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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

BOLDFACE Group, Inc. (“BGI” and, together with its wholly-owned subsidiary BOLDFACE Licensing + Branding (“BLB”), the “Company”, “we”, “us” or “our”) is a celebrity beauty licensing and branding company focused on acquiring top-tier entertainment, celebrity and designer brands for opportunities in the beauty, personal care, home and fragrance markets. We contract to design, manufacture and sell branded color cosmetics, hair preparations, fragrances, home fragrances, skin care, beauty tools and other beauty products in multiple channels of distribution. We currently own the brand Kardashian Beauty™, and have licensed the right to use the Mario Lopez brand to develop and distribute products in the male fragrance and men’s grooming categories and the UGLYDOLL® brand to develop and distribute products in the personal care category. Our vision for our Kardashian Beauty™ brand is to offer luxury products at affordable prices through mass retail channels. We have secured distribution of Kardashian Beauty™ products in over 5,100 points of distribution with retail partners, including, among others, CVS, ULTA Beauty, Duane Reade™, Fred Meyer®, meijer®, and Ricky’s NYC, and are currently in active discussions with other retailers to distribute Kardashian Beauty™ products.

RECENT DEVELOPMENTS – RESULTS OF OPERATIONS

Overview

During the quarter ended December 31, 2013, we achieved top-line gross and net revenue of $1.969 million and $1.469 million, respectively compared to $1.754 million and $1.526 million for the quarter ended December 31, 2012. During the quarter ended December 31, 2013, we continued to work on the expansion of our Kardashian Beauty™ brand through securing additional international points of distribution as well as developing seasonal and core-line products that we believe are both unique and high-quality; thereby, building on our strategy of bringing luxury products at an affordable price for distribution to mass retailers. We also continued to work on the development of our lines of products that will be branded under our Mario Lopez and UGLYDOLL® licenses.

Kardashian Beauty™ License

We had net revenues of $2.738 million and a gross margin of 31% from our Kardashian Beauty ™ license for the six months ended December 31, 2013 compared $1.526 million and a gross margin of 48% for the six months ended December 31, 2012. Our gross margin as of December 31, 2013 was impacted by the name change of our Kardashian Beauty ™ brand due to the re-labeling efforts and associated costs to update our products as well as a reserve for inventory liquidation and write-offs for slow moving inventory. The Kardashian Beauty™ brand currently consists of four categories of products: eyes (38 SKUs), lips (40 SKUs), face/body (24 SKUs), and nails (46 SKUs). Since inception, we have garnered over 139 million media impressions for the Kardashian Beauty™ brand in print and online media channels. We have secured distribution for the Kardashian Beauty™ brand in over 5,100 points of distribution with U.S. retail partners, including, among others, CVS, ULTA Beauty, Duane Reade™, Fred Meyer®, meijer®, and Ricky’s NYC. We have also secured international distribution relationships in the European Union, Middle East, Australia and South Africa.

We had net revenues of $1.469 million and a gross margin of 22% from our Kardashian Beauty ™ license for the three months ended December 31, 2013 compared $1.526 million and a gross margin of 48% for the three months ended December 31, 2012. Our net revenues for the three months ended December 31, 2013 represented 54% of the revenues for the six months ended December 31, 2013 primarily due to sales of seasonal items as well as improving our in-stock position for our core items in the quarter. Our gross margin for the three months ended December 31, 2013 was negatively impacted by an inventory reserve of $0.200 million for inventory liquidations as well as seasonal items that have a lower gross margin as compared to our core line.

Mario Lopez License

We are currently in the product development phase for the products that will be branded under our Mario Lopez license. We expect to complete development and launch our product line by the end of 2014. Accordingly, no revenue was generated from our Mario Lopez license for the three and six months ended December 31, 2013 and December 31, 2012.

UGLYDOLL® License

We are currently in the product development phase for the products that will be branded under our UGLYDOLL® license. We expect to complete development and launch our product line by the end of 2014. Accordingly, no revenue was generated from our UGLYDOLL® license for the three and six months ended December 31, 2013 and December 31, 2012.

FACTORING AND SUPPLY AGREEMENTS

Effective as of November 21, 2012, the Company and BLB each entered into a (i) Factoring Agreement, dated as of October 17, 2012 (the “Factoring Agreements”), with Star Funding, Inc. (“Star Funding”) pursuant to which Star Funding provides financing, on a discretionary basis, against our purchase orders, accounts, contract rights and other obligations for the payment of money, and (ii) Supply Agreement, dated as of October 17, 2012 (the “Supply Agreements”), with Star Funding pursuant to which Star Funding provides to us, on a discretionary basis, factoring and financial accommodations to enable the Company to purchase cosmetics and related products (collectively, the “Goods”). Each of the Factoring and Supply Agreements is for an initial term of one year, subject to automatic one-year renewals or early termination as provided therein.

Under the Factoring Agreements, Star Funding has agreed to purchase certain of our accounts receivable. We agreed to pay Star Funding a factoring commission of between 1.0% and 1.5% of the gross amount of each account receivable subject to the Factoring Agreements, depending on the total gross amounts of account receivables purchased and the actual duration of the selling terms. As of December 31, 2013, $0.245 million was due from factor.

The financing under the Supply Agreements may be made via direct payment to the Company’s suppliers, issuance of letters of credit and/or advances to the Company. Under the Supply Agreements, the Company is required to pay Star Funding an amount equal to 5.0% per month of all Expenses (as such term is defined in the Supply Agreements) associated with the purchase of any Client-Assembled Goods (as such term is defined in the Supply Agreements), and (b) 2.0% of all Expenses associated with the purchase of any Pre-Assembled Goods (as such term is defined in the Supply Agreements) for the initial 30-day period, provided that such fee shall be reduced to 1.0% for each subsequent 15-day period until the date on which all of the Expenses have been paid in full in cash under the Supply Agreements. As of December 31, 2013, $0 was outstanding under the Supply Agreements.

MERGER WITH BOLDFACE LICENSING + BRANDING

On July 12, 2012, our wholly-owned subsidiary, BOLDFACE Acquisition Corp. (“Acquisition Corp.”), merged with and into BLB, with BLB remaining as the surviving entity (the “Merger”). As a result of the Merger, each outstanding share of BLB common stock was cancelled and converted into 200 shares of our common stock resulting in the issuance of an aggregate of 20,000,000 shares to former BLB stockholders. As part of the Merger, we also issued 5,000,000 shares of our common stock to stockholders of BLB in proportion to their ownership of shares of BLB common stock, in connection with the execution of the License Agreement with Pez-Mar, Via Mar Productions Inc., a corporation wholly owned by Mario Lopez, dated as of July 11, 2012.

The Merger Agreement, dated as of July 12, 2012 (the “Merger Agreement”), executed in connection with the Merger contained customary representations, warranties and covenants of the Company and Acquisition Corp. The Merger Agreement provides for a post-closing adjustment in an aggregate amount of up to 1,000,000 additional shares of our common stock issuable pro rata to BLB’s pre-Merger stockholders for any breach of the Merger Agreement by us that is discovered during the two-year period following the closing date. The Merger Agreement also provided that 5% of the 20,000,000 shares of our common stock (the “BLB Escrowed Shares”) that BLB’s pre-Merger stockholders received in the Merger in exchange for shares of BLB common stock be held in escrow for any breach of the Merger Agreement by BLB that is discovered during the two-year period following July 12, 2012 pursuant to the terms of an Escrow Agreement, dated as of July 12, 2012, among us, the pre-Merger stockholders of BLB, and Gottbetter & Partners, LLP, as Escrow Agent. As of the date of this report, no breaches of the Merger Agreement have occurred.

In connection with the Merger, for a period of 24 months from the closing date except in certain limited circumstances, our officers, directors, key employees and holders of 10% or more of our common stock, calculated after giving effect to the Merger, who received shares of our common stock in connection with the Merger, agreed to “lock-up”, not sell or otherwise transfer or hypothecate directly or indirectly, or effect or agree to effect any short sale of, any of their shares of our common stock received in connection with the Merger.

In connection with the closing of the Merger, we issued warrants to purchase 10,000,000 shares of our common stock (the “Licensor Warrants”) to the licensors under the Kardashian Beauty™ license agreement. The warrants are exercisable for a term of ten years. The warrants were originally exercisable at $0.24 per share. Subsequently, we agreed with the warrant holders to lower the exercise price of the warrants to $0.12 per share.

For financial reporting purposes, the Merger represented a capital transaction of BLB or a “reverse merger” rather than a business combination, because the sellers of BLB effectively controlled the combined company immediately following the completion of the Merger. As such, BLB was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as a recapitalization of BLB.

CAPITAL EXPENDITURES

As of December 31, 2013, we incurred capital expenditures of $0.183 million, which consisted of fixtures at certain key customer retail stores and display rooms.

RESULTS OF OPERATIONS

Revenues

We generated net revenues from operations of $2.738 million and $1.526 million for the six months ended December 31, 2013 and December 31, 2012, respectively. Net sales were generated from the successful launch of our Kardashian Beauty™ brand and securing retail points of distribution domestically and international distribution relationships.

We generated gross and net revenues from operations of $1.969 million and $1.469 million for the three months ended December 31, 2013. We generated gross and net revenues of $1.754 million and $1.526 million for the three months ended December 31, 2012, respectively. Our gross revenues for the three months ended December 31, 2013 improved over the three months ended December 31, 2012 as a result of sales of our core line in addition to seasonal items in the period ended December 31, 2013 as compared to only seasonal items in most points of distribution for the three months ended December 31, 2012, which were partially offset by an increase in discounts and reserves for discounts in the three months ended December 31, 2013.

Cost of Goods Sold

Cost of goods sold was $1.900 million and $0.794 million for the six months ended December 31, 2013 and December 31, 2012, respectively, or 69% and 52% of net revenues over the same period. The cost of goods sold includes direct materials, labor, overhead, and in-bound freight costs. As of December 31, 2013, we reclassified the presentation of freight-out from cost of sales and have included the expense as a selling expense in the accompanying statement of operations. Accordingly, the prior periods have been updated to reflect such reclassification. Cost of goods sold also includes a reserve of $0.200 million and $0 for the six months ended December 31, 2013 and December 31, 2012 for inventory write-offs and write-downs.

Cost of goods sold was $1.143 million and $0.794 million for the three months ended December 31, 2013 and December 31, 2012, respectively, or 78% and 52% of net revenues over the same period. As compared to the prior period, the cost of goods sold during the period ended December 31, 2013 was negatively impacted by relabeling costs of our Kardashian Beauty™ line and reserves for inventory liquidation.

Operating Expenses

We incurred operating expenses from operations for the six months ended December 31, 2013 and 2012 of $3.858 million and $3.175 million, respectively. Our operating expenses primarily consisted of general and administrative expenses, selling expenses, professional fees, depreciation and amortization expense and product development fees paid to a related party. The increase in our operating expenses is due to the increase in royalty expense, general and administrative expense, depreciation and amortization expense related to our fixtures in customer locations, and product development fees to a related party. Our general and administrative expense for the six months ended December 31, 2013 was increased over the prior year primarily due to an increased reserve for penalties and settlements for our ongoing litigation (see Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q).

We incurred operating expenses from operations for the three months ended December 31, 2013 and 2012 of $2.053 million and $2.094 million, respectively. Our operating expenses for the three months ended December 31, 2013 were improved over the three months ended December 31, 2012 due to lower professional fees and selling expenses, primarily due to lower freight-out costs, offset by higher product development fees and increased general and administrative expense as a result of reserves for penalties and settlements as discussed above.

Losses from Operations

We incurred operating losses of $3.019 million and $2.444 million for the six months ended December 31, 2013 and 2012, respectively. The main components of the recorded operating loss during both periods were general and administrative expenses, professional fees, depreciation and amortization expense and product development fees paid to a related party.

Our operating loss for the three months ended December 31, 2013 and 2012 was $1.727 million and $1.362 million, respectively. Our operating loss for the three months ended December 31, 2013 was primarily impacted by our gross margin of 22% for the three months ended December 31, 2013 as compared to 48% for the three months ended December 31, 2012.

Other (Income) / Expense

We incurred other (income) / expenses for the six months ended December 31, 2013 and 2012 of $(0.463) million and $0.643 million, respectively. Our other (income)/expense for the three months ended December 31, 2013 and 2012 was $0.038 million and $0.703 million, respectively. Our other (income) / expense primarily consisted of non-cash interest expense and derivative liability gains.

Net Losses

We incurred net losses in the amounts of $2.556 million and $3.086 million, of $0.02 and $0.04 per basic and diluted share for the six months ended December 31, 2013 and 2012, respectively, primarily due to our losses from operations and net interest expense, offset by a non-cash derivative liability gain.

Our net loss for the three months ended December 31, 2013 and 2012 was $1.765 million and $2.065 million, respectively, primarily due to our losses from operations, which were driven by higher cost of goods and increased general and administrative expense as a result of reserves for penalties and settlements partially offset by lower selling expenses as compared to the three months ended December 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2013, we had cash and cash equivalents of $0.026 million compared to $0.389 million as of June 30, 2013. We had negative working capital of $2.653 million at December 31, 2013 compared to positive working capital $0.047 million, including $0.589 million and $0.023 million of current portion of convertible debt net of debt discounts, at December 31, 2013 and June 30, 2013, respectively. The change is attributable to investments in inventory as we continue to grow the Kardashian Beauty™ brand, an increase in due from factor and an increase in short term debt due to our recent financings.

As of December 31, 2013, our total assets were $3.652 million, our total shareholders’ deficit was $3.035 million and our total liabilities were $6.687 million compared to $4.382 million in total assets, $0.849 million in shareholders’ deficit and $5.231 million in total liabilities as of June 30, 2013.

As of December 31, 2013, our assets were comprised of $0.254 million in accounts receivable and due from factor, $2.357 million in inventory and prepaid inventory, and $0.290 million in deferred financing costs. Our total liabilities were comprised primarily of $3.643 million in accounts payable, $1.068 million in accrued expenses and other liabilities, $0.528 million in long-term liabilities related to the value of our derivative instruments, and debentures in the net amount of $1.214 million.

As of June 30, 2013, our assets were comprised of $0.264 million in accounts receivable and due from factor, $2.207 million in inventory and prepaid inventory, $0.379 million in prepaid royalty, and $0.359 million in deferred financing costs. Our total liabilities were comprised primarily of $2.482 million in accounts payable and $1.660 million in long-term liabilities related to the value of our derivative instruments, debentures in the net amount of $0.282 million and accrued expenses of $0.807 million.

We have limited cash reserves and need a substantial amount of capital to implement our business plan. To date, we have financed our operations from proceeds generated by the private placement of equity and convertible debt instruments and through our factoring line of credit. In connection with our business plan, management anticipates continuing to have operating expenses and capital expenditures relating to: (i) payments under existing licenses, (ii) investments in inventory for our Kardashian Beauty™ brand; (iii) research and development costs associated with new product offerings, and (iv) management and consulting costs, as well as general administrative expenses, including the costs of being a public company. We intend to finance these expenses by raising additional capital and generating sufficient revenues to meet our short-term and long-term operating requirements. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations. We currently do not have a specific plan of how we will obtain such funding; however, we anticipate that additional funding will be in the form of equity and/or debt financing and/or additional short-term borrowing.

Net Cash Used in Operating Activities

During the six months ended December 31, 2013, we used net cash in operating activities of $0.667 million related to losses in net income and investments in inventory offset primarily by increases in accounts payable and accrued expenses. We spent $3.011 million for operating activities during the six months ended December 31, 2012 in relation to our net loss as well as investments in inventory and prepaid inventory, increases in accounts receivable for the launch of our Kardashian Beauty™ line, which were partially offset by increases in accounts payable and accrued expenses.

Net Cash Used in Investing Activities

Net cash used in investing activities was $0.183 million and $0.140 million during the six months ended December 31, 2013 and December 31, 2012. Net cash used in investing activities was attributable to the acquisition of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $0.488 million and $3.241 million during the six months ended December 31, 2013 and December 31, 2012. Net cash provided by financing activities for the six months ended December 31, 2013 was primarily attributable to a convertible note we issued to an existing investor. Net cash provided by financing activities for the six months ended December 31, 2012 was attributable to short term loans and proceeds from convertible debt.

GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to generate sufficient cash flow from its planned operations to meet its obligations on a timely basis and ultimately attain profitability. The Company’s ability to continue as a going concern is also dependent upon its ability to obtain additional equity and/or debt financing or ability to generate sufficient revenue to cover its operating expenses. Additional financing may not be available upon acceptable terms, or at all.

To date, the Company has financed its operations from the proceeds generated from the private placement of equity, convertible debt instruments as well as through its factoring arrangements. In connection with the execution of its business plan, the Company anticipates additional increases in operating expenses and capital expenditures relating to: (i) payments under existing licenses, (ii) investments in inventory for our Kardashian Beauty™ brand; (iii) research and development costs associated with new product offerings, and (iv) management and consulting costs, as well as general administrative expenses, including the costs of being a public company. The Company intends to finance these expenses by raising additional capital and generating sufficient revenues to meet short-term and long-term operating requirements. If additional financings are not available or are not available on acceptable terms, the Company may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict its business operations. The Company currently does not have a specific plan of how it will obtain such funding; however, it anticipates that additional funding will be in the form of equity and/or debt financings and/or additional short-term borrowings. As such, these factors raise substantial doubt as to the Company’s ability to continue as a going concern.

The Company’s condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s auditors expressed substantial doubt about its ability to continue as a going concern in their audit report dated October 15, 2013, for the period ending June 30, 2013.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The presentation of our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete listing of these policies is included in Note 2 – Summary of Significant Accounting Policies of the notes to our unaudited condensed consolidated financial statements for the six months ended December 31, 2013 included elsewhere in this Form 10-Q. Below, we have identified the accounting policies that are of particular importance in the presentation of our financial statements, results of operations and cash flows, and which require the application of significant judgment by management.

Use of Estimates

In preparing our financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”), management makes estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Significant estimates include the fair value of warrant liabilities, debt discount and the ability to realize deferred tax assets. Actual results could differ from these estimates.

Revenue Recognition

As required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, we expect to recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable.

We offer our customers a variety of sales and incentive programs, including discounts, allowances, coupons, slotting fees, and co-op advertising; such amounts are recorded as a reduction in revenue over the period in which revenue is recognized. We expensed $0.783 million and $0.228 million for the six months ended December 31, 2013 and 2012, respectively, and such amounts are included in discounts in the accompanying statement of operations. We expensed $0.500 million and $0.228 million for the three months ended December 31, 2013 and 2012, respectively, and such amounts are included in discounts in the accompanying statement of operations.

Fair Value Measurements

Our financial instruments are primarily composed of cash, accounts receivable, factoring line of credit, accounts payable, and its convertible notes and warrants. The fair value of cash, restricted cash, accounts receivable, factoring line of credit, accounts payable and convertible notes closely approximates their carrying value due to their short maturities.

The valuation techniques utilized for the warrants and beneficial conversion feature of its convertible notes are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

We utilize observable market inputs (quoted market prices) when measuring fair value whenever possible. Our warrants and the beneficial conversion feature for its convertible notes are categorized within Level 3 of the fair value hierarchy. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company's accounting and finance department.

As of December 31, 2013, there were no transfers in or out of Level 3 from other levels.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable balances represent payments due to us for previously recognized net sales, reduced by an allowance for doubtful accounts for balances, which are estimated to be uncollectible at December 31, 2013 and June 30, 2013, respectively. We grant credit terms in the normal course of business to its customers and do not require collateral or other security to support credit sales.

The allowance for doubtful accounts is determined based on historical experience and ongoing evaluations of our receivables and evaluations of the risks of payment. The allowance for doubtful accounts is recorded against accounts receivable balances when they are deemed uncollectible. When accounts are deemed significantly past due and uncollectible, the accounts receivable balances are written down for the amount deemed to be uncollectible. Recoveries of accounts receivable previously reserved are recorded in the consolidated statements of operations when received. One customer accounted for 69% and 94% of outstanding accounts receivable as of December 31, 2013 and June 30, 2013, respectively. As of December 31, 2013, all of our accounts receivable balances were deemed to be collectible.

Inventories

Inventories include items which are considered salable or usable in future periods, and are stated at the lower of cost or market value, with cost being based on standard cost which approximates actual cost on a first-in, first-out basis. Costs include direct materials, direct labor and overhead (e.g., indirect labor, rent and utilities, depreciation, purchasing, receiving, inspection and quality control), and in-bound freight costs. We periodically review the value of items in inventory and provide write-downs or write-offs of inventory based on our assessment of market conditions Write-downs and write-offs are charged to cost of goods sold.

During the six months ended December 31, 2013 and the period ended June 30, 2013, we reserved $0.200 million and $0.366 million, respectively, for write-offs. During the three months ended December 31, 2013 and the period ended June 30, 2013, we reserved $0.200 million and $0.366 million, respectively, for write-offs.

The inventory write-off as of June 30, 2013 was primarily due to the name change of our Kardashian Beauty ™ brand, which forced the Company to destroy or mark for destruction finished goods and work-in-process. Total inventories as of December 31, 2013 and June 30, 2013 were $2.050 million and $1.949 million, respectively.

Property and Equipment

Fixed assets as of December 31, 2013 consisted of costs incurred by us in connection with installing display fixtures at certain key customer display rooms and retail stores. The display fixtures are being depreciated on a straight-line basis over two years, which approximates the estimated useful lives of such assets. Display fixtures maintained at customer display rooms and retail stores amounted to $0.617 million, net of accumulated depreciation, at December 31, 2013. Depreciation expense amounted to $0.235 million and $0.012 million for the six months ended December 31, 2013, and is included in depreciation & amortization expense in the accompanying statements of operations. Depreciation expense for the three months ended December 31, 2013 and 2012 amounted to $0.127 million and $0.012 million for the three months ended December 31, 2013, and is included in depreciation & amortization expense in the accompanying statements of operations.

Advertising

Advertising costs are expensed as incurred. Total advertising expenses amounted to $0.088 million and $0.291 million for the six months ended December 31, 2013 and 2012, respectively, and are included in general and administrative expenses in the accompanying statement of operations. Total advertising expenses amounted to $0.053 million and $0.100 million for the three months ended December 31, 2013 and December 31, 2012, respectively. Our advertising expenses in the three and six months ended December 31, 2013 were lower than the prior period due to the reduced spend on print advertising and photo shoot expenses during the current period.

Selling Expenses and Commissions

Selling expenses are expensed as incurred. Total selling expenses amounted to $0.351 million and $0.342 million for the six months ended December 31, 2013 and 2012, respectively. Total selling expenses amounted to $0.254 million and $0.342 million for the three months ended December 31, 2013 and 2012. As of September 30, 2013, the Company reclassified the presentation of freight-out from cost of sales and has included the expense as a selling expense under operating expenses in the accompanying statement of operations. Accordingly, the prior periods have been updated to reflect such reclassification. Shipping expense is included in selling expense under operating expenses and amounted to $0.075 million and $0.263 million during the six months ended December 31, 2013 and December 31, 2012, respectively. Total shipping expense was $0.043 million and $0.263 for the three months ended December 31, 2013 and 2012, respectively. Our shipping expense for the three months ended December 31, 2012 was significantly impacted due to one-time airfreight costs for outbound shipments.

Selling commissions are expensed as incurred. As of December 31, 2013, the Company reclassified the presentation of commissions and fees from general and administrative expenses and has included the expense as a selling expense under operating expenses in the accompanying condensed consolidated statements of operations. Accordingly, the prior periods have been updated to reflect such reclassification. Total selling commissions amounted to $0.074 million for each of the six months ended December 31, 2013 and 2012, respectively, and are included in selling expenses in the accompanying statement of operations. Total selling commissions amounted to $0.048 million and $0.074 million for the three months ended December 31, 2013 and 2012, respectively. Our selling commissions for the three months ended December 31, 2013 were lower over the prior period as a result of a different mix of our sales from domestic versus international sales where we do not pay a sales commission as well as increased discounts in the three months ended December 31, 2013.

Deferred Financing Costs

Deferred financing costs represent fees paid in connection with obtaining short-term and long-term loans (see Notes 4 and 5 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q). These fees are amortized using a method that approximates the effective interest method over the term of the related financing.

In connection with an offering of debentures that closed in August 2013, we paid $50,000 to the investor in the offering and $12,064 in legal fees, collectively, to Loeb & Loeb and Gottbetter & Partners.

In connection with an offering of debentures that closed in June 2013, we paid Gottbetter Capital Markets (“GCM”) who acted as the sole placement agent for the offering a commission of 7.2% of the first $1,400,000 funds raised in the offering for a total payment of $100,000. We also issued 1.9 million five-year warrants to GCM on the same terms as the warrants offered to the investors in the offering, with an exercise price of $0.082. In addition, we paid $117,446 in legal fees to Gottbetter & Partners and $85,207 in professional fees to the lead investor in the offering.

As of December 31, 2013 and June 30, 2013, deferred financing costs of $0.290 million and $0.359 million, respectively, net of accumulated amortization, are presented on the accompanying balance sheet. Amortization of deferred financing costs of $0.131 million and $0.063 million for the six months ended December 31, 2013 and 2012, respectively, is included in interest expenses in the accompanying statement of operations. Amortization expense for deferred financing costs was $0.069 million and $0.063 million for the three months ended December 31, 2013 and 2012, respectively. The remaining deferred financing costs will be fully amortized by March 1, 2015.

Debt Discount

We may record debt discounts in connection with raising funds through the issuance of convertible debt (see Note 5 and 6 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

As of December 31, 2013 and June 30, 2013, convertible debt, net of unamortized debt discounts, was $1.214 million and $0.282 million, respectively. Amortization of debt discounts of $0.496 million and $0.053 million is included in interest expense in the accompanying statement of operations for the six months ended December 31, 2013 and 2012, respectively. Amortization expense for debt discounts was $0.255 million and $0.053 million for the three months ended December 31, 2013 and 2012, respectively. The remaining debt discounts will be fully amortized by March 1, 2015. See Note 5 and 6 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

Derivative Financial Instruments

GAAP requires derivative instruments embedded in convertible debt or equity instruments, to be bifurcated and measured at their fair value for accounting purposes. In determining the appropriate fair value, we use the Black-Scholes option-pricing model, which we estimate to approximate the fair value using the Binomial Lattice model. In assessing the debt instruments with characteristics of liability and equity, management determines if the convertible debt host instrument is conventional convertible debt and if there is a beneficial conversion feature. If the instrument is not considered conventional convertible debt, we estimate the fair value of the embedded derivative instruments. The warrant liability is measured at fair value on a recurring basis using level 2 inputs (see Notes 5 and 6 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q).

As of December 31, 2013, we had reserved 69,682,783 shares of common stock for issuance of common stock upon exercise of our outstanding warrants.

As of December 31, 2013, the fair value of all warrants issued was estimated at $0.528 million. The gain/(loss) in the fair value of the warrants of $1.246 million and $(0.347) million for the six months ended December 31, 2013 and 2012, respectively, was recorded in the long-term liability section of the balance sheet and recorded as a gain in the derivative liability section on the statement of operations. The gain/(loss) in the fair value of the warrants was $0.375 million and $(0.407) million for the three months ended December 31, 2013 and 2012, respectively.

Financial Instruments and Concentrations of Business and Credit Risk

Our financial instruments include cash and cash equivalents, factoring lines of credit, convertible debt, accounts payable, other current assets and liabilities, and short-term loans. The fair value of these instruments approximates their carrying value due to their relatively short maturities.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents. We may maintain cash balances that at times may exceed amounts insured by the Federal Deposit Insurance Corporation. Three customers accounted for approximately 33%, 25% and 24% of the Company’s net revenues for the six months ended December 31, 2013. Three customers accounted for approximately 30%, 29% and 18% of the Company’s net revenues for the three months ended December 31, 2013. Three customers accounted for approximately 36%, 20% and 17% of the Company’s net revenues for the three and six months ended December 31, 2012.

Accounts receivable for one customer represented 69% of the Company’s accounts receivable balance, prior to accrued discounts, as of December 31, 2013. Accounts receivable for one customer represented 94% of the Company’s accounts receivable balance as of June 30, 2013.

We have not experienced any losses in these accounts and believe we are not exposed to any significant credit risk in this area.

License Acquisition Costs

License acquisition costs represent legal fees paid in connection with obtaining our license agreements (see Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q). These fees are amortized using the straight-line method over the term of each license agreement.

As of December 31, 2013 and June 30, 2013, license acquisition costs, net of amortization, were $20,298 and $24,504, respectively on the accompanying condensed consolidated balance sheets.

Amortization of license acquisition costs of $4,206 and $1,342 is included in depreciation and amortization expense in the accompanying condensed consolidated statements of operations for the six months ended December 31, 2013 and December 31, 2012. Amortization of license acquisition costs was $3,535 and $671 for the three months ended December 31, 2013 and December 31, 2012.

Impairment of Long-Lived Assets

We evaluate long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. In such cases, the carrying value of these assets is adjusted to their estimated fair value and assets held for sale are adjusted to their estimated fair value less selling expenses. No impairment losses of long-lived assets or intangible assets were recognized for the six months ended December 31, 2013.

Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We provide a valuation allowance against our deferred tax assets when circumstances indicate that it is no longer more likely than not that such assets will be realized. As we provided a full valuation allowance against our deferred tax assets, there was no net impact on net loss or net loss per share as of December 31, 2013.

Section 382 of the Internal Revenue Code can limit the amount of net operating losses, which may be utilized if certain changes to a company’s ownership occur. While the Company underwent a shift in ownership in 2013 as defined by Section 382 of the Internal Revenue Code, the Company has not incurred any limitations on its ability to utilize its net operating losses under Section 382 of the Internal Revenue Code, it may incur limitations in the future if there is a change in ownership.

Net Loss Per Share

Basic net income / (loss) per share is computed by dividing net income / (loss) by the weighted average number of shares of common stock outstanding for the period. Our potential dilutive shares, which include common stock options, common stock warrants and convertible debt have not been included in the computation of diluted net loss per share for all periods where there was a net loss as the result would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

There have been no recently issued accounting pronouncements that impact us.

INFLATION

The effect of inflation on our revenues and operating results has not been significant.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. During the quarter ended December 31, 2013, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act. Based on this evaluation, because of the identification of the material weakness described below, management concluded that as of December 31, 2013 our disclosure controls and procedures were ineffective.

As reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, our management identified a control deficiency relating to inadequate accounting resources. Management believes that this material weakness is primarily due to the limited number of accounting personnel. To mitigate the effects of this deficiency, we rely heavily on the use of external consultants.

Subject to the availability of funds, we plan to hire additional personnel with financial accounting expertise to further support our current accounting personnel. If and when implemented, our internal accounting personnel will be responsible for performing regular internal audits of the Company’s disclosure controls and procedures, internal control over financial reporting and performing other financial functions.

Management believes that hiring additional accounting personnel who have financial expertise and knowledge will result in a much more knowledgeable accounting staff. Additional accounting personnel will also ensure the proper segregation of duties and provide more checks and balances and better enable us to deal with any personnel losses within our accounting staff. We believe this will greatly decrease any disclosure control and procedure issues we may encounter in the future.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We may, from time to time, be a party to litigation that arises in the normal course of our business operations. Except as set forth below, there are no legal proceedings, governmental actions, administrative actions, investigations or claims pending against us or that we are a party to that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

On November 19, 2012, an action entitled Chroma Makeup Studio LLC. v. BOLDFACE Group, Inc. and BOLDFACE Licensing + Branding was filed in the United States District Court for the Central District of California, Western Division. Chroma Makeup Studio LLC (“Chroma”) alleged that our use of the Khroma mark, alleged that our use of the term Khroma, including the marks Khroma Beauty and Khroma Beauty By Kourtney, Kim and Khloe (the “Khroma Beauty Marks”), infringes upon Chroma’s rights in its Chroma mark. The complaint included claims for trademark infringement under the Lanham Act and unfair competition under applicable California law. On December 5, 2012, Chroma filed a motion for preliminary injunction to enjoin our use of the Khroma Beauty Marks, including the promotion and sale of products offered under such marks during the pendency of the litigation. On January 23, 2013, the court denied Chroma’s motion. Prior to deciding the motion, the court ordered the parties to appear at a scheduling conference on March 25, 2013 to discuss the proposed pretrial discovery plan and address other pretrial issues. The scheduling conference occurred on March 25, 2013, and the court issued a scheduling order setting November 18, 2013 as the end of the discovery period, January 6, 2014 as the deadline to file dispositive motions, and a tentative trial date of April 22, 2014. On December 11, 2013, following private mediation, the parties entered into a settlement agreement and mutual general release (the “Settlement Agreement”) with Chroma to settle any and all claims between the Company and Chroma. Pursuant to the terms of the Settlement Agreement, the parties have agreed that the terms of the Settlement Agreement are to remain confidential.

Pursuant to the terms of the Settlement Agreement, and with no admission of any liability, the Company has agreed to pay Chroma a cash amount over a period of one year commencing on December 31, 2013 and ending on December 31, 2014. The total cash amount that the Company has agreed to pay Chroma is lower than the amount the Company reserved for any payments to be made in connection the dispute.

On November 30, 2012, we filed a complaint for a declaratory judgment in the United States District Court for the Central District of California, Western Division entitled BOLDFACE Licensing + Branding v. By Lee Tillett, Inc. BLB’s complaint requests a declaration from the court that (1) BLB’s use of the Khroma term, including the marks Kardashian Khroma and Khroma Beauty By Kourtney, Kim and Khloe (the “Khroma Marks”), does not infringe on By Lee Tillett, Inc.’s (“Tillett”) rights in its Kroma mark, and (2) BLB’s two pending trademark applications for the Khroma Marks should be allowed to register with the United States Patent and Trademark Office (“USPTO”). On January 9, 2013, Tillett filed an answer and counterclaims for (1) trademark infringement, (2) false designation of origin, (3) trademark infringement, and (4) unfair competition under applicable California law. In addition to BLB, Tillett’s counterclaims are made against BGI and Kimasprincess Inc., 2Die4Kourt Inc., Khlomoney Inc., Kim Kardashian, Kourtney Kardashian and Khloe Kardashian (the “Kardashian Parties”).

BLB and the Kardashian Parties filed an answer to Tillett’s counterclaims on February 11, 2013, and Tillett contemporaneously filed a motion for preliminary injunction to enjoin the Company’s use of the Khroma Marks. The Court heard the motion on March 11, 2013, and granted the motion after finding that Tillett had demonstrated a likelihood of success on its trademark infringement claim and related claims, and a likelihood of irreparable harm in the absence of injunctive relief. In the order granting the injunction, the Court enjoined BLB and its affiliates from making, promoting, or selling any goods or services using the Khroma trademark, although it did not prohibit the Company’s retailers from selling the Khroma products already in their inventories. On March 20, 2013, BLB filed an ex-parte application for clarification of the court’s order granting the motion and setting forth the terms of the injunction. With its application, BLB submitted a proposed order that would limit the scope of the injunction to the United States only, and make clear that it was not intended to apply to overseas sales or promotion. BLB ex-parte application is still pending and the Court has not yet issued a ruling or set a hearing date.

The Court ordered counsel for the parties to appear for a scheduling conference on March 25, 2013, following which the Court filed a preliminary scheduling order setting November 18, 2013 as the last day of the parties’ discovery period, January 6, 2014 as the deadline to file dispositive motions, and a tentative trial date of April 22, 2014. Following the scheduling conference, the discovery period opened and the parties exchanged requests for documents and information. BLB and the Kardashian Parties served their respective objections and responses to Tillett’s discovery requests on April 29, 2013. The parties have entered into a stipulated protective order concerning the production of confidential, proprietary, and private information during the discovery process.

In response to the injunction issued by the court, the Company filed a notice of appeal with the Ninth Circuit Court of Appeals (the “9th Circuit”) on March 15, 2013 to overturn the district court’s March 11, 2013 decision. The Company filed its opening brief with the 9th Circuit on April 19, 2013. On March 18, 2013, the Company also filed a motion to stay with the 9th Circuit, requesting a stay of the injunction during the pendency of the Company’s appellate case. The 9th Circuit ruled on the Company’s motion on June 7, 2013 granting Tillett’s application and ruling that the preliminary injunction would be effective as of June 7, 2013

On October 28, 2013, Tillett filed a motion to amend its counterclaim to add Gold Grenade, LLC as a counter-defendant and two additional claims: conspiracy and common law trademark infringement. The Company and the Kardashian Parties have filed an answer to Tillet’s motion. On November 18, 2013, the Court denied Tillet’s motion to amend its counterclaim.

The Company filed a motion for summary judgment, contending that Tillett could not prove that it suffered any damages based on the conduct of the BLB. On December 6, 2013, the Court issued an order to show cause re: contempt and sanctions against BLB based on allegations that BLB had distributed Khroma labeled product after the effective date of the preliminary injunction. As part of that order, the Court took off the calendar the pending summary judgment motion and all remaining trial and pre-trial dates. The parties filed briefs regarding the alleged contempt and an evidentiary hearing was held on January 9, 2014, after which the Court took the matter under submission. As of the date of this filing, no ruling has been issued.

Based on the existing status of the two actions, our management believes it has adequately reserved for these matters such that there would not be a material effect on future financial statements.

ITEM 1A. RISK FACTORS

An investment in shares of our common stock is highly speculative and involves a high degree of risk. We face a variety of risks that may affect our operations or financial results and many of those risks are driven by factors that we cannot control or predict. Before investing in our common stock you should carefully consider the following risks, together with the financial and other information contained in this Form 10-Q. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be materially adversely affected.

RISKS RELATED TO THE COMPANY

We have a limited operating history.

Our wholly-owned operating subsidiary, BLB, was incorporated on April 26, 2012. BLB has a limited operating history in an industry characterized by changing consumer preferences, evolving industry standards and frequent introductions of new products and services. As of December 31, 2013, BLB had acquired three licenses: (i) the Kardashian Beauty™ license, (ii) the Mario Lopez license and (iii) the UGLYDOLL® license.

The Company expects to acquire additional celebrity and designer brand licenses although no assurance can be given that the Company will be able to do so. Our limited operating history, and our dependence on a limited number of licenses and the uncertainty surrounding our ability to acquire additional licenses may have a material adverse effect on our business, results of operations and financial condition.

Our operating results are unpredictable and are expected to fluctuate in the future.

Our operating results are unpredictable and are expected to fluctuate in the future as a result of a number of factors, many of which may be beyond our control. As a result, operating results for any period should not be relied upon as an indication of our future performance. The following factors may affect our operating results:

· our ability to deliver products in a timely manner and in sufficient volumes;

· our ability to recognize product trends;

· our loss of one or more significant distributors or customers;

· the introduction of successful new products by our competitors;

· our inability to maintain or increase awareness and recognition of our brands; and

· adverse media reports on the use of our products.

Because our business is constantly evolving, our historical operating results may not be useful in predicting our future operating results.

Our working capital is limited and we may need additional financing to continue our operations.

As of December 31, 2013, we had negative working capital of $2.653 million, which includes the current portion of amortized debt discounts of $0.596 million. We require substantial working capital to fund our operations, and additional capital will be necessary for the Company to continue its operations. If we are unable to obtain financing in the amounts required and on acceptable terms, or at all, or raise additional capital, we will need to significantly reduce the scope of our operations, which may have a material adverse effect on our business, results of operations and financial condition.

If unknown liabilities should arise in connection with the Merger and the split-off of our wholly-owned subsidiary BOLDFACE Split Corp., we may be required to divert cash from other business purposes to discharge such liabilities, which may have a material adverse effect on our business, results of operations and financial condition.

In connection with the Merger, we split off (the “Split-Off”) our wholly-owned subsidiary, BOLDFACE Split Corp., a Nevada corporation (“Split Corp.”). The Split-Off was accomplished through the exchange of 189,781,000 shares of our common stock held by Noah Levinson for all of the issued and outstanding shares of common stock of Split Corp. All of our assets and liabilities immediately following the Merger, excluding any assets and liabilities of BLB assumed in the Merger, were transferred to Split Corp.

Although we transferred certain assets and liabilities relating to our pre-merger shell operations in connection with the Merger and the Split-off, there can be no assurance that such transfer will release us of all such liabilities. If Split Corp. does not pay such liabilities or unknown liabilities arise, we may be required to divert cash from other business purposes to discharge such liabilities, which may have an adverse effect on our current business, results of operation and financial condition.

Our failure to manage our growth could place a significant strain on our operational and financial resources.

Our growth has placed a significant strain on our operational and financial resources and has placed significant demands on our current management and personnel. In order to manage growth, we will be required to expand existing operations, particularly with respect to product development and marketing, and to improve existing, and implement new, operational and financial systems, procedures and controls.

We have experienced a significant strain on our resources because of difficulties in hiring and retaining skilled personnel necessary to support our business and the continued development of our financial and information management systems. Difficulties we may encounter in dealing successfully with the above risks could adversely affect our operations. We cannot offer any assurance that our current personnel, systems, procedures and controls will be adequate to support our future operations or that management will be able to identify, hire, train, retain, motivate and manage required personnel. A failure to manage our growth effectively could have a material adverse effect on our business, results of operations and financial condition.

Our success depends on our key personnel and our ability to attract and retain qualified personnel.

Our success depends on our ability to retain our key personnel including our Chief Executive Officer and Chief Financial Officer. The unexpected loss of one or more of our key employees could adversely affect our business. Our success also depends on our ability to identify, attract, hire, train, motivate, and retain other highly qualified personnel. We may not be successful in attracting, assimilating or retaining qualified personnel in the future, and our failure to do so could adversely affect our business.

Our success depends on our ability to execute our business strategy. If we are unable to raise additional capital, our ability to fully implement our business strategy will be limited.

Our ability to implement our business strategy is dependent upon a number of factors, including our ability to:

	●	develop high-quality brands in connection with our current licenses;

	●	establish, maintain and increase our product sales and market share, and strengthen the recognition of our brands;

	●	implement appropriate product mix and pricing strategies and realize the anticipated benefits from these strategies;

	●	realize efficiencies across our supply chain, marketing processes, sales model and organizational structure;

	●	effectively manage our inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence;

	●	acquire additional celebrity and designer brand licenses; and

	●	secure short and long-term financing at attractive rates.

There can be no assurance that any of these initiatives will be successfully and fully executed in the amounts or within the time periods that we expect.

We rely on a limited number of customers for a substantial portion of our sales, and the loss of or a material reduction in purchase volume by any of these customers would adversely affect our sales and results of operations.

For the three and six months ended December 31, 2013, three customers accounted for approximately 77% and 83%, respectively, of our net revenues. Our largest customer for the three and six months ended December 31, 2013, accounted for 29% and 33%, respectively, of our sales. The loss of any of our major customers, a significant reduction in purchases by any major customer, or, any serious financial difficulty of a major customer, would have a material adverse effect on our sales and results of operations.

We are currently defendants in one pending trademark infringement action. If we are unable to successfully defend against or settle these actions, our business, financial condition and results of operations may be materially adversely affected.

On November 30, 2012, we filed a complaint for a declaratory judgment in the United States District Court for the Central District of California, Western Division entitled BOLDFACE Licensing + Branding v. By Lee Tillett, Inc. BLB’s complaint requests a declaration from the Court that (1) BLB’s use of the Khroma Marks does not infringe on Tillett’s rights in its Kroma mark, and (2) BLB’s pending trademark applications for the Khroma Marks should be allowed to register with the USPTO. On January 9, 2013, Tillett filed an answer and counterclaims for (1) trademark infringement, (2) false designation of origin, (3) trademark infringement, and (4) unfair competition under applicable California law. In addition to BLB, Tillett’s counterclaims are made against the following additional parties: BGI and the Kardashian Parties. The parties are currently in the discovery phase, and the court has set a tentative trial date of April 22, 2014.

If we are unable to settle these actions or successfully defend against these actions, our business, financial condition and results of operations may be materially adversely affected.

For additional disclosure relating to these actions, please see Item 1 “Legal Proceedings” contained elsewhere in this Form 10-Q.

There is substantial doubt about our ability to continue as a going concern.

In its audit report, dated October 15, 2013, for the period ending June 30, 2013, Friedman LLP, our former independent registered public accounting firm, expressed substantial doubt about our ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flow from our planned operations to meet our obligations on a timely basis and ultimately attain profitability. Our ability to continue as a going concern is also dependent on our ability to raise additional capital or obtain additional financing and our ability to generate sufficient revenue to cover our operating expenses. Additional financing may not be available upon acceptable terms, or at all.

To date, we have financed our operations from proceeds generated by the private placement of equity and convertible debt instruments and through our factoring line of credit. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) payments under existing licenses, (ii) investments in inventory for our Kardashian Beauty™ brand; (iii) research and development costs associated with new product offerings, and (iv) management and consulting costs, including the cost of being a public company. We intend to finance these expenses by raising additional capital and generating sufficient revenues to meet our short-term and long-term operating requirements. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations. We currently do not have a specific plan of how we will obtain such funding; however, we anticipate that additional funding will be in the form of equity and/or debt financing and/or additional short-term borrowing. As such, these factors raise substantial doubt about our ability to continue as a going concern.

As of December 31, 2013, our management determined that certain disclosure controls and procedures were ineffective, which could result in material misstatements of our financial statements.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. As of December 31, 2013, our management determined that some of our disclosure controls and procedures were ineffective due to weaknesses in our financial closing process.

When our resources permit, we intend to implement remedial measures designed to address the ineffectiveness of our disclosure controls and procedures, including (i) hiring additional individuals with accounting, auditing and financial reporting experience, (ii) segregating our internal and external financial reporting among a larger finance and accounting staff, (iii) implementing more specific segregation of our accounting software and (iv) providing historical information more timely. We have also adopted and implemented written procedures to document retailer purchase orders, inventory buying, product discounts and product transition flow, invoice review, cash and expense management, as well as an analyses of our cost of goods sold. If these remedial measures are insufficient to address the ineffectiveness of our disclosure controls and procedures, or if material weaknesses or significant deficiencies in our internal controls are discovered or occur in the future, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial statements may contain material misstatements, and we may be required to restate our prior period financial results.

We can give no assurance that the measures we plan to take in the future will remediate the ineffectiveness of our disclosure controls and procedures or that any material weaknesses will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or adequate disclosure controls and procedures. In addition, even if we are successful in strengthening our disclosure controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.

Upon completion of our offering of 8% original issue discount senior secured convertible debentures (the “Debentures”) and related warrants, we incurred significant debt obligations. The terms of the Debentures impose significant operating and financial restrictions on us and our subsidiaries, which may materially and adversely affect our business.

As of December 31, 2013, we had total debt, prior to debt discounts, of approximately $2.296 million under the Debentures, plus accrued interest of approximately $0.031 million. In connection with the sale of the Debentures, the investors who purchased our 12% secured convertible notes in December 2012, March 2013 and April 2013 in an aggregate principal amount of $3.380 million converted all of their 12% secured convertible notes (including accrued and unpaid interest thereon) into shares of our common stock.

The terms of the Debentures and the Factoring Agreements and the Supply Agreements and related agreements we entered into with Star Funding, Inc. impose significant operating and financial restrictions on us, which limit our ability, among other things, to:

	·	incur additional indebtedness;

	·	pay dividends or make distributions to our shareholders;

	·	incur liens that would rank senior in priority to, or pari passu with, the obligations under the Debentures; and

	·	sell or otherwise dispose of any assets or rights of the Company or any subsidiary, subject to certain exceptions.

	·	These restrictions may affect our ability to operate our business, including, among other things:

	·	making it more difficult for us to satisfy our obligations with respect to the Debentures and our other indebtedness;

	·	limiting our ability to obtain additional financing to fund future working capital, capital expenditures, strategic acquisitions or other general corporate requirements;

	·	requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes;

	·	limiting our financial flexibility in planning for and reacting to changes in the industry in which we compete;

	·	placing us at a disadvantage compared to other, less leveraged competitors; and

	·	increasing our cost of borrowing.

We may not be able to generate a sufficient amount of cash flow to meet our debt service obligations, including the Debentures and the Chroma Settlement.

Our ability to make scheduled payments or to refinance our debt obligations with respect to the Debentures, the Chroma Settlement, and our other indebtedness depends on our financial and operating performance, which, in turn is subject to certain financial, competitive, business and other factors which may be beyond our control. If our cash flow and capital resources are insufficient to fund our debt service obligations, including the Debentures, and our other commitments, we could face substantial liquidity problems and may be forced to reduce or delay scheduled expansions and capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt.

In addition, we cannot assure you that our operating performance, cash flow and capital resources will be sufficient for payment of our debt in the future. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more restrictive covenants which could further restrict our business operations. In the event that we are required to dispose of material assets or operations or restructure our debt to meet our debt service obligations, we cannot provide assurance that we could effect any of these actions on a timely basis, on commercially reasonable terms or at all, or that these actions would be sufficient to repay our debt service obligations.

If we cannot make scheduled payments on our debts, we will be in default and, as a result, our debt holders could declare all outstanding principal and interest to be due and payable and we could be forced into bankruptcy or liquidation.

RISKS RELATED TO OUR BUSINESS

The beauty business is highly competitive, and if we are unable to compete effectively, our results of operations could suffer.

We face vigorous competition from companies throughout the United States and the world, including multinational consumer product companies. Most of these competitors have greater resources than we do and may be able to respond to changing business and economic conditions more quickly than us. Competition in the beauty business is based on the pricing of products, innovation, perceived value, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce and m-commerce initiatives and other activities. It is difficult for us to predict the timing and scale of our competitors’ actions in these areas. Our ability to compete also depends on the continued strength of our brands, our ability to attract and retain key talent and other personnel and the efficiency of our manufacturing channels and distribution networks. If we are unable to compete effectively, our results of operations could suffer.

A general economic downturn or sudden disruption in business conditions may affect consumer purchases of discretionary items and the financial strength of customers that are retailers, which could adversely affect our financial results.

Consumer spending is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower. A decline in consumer purchases of discretionary items may impact sales of our products and our customers that are retailers. A downturn in the economies in which we expect to sell our products or a sudden disruption of business conditions in those economies could adversely affect our sales and profitability.

Our failure to effectively anticipate and respond to market trends and changes in consumer preferences could have a material adverse effect on our business, financial condition and results of operations.

Our success depends in large part on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty and other consumer products that we market and sell. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. Although we devote effort and resources to analyzing and responding to consumer spending patterns and preferences, consumer spending patterns and preferences are difficult to predict and can change rapidly. If we are unable to anticipate and respond to trends in the market for beauty and other consumer products and changing consumer demands, our business, results of operations and financial condition may be materially and adversely affected.

Furthermore, material shifts or decreases in market demand for our products could result in an inability to sell our products in sufficient quantities or at anticipated prices. In addition, shifts and decreases in market demand for our products could result in increased product returns by our customers and excess inventory levels. To the extent that we experience any of these risks, it may have a material adverse effect on our business, financial condition and results of operations.

An increase in product returns could negatively impact our operating results and profitability.

We permit the return of damaged or defective products and accept limited amounts of product returns in certain instances. While such returns have historically been nominal and within management’s expectations and the provisions established, future return rates may differ from those experienced in the past. Any significant increase in damaged or defective products or expected returns could have a material adverse effect on our operating results for the period or periods in which such returns are realized.

Our success depends, in part, on the quality and safety of our products.

Our success depends, in part, on the quality and safety of our products. If our products are found to be defective or unsafe, or if they otherwise fail to meet our consumers’ standards, our relationships with our customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we could lose sales and become subject to liability claims, any of which could result in a material adverse effect on our business, results of operations and financial condition.

A disruption in operations or our supply chain could adversely affect our business and financial results.

As we are a company engaged in the manufacture (through third-party manufacturers) and distribution of beauty products, our operations are subject to the risks inherent in manufacturing and distribution activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or information systems, loss or impairment of key manufacturing sites, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters and other external factors over which we have little or no control. If such an event were to occur, it could have an adverse effect on our business, results of operations and financial condition.

Our success depends upon market awareness of our brands.

Development and awareness of the Company will depend largely on our success in creating recognition of the brands we manufacture and distribute. If our distributors and customers, and ultimately our consumers, do not perceive us as a company that manufactures and distributes high-quality affordable beauty products, we may be unsuccessful in promoting and maintaining our brands. Our business is significantly dependent on our licenses with celebrities and designer brands. In addition, our ability to successfully market, promote and sell our products is tied, to a certain extent, to the popularity of our celebrity licensors. Any negative publicity associated with our celebrity licensors could affect our ability to market and distribute our products.

To attract and retain customers and consumers and to promote and maintain a competitive position, we may find it necessary to increase our marketing, networking, and advertising budgets and otherwise to increase substantially our financial commitment to creating and maintaining brand loyalty among distributors, customers and consumers. We will continue to devote substantial financial and other resources to increase and maintain the awareness of our brands. However, we cannot offer any assurance that our efforts will be successful and our inability to increase and maintain awareness of our brands could have a material adverse effect on our business, financial condition and results of operations.

ITEM 2.

UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

Equity Transactions

On December 31, 2013, the Company issued 337,338 shares of common stock, fair valued at $6,250, to a board member as compensation for serving on the Board of Directors of the Company. The foregoing securities were issued in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit Number		Description

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*†		The following materials from the Company’s Quarterly Report on Form 10-Q for the six months ended December 31, 2013 formatted in XBRL (extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of December 31, 2013 (unaudited) and June 30, 2012, (ii) Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2013 and 2012 (unaudited), (iii) Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2013 and 2012 (unaudited) and (iv) Notes to Interim Condensed Consolidated Financial Statements

* Filed herewith.

† Pursuant to Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of such section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: February 14, 2014

	BOLDFACE Group, Inc.

	By:	/s/ Nicole Ostoya
	Name:	Nicole Ostoya
	Title:	Chief Executive Officer and President

	BOLDFACE Group, Inc.

	By:	/s/ Ashumi Shippee
	Name:	Ashumi Shippee
	Title:	Chief Financial Officer

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

For the quarterly period ended December 31, 2013

OR

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

	For the transition period from ________________ to ________________

Nevada		02-0811868
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1309 Pico Blvd., Suite A, Santa Monica, CA		90405
(Address of principal executive offices)		(Zip Code)

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

	December 31, 2013			June 30, 2013
	(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents	$	26,431		$	388,892
Accounts receivable		9,199			100,087
Due from factor, net		244,970			164,090
Inventory (net of reserve of $200,000 and $365,772, as of December 31, 2013 and June 30, 2013, respectively)		2,049,503			1,948,908
Prepaid inventory		307,376			258,531
Prepaid expenses and other current assets		78,449			89,786
Current portion of prepaid royalty		8,055			378,960
Current portion of deferred financing costs, net		157,138			29,899
Total current assets		2,881,121			3,359,153

Property and equipment, net		617,414			669,033
Deferred financing costs, net		133,059			328,893
License acquisition costs		20,298			24,504

Total assets	$	3,651,892		$	4,381,583

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
Accounts payable	$	3,642,532		$	2,481,852
Accrued expenses and other current liabilities		1,067,818			806,553
Current portion of convertible debt, net of debt discount ($596,021 and $116,524, as of December 31, 2013 and June 30, 2013, respectively)		589,312			23,476
Due to Gold Grenade, LLC (related party)		234,550			-
Total current liabilities		5,534,212			3,311,881

Long-Term Liabilities
Convertible debt, net of debt discount ($485,798 and $1,281,760, as of December 31, 2013 and June 30, 2013, respectively)		624,869			258,240
Derivative liability		527,606			1,660,440
Total Long-Term Liabilities		1,152,475			1,918,680

Total Liabilities		6,686,687			5,230,561

Commitments and Contingencies (Note 7)

Shareholders' deficit:
Preferred stock, $.001 par value, 10,000,000 shares authorized, zero issued and outstanding		-			-
Common stock, $.001 par value, 300,000,000 shares authorized, 155,829,276 and 155,301,468 shares issued as of December 31, 2013 and June 30, 2013 respectively		155,829			155,301
Treasury stock, at cost - 999,680 and 999,680 shares as of December 31, 2013 and June 30, 2013, respectively		(228,284	)		(228,284	)
Additional paid in capital		7,211,525			6,841,822
Accumulated deficit		(10,173,865	)		(7,617,817	)
Total shareholders' deficit		(3,034,795	)		(848,978	)

Total liabilities and shareholders' deficit	$	3,651,892		$	4,381,583

		Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		1

PART I FINANCIAL INFORMATION		2

	CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 (UNAUDITED) AND JUNE 30, 2013	2

	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012 (UNAUDITED)	3

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012 (UNAUDITED)	4

	NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5-27

ITEM 1.	FINANCIAL STATEMENTS	2

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	36

ITEM 4.	CONTROLS AND PROCEDURES	36

PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	37

ITEM 1A.	RISK FACTORS	38

ITEM 2.	UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS	45

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45

ITEM 4.	MINE SAFETY DISCLOSURES	45

ITEM 5.	OTHER INFORMATION	45

ITEM 6.	EXHIBITS	45

SIGNATURES		46

	Six Months Ended						Three Months Ended
	31-Dec-13			31-Dec-12			31-Dec-13			31-Dec-12
Revenues
Gross revenues	$	3,520,976		$	1,753,812		$	1,968,962		$	1,753,812
Discounts		782,521			227,543			499,861			227,543
Revenues, net of discounts		2,738,455			1,526,269			1,469,101			1,526,269

Cost of Goods Sold
Cost of goods sold		1,900,211			794,396			1,143,141			794,396

Gross Profit		838,244			731,873			325,960			731,873

Operating expenses:
Selling expenses		350,516			341,778			253,513			341,778
Research and development		11,189			23,012			5,747			3,473
Royalty expense		396,334			322,809			176,597			161,404
Professional fees		667,705			608,723			245,443			571,326
General and administrative expenses		1,697,022			1,392,179			1,015,521			731,830
Depreciation and amortization expense		234,969			74,176			126,598			74,176
Product development fee - related party		500,000			412,700			230,000			210,000
Total Operating Expense		3,857,735			3,175,377			2,053,419			2,093,987

Loss from operations		(3,019,491	)		(2,443,504	)		(1,727,459	)		(1,362,114	)

Other (income) / expenses:
Interest expense, net of interest income		782,482			296,135			413,016			296,135
Derivative liability (gain) / loss		(1,245,925	)		346,627			(375,334	)		406,803

Net loss	$	(2,556,048	)	$	(3,086,266	)	$	(1,765,141	)	$	(2,065,052	)

Net loss per share attributable to common shareholders—basic and diluted	$	(0.02	)	$	(0.04	)	$	(0.01	)	$	(0.02	)

Weighted average number of common shares used in computing —basic and diluted		154,397,805			87,188,180			154,491,758			87,773,384

	Six Months Ended			Six Months Ended
	December 31, 2013			December 31, 2012

Cash flows from operating activities:
Net loss	$	(2,556,048	)	$	(3,086,266	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation expense		327,606			289,279
Shares issued for services		42,625			-
Inventory reserves		200,000			-
Amortization of license acquisition costs		4,206			1,342
Amortization of deferred financing costs		130,659			62,523
Amortization of debt discount		495,559			52,704
Depreciation		234,969			11,652
Derivative liability gain		(1,245,925	)		346,627
Change in operating assets and liabilities:
Accounts receivable		90,888			(905,496	)
Due from factor, net		(80,880	)		-
Prepaid royalty		370,905			272,808
License acquisition costs		-			(8,902	)
Inventory		(300,595	)		(626,677	)
Prepaid expenses and other current assets		11,337			(98,528	)
Prepaid inventory		(48,845	)		(570,806	)
Accounts payable		1,160,680			996,984
Customer deposits		-			13,470
Accrued expenses and other current liabilities		261,265			347,134
Due to Gold Grenade, LLC		234,550			(108,475	)

Net cash used in operating activities		(667,044	)		(3,010,626	)

Cash flows from investing activities:
Acquisition of property and equipment		(183,351	)		(139,829	)
Net cash used in investing activities		(183,351	)		(139,829	)

Cash flows from financing activities:
Issuance of common stock, net of financing fees		-			771,235
Purchase of treasury stock and warrants		-			-
Proceeds from short term loans		-			1,335,000
Paydown of short term loans		-			(1,085,000	)
Factoring line of credit, net					536,144
Issuance of convertible debt		550,000			2,000,000
Payments for deferred financing fees in relation to convertible debt issuance		(62,065	)		(316,710	)
Net cash provided by financing activities		487,935			3,240,669

Net change in cash and cash equivalents		(362,461	)		90,214

Cash at beginning of period		388,892			71,532

Cash at end of period	$	26,431		$	161,746

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	59,161			210,228
Income Taxes		-			-

Non-cash financing activities:
Conversion of bridge notes and convertible debt		-			1,925,030
Contribution from shareholder of deferred financing cost		-			1,156,000
Other non-cash deferred financing fees from issuance of convertible debt		-			137,238
Fair value of conversion features and warrants issued in connection with equity and debt financing		113,091			5,203,574

Twelve month periods ending December 31,
2014	$	7,793
2015		7,793
2016		4,712
	$	20,298

	As of December 31, 2013
Warrants		69,682,783
Stock options		17,780,000
Convertible Debt		33,764,706
		121,355,281

	Total		Less than 1 year		1 – 3 years		3 - 5 years		More than 5 years
License agreement obligations	$	7,417,125	$	1,185,278	$	3,389,722	$	2,842,125	$	0
Operating lease obligation	$	0	$	0	$	0	$	0	$	0
Total	$	7,417,125	$	1,185,278	$	3,389,722	$	2,842,125	$	0

Outstanding Factored Receivables	$	507,700
Less:
Advances and Deductions		(262,730	)
Unapplied Customer Credits		0
Due from Factor, Net	$	244,970

August Convertible Note Face Value	$	616,000
Debt Discount
August Convertible Notes – Issued Warrant Derivative		87,264
Conversion Feature Derivative		25,827
Original Issue Discount		66,000
Total Debt Discount	$	179,091
Amortization of Debt Discount, as of December 31, 2013		(38,933	)
Debt Discount, Net	$	140,158

August Convertible Notes Carrying Value at December 31, 2013	$	475,842

Legal fees and other fees associated with the August Convertible Notes offering	$	62,065
Total Deferred Financing Costs	$	62,065
Amortization of Deferred Financing Costs, as of December 31, 2013		(13,493	)
Deferred Financing Costs, Net, as of December 31, 2013	$	48,572

June Convertible Notes Face Value	$	1,680,000
Debt Discount
June Convertible Notes – Issued Warrant Derivative		752,126
Conversion Feature Derivative		491,051
Original Issue Discount		180,000
Total Debt Discount	$	1,423,177
Amortization of Debt Discount, as of December 31, 2013		(481,516	)
Debt Discount, Net	$	941,661

June Convertible Notes Carrying Value at December 31, 2013	$	738,339

Placement agent and other fees associated with the June Convertible Notes offering	$	304,293
June Convertible Note Broker Warrants		60,886
Total Deferred Financing Costs	$	365,179
Amortization of Deferred Financing Costs, as of December 31, 2013		(123,554	)
Deferred Financing Costs, Net, as of December 31, 2013	$	241,625

	December 31, 2013			June 30, 2013
Beginning Balance	$	1,660,440		$	0
Issuance of Warrants		113,091			7,252,283
Repurchase / Exercise / Cancellation of Warrants		0			(179,884	)
Change in fair value		(1,245,925	)		(5,411,959	)
Ending Balance	$	527,606		$	1,660,440

	Number of options outstanding		Weighted average risk-free rate			Expected life in years		Expected volatility			Expected dividends
July 12, 2012		3,600,000		0.83	%		3.5		70	%		0	%
August 15, 2012		397,500		0.83	%		6.0		70	%		0	%
November 21, 2012		500,000		0.95	%		6.0		60	%		0	%
March 28, 2013		0		1.005	%		6.0		55	%		0	%
April 8, 2013		500,000		1.685	%		6.0		55	%		0	%
June 28, 2013		25,000		1.685	%		6.0		55	%		0	%
July 12, 2013		11,400,000		1.715	%		3.5		65	%		0	%
August 15, 2013		1,357,500		1.860	%		6.0		65	%		0	%
Total		17,780,000

	December 31, 2013
Statutory rate		34.0	%
State income taxes		6.0	%
Permanent differences		(15.7	)%
Valuation allowance		(21.4	)%
Other		(2.7	)%
Total		0.0	%

	December 31, 2013			June 30, 2013
Net operating losses carryforward	$	2,159,286		$	2,002,842
Start-up costs and fixed assets, net of amortization		120,011			60,005
Property and equipment		126,955			56,270
Stock based compensation		340,217			192,786
Gross deferred taxes	$	2,746,569		$	2,311,903
Valuation allowance		(2,746,569	)		(2,311,903	)
Net deferred taxes	$	-		$	-