expenditures related to the roll-out of our retail 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. We may have to raise additional funds to fund our U.S. retail sales and online marketing initiatives and to be able to engage in other distribution activities.

We presently do not have any available credit, bank financing or other external sources of liquidity. Currently, our only source of cash is derived from the agreements that we have entered into relating to Korean Air in-flight amenities and the LGHH License Agreement, as well as from sales of our skin care products generated from our website. Royalty revenue from our skin care products to Korean Air and the Peninsula Hotels since the inception of the agreements through December 31, 2013 resulted in approximately $1,136,000 of revenue. The Peninsula Hotels agreement was terminated in Q1 2014 and the Korean Air arrangement may be terminated at any time. Beginning July 1, 2013, Korean Air began purchasing the Le Grand Cru face creams for direct sale on board its flights and through its SKY SHOP magazine from LGHH. Accordingly, we receive royalty revenue from such purchases instead of revenue from product sales in accordance with the LGHH License Agreement. Product sales to Korean Air from November 2011 through September 30, 2013 resulted in approximately $110,000 of revenue. Although LGHH has begun selling Davi licensed products under the LGHH License Agreement through retail stores established in Korea, we are uncertain as to the amount of royalty income that we may recognize in future periods from LGHH's sales of DAVI-branded products. Accordingly, the amount of revenue that we will receive from our current principal sources of revenues is uncertain.

Although we anticipate that sales by LGHH will be significant in 2014, we will not receive any cash royalty payments as a result of those sales until LGHH has recouped the $250,000 cash advance LGHH paid us in September 2012. As of December 31, 2013, approximately $35,000 of the cash advance had been recognized as royalty revenues. Should any or all of these revenue sources terminate their arrangements with us, our financial condition could be materially and adversely affected, and our on-going operations could be severely hampered. Additionally, our general and administrative expenses, and wages and professional fees are expected to increase in 2014 in connection with our growing business, and we may have to incur additional product branding and marketing expenses to further promote our current and any future products. As a result, we may 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.   No assurance can be given that we will be able to obtain sufficient capital to meet our future 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, 2013.