ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. CAUTIONARY FORWARD - LOOKING STATEMENT
The following discussion should be read in conjunction with our financial statements and related notes.
Certain matters discussed herein may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following:
* the volatile and competitive nature of our industry, * the uncertainties surrounding the rapidly evolving markets in which we compete, * the uncertainties surrounding technological change of the industry, * our dependence on its intellectual property rights, * the success of marketing efforts by third parties, * the changing demands of customers and * the arrangements with present and future customers and third parties.
Should one or more of these risks or uncertainties materialize or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated. See also the disclosures under "Cautionary Statement" following the Table of Contents in this Annual Report.
GENERAL
The "Company,"formally known as "Ten Stix, Inc.," changed its name to "Motorsports Emporium, Inc." on December 1, 2004, under the laws of the State of Nevada to engage in the fast track motor sports industry targeting enthusiasts participating in die cast collecting, automobile restoration, high-performance accessories, motor sports-related collectibles, driver's apparel, race venues and product licensing.
Our shares of common stock are traded on the OTC Bulletin Board under the symbol "MSEP.OB"
Our principal executive offices are located at 16055 N. Dial Blvd. Suite 5, Scottsdale, AZ 85260. Our telephone number is (480) 596-4002 and facsimile number is (480) 556-0831. More information regarding our company and our products is available on our website at www.motorsportsemporium.com
EXECUTIVE OVERVIEW
During 2005, we transformed our business away from the gaming operations of Ten Stix, Inc. and began to develop a diverse business entity in the motor sports industry, targeting enthusiasts who participate in automobile racing, die cast collectible cars, automobile restoration, high-performance accessories, motor sports-related collectibles, automotive and racing art, as well as driver's apparel, race venues and product licensing. We initiated operations by selling die-cast collectibles in December 2004, under the name ScaleCars.com and have been steadily expanding our product portfolio to include race worn memorabilia from well known professional racing drivers and sell these products through our DriversDigs.com division. We sell our automotive and race related art work sold through PitStopStudios.com, another division of the Company.. We also have expanded our product portfolio through our acquisition of an exclusive license to manufacture and distribute GS610(TM) Maximum Performance Brake Fluid(TM), a high quality performance brake fluid.
We have focused our efforts on expanding our existing lines of business, as well as developing our high performance brake fluid line. We have begun to manufacture our brake fluid and develop our sales and distribution infrastructure and expect to generate revenues from this business in 2006.
We have been incurring selling, general and administrative expenses primarily to develop our existing businesses, improve our current infrastructure to address anticipated growth and identify and evaluate complementary business development opportunities and marketing. The development of these businesses has
led to recent operating losses and cash outflows. However, we believe that the actions taken in 2005 will allow us to generate positive operating results in the future.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Our net loss for the year ended December 31, 2005 was approximately ($1,010,499) compared to a net loss of approximately ($1,691,109) for the year ended December 31, 2004 (a decrease of $680,610). We divested from the gaming industry in 2004 and now operate a completely separate entity. The net loss of $1,691,109 during 2004 includes a loss from discontinued operations in the amount of $1,129,225. Revenues and expenses associated with discontinued operations are reported separately as "Loss from discontinued operations" in the consolidated statement of operations included elsewhere in this report.
Net revenues for the years ended December 31, 2005 and 2004 were $222,025 and $22,168 respectively (an increase of $199,857). The increase in revenue during the twelve-month period ended December 31, 2005 was due primarily to the length of time in which the core business has been operating, as revenues from our motorsports- related operations did not begin until the fourth quarter of 2004. We generated $90,435 in revenue in 2004 from discontinued businesses.
Our net revenues consisted primarily of retail sales of die cast collectible cars and automobile racing related merchandise. While the Company acquired a license to distribute high performance brake fluid during the third quarter of 2005, sales related to this line of business were insignificant as we devoted most of our efforts in 2005 toward developing our manufacturing, distribution and marketing infrastructure.
Cost of sales for the years ended December 31, 2005 and 2004 was $134,517 and $10,612, respectively (an increase of $123,905). This increase was due primarily to the increase in net revenues. Gross profit, as a percentage of net revenues, was 39% and 52% for 2005 and 2004, respectively. Our larger margin percentage in 2004 was based only on a short period of time and, therefore, we do not believe that it is representative of margins to be realized on an ongoing basis.
Operating expenses for the years ended December 31, 2005 and 2004 were $1,058,936 and $343,233, respectively (an increase of $715,703), due primarily to the length of time in which the current core business has been operating. A significant amount of our operating expenses in 2005 were focused toward increasing our brand awareness, developing our business infrastructure, establishing relationships with sponsors, suppliers and customers. We incurred total expenses of $1,129,255 in 2004 related to discontinued operations.
Interest expense for the years ended December 31, 2005 and 2004 was $34,902 and $31,198, respectively (an increase of $3,704). This increase is attributable to $17,394 of preferred stock dividends, partially offset by an elimination of a significant portion of our debt during 2005, as further discussed below.
Net loss before discontinued operations for the years ended December 31, 2005 and 2004 was ($1,010,499) and ($561,884), respectively (an increase of $448,615). This increase is due primarily to the length of time in which the core business has been operating, as we have incurred net operating losses associated with our motorsports-related businesses since inception.
LIQUIDITY AND CAPITAL RESOURCES
Our future success and viability is primarily dependent upon our ability to increase operating cash flows and develop new business opportunities. We will continue marketing, promoting and operating our die cast replica car business, while seeking growth opportunities to develop a diverse business entity within the motor sports industry. Our plan of operation for the next 12 months is to develop existing business lines and to seek the acquisition of assets, property or businesses that may benefit the Company and its shareholders. Because the Company has minimal capital resources, management anticipates that to achieve any such acquisition, it may be required to issue shares of its stock as consideration for such acquisition. In the event that the Company contacts or is contacted by a private company or other entity, which may be considering a merger with or into the Company, it is possible that the Company would be required to raise additional funds in order to accomplish the transaction. Such transactions would be evaluated on a case by case basis.
During the next 12 months, the Company's foreseeable cash requirements will relate to continuing to develop the operations of its wholly owned subsidiary and business divisions, maintaining the Company in good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with reviewing or investigating any potential business venture. Because the Company has not identified any such venture as of the date of this Report, it is impossible to predict the costs. Additionally, the Company may experience a liquidity predicament and be required to raise additional capital. Historically, the Company has relied upon internally generated funds and funds from the sale of shares of stock and loans from its shareholders and private investors to finance its operations and growth. Management may raise additional capital through future public or private offerings of its stock or through loans from private investors, although there can be no assurance that the Company will be able to obtain such financing. The Company's failure to do so would have a material and adverse affect upon the Company and its shareholders.
The Company's financial statements have been prepared assuming that it will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classifications of liabilities that might be necessary should the Company be unable to continue in operations.
YEAR ENDED DECEMBER 31, 2005
As of December 31, 2005, the Company's current assets were $171,919 and its current liabilities were $427,688, resulting in a working capital deficit of $255,769. As of December 31, 2005, current assets were comprised of (i) $23,960 in cash; (ii) $1,267 in accounts receivable; (iii) $139,442 in inventory and (iv) $7,250 in other current assets. The Company divested inventory from gaming items in 2004. The Company's inventory consisted of $49,317 of diecast cars and motorsports related memorabilia and $90,125 of brake fluid inventory at December 31, 2005. The $1,267 in accounts receivable consisted of credit card transactions in transit at the end of the year. The Company sells all products for immediate payment. The Company has continued to execute its business plan to aggressively list inventory on the web site for immediate sale. Inventory is generally listed on the web site for sale within hours of being received by the Company. The Company is also using email addresses of customers to send notification of new inventory and of sale prices and inventory clearances. Additionally, the presence on eBay(R) has contributed significantly to the Company's overall revenue.
As of December 31, 2005, current liabilities were comprised of (i) $209,889 in notes payable to stockholders; and (ii) $116,299 in accounts payable and accrued expenses and $101,500 of other amounts due to shareholders. Of these amounts, approximately $97,000 are disputed amounts with vendors and individuals associated with former management. For conservatism, these amounts are carried as current liabilities in our consolidated balance sheet; however, it is likely that we will not expend cash in the next twelve months to satisfy all of these liabilities.
As of December 31, 2005, the Company's total assets were $218,298 and its total liabilities were $561,283, with a net stockholder's deficit of ($342,985).
For the year ended December 31, 2005, net cash flows used in operating activities was ($652,360) compared to net cash flows used in operating activities of ($272,501) for the year ended December 31, 2004. The increase of $379,859 during the twelve-month period ended December 31, 2005 was primarily due to expenditures to promote and operate our die-cast and memorabilia businesses and expenditures to develop our high-performance brake fluid line. Net losses in 2005 exceeded net operating cash outflows as approximately $315,000 of our operating expenses consisted of non-cash, stock-based compensation to employees and third-parties.
For the year ended December 31, 2005, net cash flows used in investing activities was ($26,207) compared to ($261) during the year ended December 31, 2004. Cash outflows in 2005 consisted of expenditures for fixed assets and a license to distribute high performance brake fluid.
For the twelve-month period ended December 31, 2005, net cash flows provided by financing activities was $689,795 compared to net cash flows provided by financing activities of $281,880 for the twelve-month period ended December 31, 2004. During 2005, the Company utilized a portion of its financing
cash inflows (consisting of proceeds from the issuance of common stock and the exercise of stock options) to repay certain notes payable, with the remainder used for operating and investing activities.
As of the date of this Annual Report, the Company has generated little revenue from operations, has a working capital deficit and a retained earnings deficit. Therefore, the Company's auditors have expressed substantial doubt about the Company's ability to continue as a going concern. Management believes that it can maintain its status as a going concern based on its ability to raise funds pursuant to future public and private offerings and to obtain advances and minimize operating expenses by not duplicating or incurring needless expenses.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Annual Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has (i) any obligation arising under a guarantee, contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
FUTURE COMMITMENTS
As of the date of this Annual Report, the Company does not have any material commitments nor does management anticipate any further material commitments within the next twelve months.
-------------------- Goldorak
Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
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