ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. FORWARD-LOOKING INFORMATION
Much of the discussion in this Item is "forward looking" as that term is used in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Actual operations and results may materially differ from present plans and projections due to changes in economic conditions, new business opportunities, changed business conditions, and other developments. Other factors that could cause results to differ materially are described in the Company's filings with the Securities and Exchange Commission.
There are several factors that could cause actual results or events to differ materially from those anticipated, and include, but are not limited to general economic, financial and business conditions, changes in and compliance with governmental laws and regulations, including various state and federal environmental regulations, the Company's ability to obtain additional financing from outside investors and/or bank and mezzanine lenders and the Company's ability to generate sufficient revenues to cover operating losses and position the Company to achieve positive cash flow.
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. The Company believes the information contained in this Form 10-QSB to be accurate as of the date hereof. Changes may occur after that date. The Company will not update that information except as required by law in the normal course of its public disclosure practices.
Additionally, the following discussion regarding the Company's financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part I of this Form 10-QSB, as well as the financial statements in Item 7 of Part II of the Company's Form 10-KSB/A for the fiscal year ended, 2 December 31, 2004.
MANAGEMENT'S PLAN OF OPERATIONS
GENERAL
The Company was originally incorporated in the State of Nevada on May 26, 1993. The Company markets and distributes different nutritional and/or health and skin care products. The products which the Company sells are intended to provide nutritional supplementation to the users; the products are not intended to diagnose, treat, cure or prevent any disease.
CURRENT BUSINESS PLAN
The Company's current purpose is to seek, investigate and, if such investigation warrants, acquire an interest in business opportunities presented to the Company by persons or firms who or which desire to seek the perceived advantages of a corporation which is registered under the Securities Exchange Act of 1934, as amended. The Company does not restrict its search to any specific business; industry or geographical location and may participate in a business venture of virtually any kind or nature.
The Company may seek a business opportunity with entities which have recently commenced operations, or which wish to utilize the public marketplace in order to raise additional capital in order to expand into new products or markets, to develop a new product or service or for other corporate purposes. The Company may acquire assets and establish wholly owned subsidiaries in various businesses or acquire existing businesses as subsidiaries.
As part of the Company's investigation of potential merger candidates, the Company's officers and directors will meet personally with management and key personnel, may visit and inspect material facilities, obtain independent analysis or verification of certain information provided, check references of management and key personnel and take other reasonable investigative measures, to the extent of the Company's financial resources and management expertise. The manner in which the Company participates in an opportunity will depend on the nature of the opportunity, the respective needs and desires of the Company and other parties, the management of the opportunity, the Company's relative negotiation strength and that of the other management.
The Company intends to concentrate on identifying preliminary prospective business opportunities that may be brought to the Company's attention through present associations of its officers and directors, or by stockholders. In analyzing prospective business opportunities, the Company will consider such matters as the available technical, financial and managerial resources; working capital and other financial requirements; history of operations, if any; prospects for the future; nature of present and expected competition; the quality and experience of management services which may be available and the depth of that management; the potential for further research, development or exploration; specific risk factors not now foreseeable but which then may be anticipated to impact the Company's proposed activities; the potential for growth or expansion; the potential for profit; the perceived public recognition or acceptance of products, services or trades; name identification; and other relevant factors.
The Company's officers and directors will meet personally with management and key personnel of the business opportunity as part of the investigation. The Company will not acquire or merge with any company for which audited financial statements cannot be obtained within a reasonable period of time after closing of the proposed transaction, as required by the Exchange Act.
The Company will not restrict its search to any specific kind of firms, but may acquire a venture which is in its preliminary or development stage, which is already in operation, or which is in essentially any stage of its corporate life. It is impossible to predict at this time the status of any business in which the Company may become engaged, in that such business may need to seek additional capital, may desire to have its shares publicly traded or may seek other perceived advantages which the Company may offer.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
THIRD QUARTER COSTS AND CHANGES IN FINANCIAL CONDITIONS
The balance of current assets at December 31, 2004 was approximately $806,000 compared to a balance of $1,104,000 at September 30, 2005, an increase of $298,000. The balance of current liabilities was $2,954,000 and $3,253,000 respectively, for the same periods, an increase of $299,000. The resulting current ratio at December 31, 2004 was 0.27 to 1. The current ratio at September 30, 2005 is .34 to 1. The current ratio indicates that the Company's ability to pay the Company's obligations has improved since December 31, 2004.
REVENUE AND OPERATING EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004.
Total net sales and revenues were at approximately $188,000 for the three months ended September 30, 2005 compared to $316,000 for the prior period a year earlier, a decrease of 60 percent. This is due to the inactivity of the subsidiary Grandma Hammans Specialty Foods which has ceased operations and the recognition of QDS sales in 2004, while only recognizing QDS as an investment in 2005. Aspen Cove Resorts, Inc was sold on June 2, 2005, resulting in no sales recorded for the 3rd quarter 2005. Although sales of the core business, The Right Solution Gateway, have increased during the three month period.
The Company's gross profit for the three months ended September 30, 2005 compared to 2004 decreased to $154,000 from $178,000. Gross profit as a percentage of sales increased to 82 percent in 2005 from 56 percent in 2004. This is primarily due to the low to no mark up of the products sold in the prior year by the subsidiary Grandma Hammans Specialty Foods, which ceased operations the end of December 31, 2004. QDS also had a low markup on sales recorded in 2004.
Total operating expenses (selling, general and administrative expenses) for the three months ended September 30, 2005 compared to 2004 decreased by $536,000 to $1,001,000 from $1,537,000 in the prior period. This came about primarily in the reduction of professional fees and product development efforts of the Company during the period.
Loss from operations for the three months ended June 30, 2005 decreased to a loss of $847,000 from a loss of $1,359,000 compared to the same period 2004, a decrease of $512,000. Even though the Company has succeeded in
reducing the Company's operating losses considerably from that of the prior year, the Company is still unable to garner an operating profit. Sales still remain insufficient to cover the Company's operating needs.
Net interest expense for the three months ended September 30, 2005 was $81,000 as compared to the same period in 2004 of $50,000, up $31,000.
Net loss decreased $1,408,000 from a loss of $1,287,000 to an income of $121,000 for the three months ended September 30, 2004 and 2005 respectively. This came about primarily from the reduction of professional services and fees, decrease in product development efforts, and a $1,014,000 gain on the sale of properties during the most recent three months.
NINEMONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004.
Total net sales and revenues were at approximately $580,000 for the nine months ended September 30, 2004 compared to $815,000 for the prior period, a decrease of 29 percent. This is due primarily to the inactivity of the subsidiary Grandma Hammans Specialty Foods which has ceased operations and the recognition of QDS sales in 2004, while only recognizing the investment in QDS in 2005. Aspen Cove Resorts, Inc was sold on June 2, 2005, resulting in no sales recorded for the 3rd quarter 2005. Although sales of the core business, The Right Solution Gateway, have increased during the nine month period.
The Company's gross profit for the nine months ended September 30, 2005 compared to 2004 decreased to $458,000 from $587,000. Gross profit as a percentage of sales increased to 79 percent in 2005 from 72 percent in 2004. This is primarily due to the low to no mark up of the products sold in the prior year by the subsidiary Grandma Hammans Specialty Foods, which ceased operations as of December 31, 2004. QDS also had a low markup on sales recorded in 2004.
Total operating expenses for the nine months ended September 30, 2005 compared to 2004 decreased by $5,701,000 to $2,067,000 from $7,768,000 in the prior period. This came about primarily in the reduction of professional fees and product development efforts of the Company during the period.
Loss from operations for the nine months ended September 30, 2005 decreased to a loss of $1,609,000 from a loss of $7,180,000 compared to the same period 2004, a decrease of $5,571,000. Even though the Company has succeeded in reducing the Company's operating losses considerably from that of the prior year, the Company is still unable to garner an operating profit. Sales remain insufficient to cover the Company's operating needs.
Net interest expense for the nine months ended September 30, 2005 was $192,000 as compared to the same period in 2004 of $180,000, an increase of $12,000.
Net loss decreased $7,075,000 from a loss of $7,234,000 to a loss of $159,000 for the nine months ended September 30, 2004 and 2005 respectively. This came about primarily from the reduction of professional services and fees, decrease in product development efforts, and $1,704,000 in gains on the sales of properties during the most recent nine months.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, the Company had a deficiency in working capital of $2,149,000.
Net cash used for the first nine months operating activities came to approximately $759,000, down $3,269,000 from this period last year of $4,028,000.
Cash provided from investing activities during the first nine months of this year netted $2,075,000, of which approximately $1,949,000 came from the proceeds of disposals of property and equipment.
During the first nine months 2005, the Company's financing activities provided the Company with $337,000 from stock sales, whereas, the Company paid off $1,652,000 in term debt.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and judgments that affect the Company's reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. The Company bases its estimates and judgments on historical experience and on various other assumptions believed to be reasonable under the circumstances. Future events, however, may differ markedly from current expectations and assumptions. While there are a number of significant accounting policies affecting the consolidated financial statements, the Company believes the following critical accounting policy involves the most complex, difficult and subjective estimates and judgments.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS No. 123 - Accounting for Stock-Based Compensation, providing alternative methods of voluntarily transitioning to the fair market value based method of accounting for stock based employee compensation. FAS 148 also requires disclosure of the method used to account for stock-based employee compensation and the effect of the method in both the annual and interim financial statements. The provisions of this statement related to transition methods are effective for fiscal years ending after December 15, 2002, while provisions related to disclosure requirements are effective in financial reports for interim periods beginning after December 31, 2002.
The Company elected to continue to account for stock-based compensation plans using the intrinsic value-based method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under the provisions of APB No. 25, compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs- an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate Time-Sharing Transactions-an amendment of FASB Statements No. 66 and 67" ("SFAS 152) The amendments made by Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. with earlier application encouraged. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.
On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are
effective as of the first interim period that begins after June 15, 2005. Accordingly, the Company has implemented the revised standard in the third quarter of fiscal year 2005. Up to June 30, 2005, the Company accounted for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management has implemented FASB 123 (revised 2004) which requires the recognition of nonmonetary compensation costs related to share-based payment transactions be recognized at their fair values, effective for the quarter ended September 30, 2005.
On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions ("SFAS 153"). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
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