United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
September 30, 2006 333-119234
THE FLOORING ZONE, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization
20-0019425
(I.R.S. Employer Identification No.)
3219 Glynn Avenue, Brunswick, Georgia 31520
(Address of principal executive offices)
(912) 264-0505
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to section 12(g) of the Exchange Act: Common,
$0.001 par value
Check whether the Issuer filed all reports required to be filed by section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such report(s) Yes [X] No [ ]
Check whether the Issuer has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
As of November 9, 2006 we had 19,569,750 shares of our $0.001 par value, common
stock outstanding.
THE FLOORING ZONE, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited) as of
September 30, 2006 .............................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for
the three and nine months ended September 30, 2006 and 2005....... 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the nine months ended September 30, 2006 and 2005................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited).... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
Item 3. Controls and Procedures........................................ 16
PART II -- OTHER INFORMATION
Item 6. Exhibits....................................................... 17
Signatures.............................................................. 17
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet
September 30, 2006
(Unaudited)
ASSETS
Current assets:
Cash $ 32,137
Accounts receivable, net 142,639
Inventory 303,164
Prepaid expense 4,230
--------------------
Total current assets 482,170
Property & equipment, net 224,964
Other assets:
Intangible assets, net 5,158
Deposits 6,031
--------------------
Total other assets 11,189
--------------------
TOTAL ASSETS $ 718,323
====================
See accompanying notes to financial statements
3
The Flooring Zone, Inc.
Condensed Consolidated Balance Sheet-[continued]
September 30, 2006
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 255,008
Related party loans 1,604,925
Customer deposits 42,366
Accrued liabilities 11,415
Current portion long-term debt 102,259
--------------------
Total current liabilities 2,015,973
Long-term liabilities:
Note payable-related party 71,928
Long-term debt 474,133
Current portion long-term debt (102,259)
--------------------
Total long-term liabilities 443,802
Total liabilities 2,459,775
Stockholders' deficit:-Note 2
Preferred Stock, 10,000,000 shares authorized $.001 par value
value: No shares issued and outstanding -
Common stock, 100,000,000 shares authorized $.001 par
value; 19,569,750 shares issued and outstanding 19,570
Additional paid in capital 627,257
Accumulated deficit (2,388,279)
--------------------
Total stockholders' deficit (1,741,452)
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 718,323
====================
See accompanying notes to financial statements
4
The Flooring Zone, Inc.
Condensed Consolidated Statements of
Operations For the three month and nine month periods ended
September 30, 2006 and 2005.
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
Revenues:
Sales $ 639,151 $ 788,714 $ 2,034,729 $ 2,573,395
Licensing Fees - - - 2,500
----------------- ----------------- ----------------- -----------------
Net revenues 639,151 788,714 2,034,729 2,575,895
Less cost of sales 417,403 669,427 1,521,498 1,761,256
----------------- ----------------- ----------------- -----------------
Gross profit 221,748 119,287 513,231 814,639
General and administrative expenses 208,995 310,856 587,175 952,160
----------------- ----------------- ----------------- -----------------
Net income (loss) from operations 12,753 (191,569) (73,944) (137,521)
Other income (expense):
Interest expense (55,755) (18,712) (143,048) (62,592)
----------------- ----------------- ----------------- -----------------
Total other income(expense) (55,755) (18,712) (143,048) (62,592)
----------------- ----------------- ----------------- -----------------
Net income (loss) before taxes (43,002) (210,281) (216,992) (200,113)
Income taxes - - - -
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (43,002) $ (210,281) $ (216,992) $ (200,113)
================= ================= ================= =================
Income (loss) per share-basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
================= ================= ================= =================
Weighted average shares outstanding-
basic and diluted 19,569,750 38,560,572 31,095,485 38,494,636
================= ================= ================= =================
See accompanying notes to financial statements
5
The Flooring Zone, Inc.
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2006 and 2005
(Unaudited)
9/30/2006 9/30/2005
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (216,992) $ (200,113)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 17,871 32,070
Decrease (increase) in accounts receivable (13,431) 1,381
Decrease (increase) in inventories (72,557) (242,971)
Decrease (increase) in prepaid expenses - 65,571
Increase (decrease) in accounts payable (42,466) (17,143)
Increase (decrease) in accrued liabilities (4,206) (295)
Increase (decrease) in customer deposits (31,694) 18,052
--------------- ---------------
Net cash used in operating activities (363,475) (343,448)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (7,748)
--------------- ---------------
Net cash used in investing activities - (7,748)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing(payments) on line of credit-related party 399,200 210,361
Net borrowing(payments) on long term debt (67,870) (127,823)
Proceeds from the issuance of common stock (less costs) - 201,593
--------------- ---------------
Net cash provided by financing activities 331,330 284,131
--------------- ---------------
NET INCREASE IN CASH 32,145 (67,065)
CASH AT BEGINNING OF PERIOD 64,282 90,092
--------------- ---------------
CASH AT END OF PERIOD $ 32,137 $ 23,027
=============== ===============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 143,103 $ 58,589
Cash paid for income taxes - -
See accompanying notes to financial statements
6
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Note 1 ORGANIZATION AND INTERIM FINANCIAL STATEMENTS
Organization-The Flooring Zone, Inc. (the "Company") is a corporation
organized under the laws of the State of Nevada on May 5, 2003. The
company's business operations provide for full-service retail floor
covering products and services.
Interim financial statements-The accompanying condensed consolidated
financial statements are unaudited and have been prepared in accordance
with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by accounting principles for complete financial
statements generally accepted in the United States of America. In the
opinion of management, the accompanying consolidated financial
statements contain all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of our financial position
as of September 30, 2006. There has not been any change in the
significant accounting policies of The Flooring Zone, Inc. for the
periods presented. The results of operations for the three months and
nine months ended September 30, 2006 and 2005 are not necessarily
indicative of the results for a full-year period. It is suggested that
these unaudited condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2005 filed with the Securities and
Exchange Commission (the "SEC").
Stock based compensation- On January 1, 2006, the Company adopted the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123R, "Share-Based Payment," using the modified
prospective method. However, for the three and nine months ended June
30, 2006, the Company's results of operations do not reflect any
compensation expense because the Company had no new stock options
granted under its stock incentive plans during the first nine months of
fiscal year 2006 and no previous stock option grants which vested
during the first nine months of fiscal year 2006.
Prior to the first quarter of fiscal year 2006, the Company accounted
for its stock-based employee compensation arrangements in accordance
with the provisions and related interpretations of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation cost for stock-based compensation been
determined consistent with SFAS No. 123R, the net loss and net loss per
share for the nine months ended September 30, 2005 would have been
adjusted to the following pro forma amounts:
9/30/2005
------------------
Net income, as reported $ (200,113)
Compensation cost under fair value-based accounting
method, net of tax -
------------------
Net income, pro forma $ (200,113)
Net income per share-basic and diluted:
As reported $ (0.01)
Pro forma $ (0.01)
7
The Flooring Zone, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
Note 2 INVENTORY
Inventories are stated at lower of cost or market and consist of the
following:
9/30/06
---------------------
Flooring material 303,164
---------------------
Total $ 303,164
=====================
Note 3 GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the financial statements, the Company has an accumulated deficit of
$2,388,279, and a negative working capital of $1,533,803. These factors
raise substantial doubt about the Company's ability to continue as a
going concern.
Management plans include obtaining additional debt financing to cover
the shortfalls in revenue and allowing the Company to begin purchasing
inventory at a discount, and making changes in operations to reduce
expenses. The Company may also seek additional equity financing through
the sale of its shares, although the Company currently has no
commitments for additional equity financing and there is no guarantee
that the Company can obtain equity financing on acceptable terms or at
all. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion summarizes the significant factors affecting our
consolidated operating results, financial condition, liquidity and capital
resources during the three and nine months ended September 30, 2006 and 2005.
This discussion should be read in conjunction with the financial statements and
financial statement footnotes included in this registration statement.
Forward-Looking Statements
Certain statements of our expectations contained herein, including, but
not limited to statements regarding sales growth, increases in comparable store
sales, commodity price, inflation and deflation, and capital expenditures
constitute "forward-looking statements." Such statements are based on currently
available operating, financial and competitive information and are subject to
various risks and uncertainties that could cause actual results to differ
8
materially from our historical experience and our present expectations. These
risks and uncertainties include but are not limited to, fluctuations in and the
overall condition of the U.S. economy, stability of costs and availability of
sourcing channels, consumer confidence, our ability to negotiate favorable terms
with suppliers, unanticipated weather conditions and the impact of competition.
Undue reliance should not be placed on such forward-looking statements, as such
statements speak only as of the date on which they are made.
General
The Flooring Zone, Inc. is a Nevada corporation organized on May 5,
2003, to operate full service retail floorcovering stores. We have a
wholly-owned subsidiary, The Flooring Zone of Georgia, Inc. The Georgia
corporation was formed in 2000, by the founders of The Flooring Zone, Inc., and
was established to develop our business concept in the retail floorcovering
industry. Through our subsidiary we operate two retail stores. We have stores in
Brunswick, Georgia and Yulee, Florida. We also maintain administrative offices
and warehouse facilities in Brunswick, Georgia.
Results of Operations
Comparison of the three months ended September 30, 2006 and 2005.
During the three months ended September 30, 2006, we realized a net
loss of $43,002, or $0.01 per share compared to a net loss of $210,281, or $0.01
per share during the three months ended September 30, 2005.
Revenues
We generate revenue primarily from the sale of flooring products. We
sell flooring products to two groups - retail customers and contractors. Retail
customers generally pay higher prices for product than contractors.
Historically, about 60% to 70% of our product sales have been to retail
customers. In the current fiscal year we have experienced a shift in our
traditional customer mix. To date this year, contractors have accounted for
approximately 50% of our product sales. We believe this shift in our customer
mix is, at least, partially due to Mr. Carroll taking a more active role in the
day-to-day operations of the Company following his appointment as CEO. Mr.
Carroll has been involved in the construction industry in Georgia for a number
of years and we believe the increase in product sales to contractors has
resulted from his relationships within the industry. While we realize smaller
margins on products sold to contractors, we believe such decreases in net
revenue are being partially offset by decreases in other expenses, including
advertising and display costs. Unlike most retail customers, contractors
represent routine repeat business. Contractors buy product often and in larger
quantities than do retail customers. As our customer mix shifts to a higher
percentage of contractor sales we have and may continue to decrease our
advertising and display expenses as we decrease our need to constantly drive new
retail customers to our stores.
During the three months ended September 30, 2006 average retail product
prices were fairly constant, although prices for supplies such as carpet pad,
glue, etc., are approximately 10% higher as compared to the same quarter of
2005. Despite higher retail prices for supplies, overall we realized a 19%
decrease in revenue from product sales. This decrease in revenue from product
sales in the three months ended September 30, 2006 is primarily the result of
the closing of our St. Mary's store. As discussed above, another contributing
factor to our decreased revenue from sales is the shift in our customer mix
9
because contractors typically pay lower prices for product than do retail
customers. We expect that revenue from product sales will continue to be lower
throughout the rest of the 2006 fiscal year as compared to the 2005 fiscal year
because of the closing of the St. Mary's store.
Gross Profit
Our gross profit is directly affected by our costs of sales. Cost of
sales includes all direct costs of floor coverings, materials used in
installation and installation labor. As with revenues, our cost of sales and
gross profit are directly affected by changes in the percentage of products sold
to retail customers versus contractors. It is also affected by fluctuations in
the prices we pay for the floor covering products we sell. As discussed above,
the prices we can charge contractors are lower than the prices we can charge
retail customers therefore our profit margin on product sales to retail
customers is greater. Moreover, we often realize profit from providing
installation services to retail customers. Contractors, on the other hand,
typically use their own subcontractors to install the floor covering products
they purchase. These subcontractors provide the materials used in installation
and the installation labor.
Gross profit during the third fiscal quarter of 2006, was $221,748, an
86% increase compared to the third fiscal quarter of 2005. As discussed above,
during the three months ended September 30, 2006 we realized a 19% decrease in
revenues compared to the three months ended September 30, 2007. During the same
time frame, we reduced costs of sales nearly 38%. The decrease in revenue we
realized in the current fiscal year was more than offset by the reduction in
cost of sales. Cost of sales as a percentage of net revenues decreased from 85%
during the third quarter 2005 to 65% during the third quarter 2006. This
decrease in cost of sales is attributable to several factors. During the current
fiscal year, we have made a conscious effort to hire better subcontractors who
install with fewer problems and more efficiently. We have sought to improve our
relationships with vendors and to reduce our accounts payable to obtain better
pricing for inventory. We have limited the discounts given to customers.
Finally, we have realized some reduction in cost of sales resulting from
decreasing fuel prices
General and Administrative Expenses
General and administrative expenses for the three months ended
September 30, 2006, decreased $101,861, or 33% to $208,995 compared to the three
months ended September 30, 2005. As a percentage of sales revenue general and
administrative expenses decreased to 33% during the quarter ended September 30,
2006, compared to 39% during the quarter ended September, 30, 2005. During the
three months ended September 30, 2006 and 2005, general and administrative costs
consisted of:
Three Months Ended
September 30, 2006 September 30, 2005
------------------ ------------------
Salaries & benefits costs $ 88,858 $ 133,803
Advertising & display costs 2,319 24,211
Occupancy costs & utilities 78,294 84,018
Legal & accounting costs 5,000 5,697
Other 34,524 63,127
------------ ------------
$ 208,995 $ 310,856
============ ============
10
The 34% reduction in salaries and benefits costs in the three months
ended September 30, 2006 compared to the same three month period 2005 is
primarily the result of a reduction in our work force. This reduction in our
work force resulted from the closing of our St. Mary's store and a reduction in
our retails sales and accounts payable departments. In anticipation of
expansion, we had hired more retail sales and accounts payable personnel than we
needed to operate our current locations. With the decision not to expand at the
current time, we laid off several persons. We do not expect significant
additional changes salaries and benefits throughout the balance of 2006.
During the quarter ended September 30, 2006, advertising and display
costs decreased by 90% compared to the same period of 2005. As explained above,
this decrease is primarily attributable to the closing of our St. Mary's store.
We anticipate the advertising and display costs will continue at lower rates
during the balance of the 2006 fiscal year as a result of closing of the St.
Mary's store and as a result of reduced marketing costs as we focus more
attention on product sales to contractors rather than retail buyers
Occupancy costs and utilities during the second quarter 2006 compared
to the same quarter 2005, decreased 7% as a result of the closing of the St.
Mary's store. We had an increase in waste services because in previous periods
we shared these costs with a neighbor. This arrangement no longer exists. We
expect these costs to remain constant in the upcoming quarters.
Legal and accounting costs remained relatively constant during the
three months ended September 30, 2006 and the three months ended September 30,
2005. We anticipate legal and accounting costs to continue at levels consistent
with or higher than the third quarter 2006 as we begin to incur legal and
accounting costs in connection with our ongoing public reporting obligations.
Other costs decreased 45% during the quarter ended September 30, 2006
as compared to the quarter ending September 30, 2005 as we continued our efforts
to control expenses. We anticipate other costs will to remain fairly constant in
upcoming quarters.
Net Income from Operations
For the reasons discussed above, we realize net income from operations
during the three months ended September 30, 2006 of $12,753 compared to a net
loss from operations during the three months ended September 30, 2005 of
$191,569. We believe that if product sales remain constant or improve and we are
able to continue to reduce costs and expenses we will continue to realize net
income from operations.
Interest Expense
As a result of carrying additional debt due to prior year losses and in
an effort to improve its relationships with its vendors and to take advantage of
vendor discounts, the Company carried more debt during the quarter ended
September 30, 2006 than during the quarter ended September 30, 2005. During the
third fiscal quarter 2006, the Company recognized interest expense of $55,755,
which represents a 198% increase in interest expense compared to the third
fiscal quarter 2005.
11
For the nine months ended September 30, 2006 and 2005
We incurred a net loss of $216,992, or $0.01 per share through the nine
months ended September 30, 2006, compared to a net loss of $200,113, or $0.01
per share during the nine months ended September 30, 2005.
Revenues
During the first nine months of fiscal 2006 average retail product
prices were fairly constant, although we increased prices for supplies such as
carpet pad, glue, etc., approximately 10% higher as compared to the same period
of 2005. Despite higher retail prices for supplies, overall we have realized a
21% decrease in revenue from product sales. This decrease in revenue from
product sales in the first three quarters of 2006 is primarily the result of the
closing of our St. Mary's store. As discussed above, another contributing factor
to our decreased revenue from sales is the shift in our customer mix because
contractors typically pay lower prices for product than do retail customers. We
expect that revenue from product sales will continue to be lower throughout the
rest of the 2006 fiscal year as compared to the 2005 fiscal year because of the
closing of the St. Mary's store.
Gross Profit
Gross profit during the first nine months of 2006 was $513,231, 37%
lower than the $814,639 gross profits realized during the first nine months of
2005. During the first nine months of 2006, we realized a 21% decrease in net
revenue. We also realized a 14% decrease in cost of sales during the first nine
months of 2006 compared to the first nine months of 2005. Through the first nine
months of fiscal 2006, cost of sales as a percentage of net revenues increased
to 75%. By comparison, during the nine months ended September 30, 2005, cost of
sales as a percentage of net revenue was 68%. While we have made efforts to
control costs in hopes of offsetting some of the reduction in net revenue
during the nine months ended September 30, 2006, decreases in cost of sales were
insufficient to offset the decrease in net revenue. As discussed above, we have
made a conscious effort to hire better subcontractors who install product with
fewer problems and more efficiently. We have sought to improve our relationships
with vendors and to reduce our accounts payable to obtain better pricing for
inventory. We have limited the discounts given to customers, and we have
realized some reduction in cost of sales resulting from decreasing fuel prices.
We will continue this course of action as we seek to realize a gross profit in
future periods.
General and Administrative Expenses
General and administrative expenses for the nine months ended September
30, 2006, decreased $364,985, or 38% to $587,175 compared to the nine months
ended September 30, 2005, and as a percentage of sales revenue it decreased from
37% during the nine months ended September 30, 2005 to 29% for the nine months
ended September 30, 2005. During the nine months ended September 30, 2006 and
2005, general and administrative costs consisted of:
12
Nine Months Ended
September 30, 2006 September 30, 2005
------------------ ------------------
Salaries & benefits costs $ 235,349 $ 383,949
Advertising & display costs 18,325 73,647
Occupancy costs & utilities 212,263 235,010
Legal & accounting costs 29,505 41,505
Other 91,733 218,049
------------ ------------
$ 587,175 $ 952,160
============ ============
The 39% reduction in salaries and benefits costs in the nine months
ended September 30, 2006 compared to 2005 is the result of a reduction in our
work force. This reduction in our work force resulted from the closing of our
St. Mary's store and a reduction in our retails sales and accounts payable
departments. In anticipation of expansion, we had hired more retail sales and
accounts payable personnel than we needed to operate our current locations. With
the decision not to expand at the current time, we laid off several persons. We
do not expect significant additional changes salaries and benefits throughout
the balance of 2006.
During the nine months ended September 30, 2006 we decreased our
advertising and display costs by 75% compared to the same period of 2005. As
explained above, this decrease is primarily attributable to the closing of our
St. Mary's store and a reduction in advertising as our traditional customer mix
continues to shift to focus more attention on product sales to contractors
rather than retail buyers.
Occupancy costs and utilities during the nine months ended September
30, 2006 compared to the same period of 2005, decreased by 10%. This decrease
was the result of a decrease in occupancy and utility costs as a result of the
closing of the St. Mary's store, which decreases were partially offset by
increased waste services costs because in previous periods we shared these costs
with a neighbor. We expect occupancy and utilities costs to remain relatively
constant in the upcoming quarters.
Legal and accounting costs decreased 29% to $29,505 during the nine
month period ended September 30, 2006 compared to the nine month period ended
September 30, 2005. We believe this decrease in legal and accounting costs is
more an issue of timing than a reflection of any long-term reduction in legal
and accounting costs and we expect legal and accounting costs to continue at
levels consistent with or higher than the amounts incurred during the prior
fiscal year.
Other costs decreased 58% to $91,733 during the nine month period ended
September 30, 2006 compared to the nine month period ended September 30, 2005 as
we continued our efforts to control expenses. We anticipate other costs will to
remain fairly consistent with those experienced in the current fiscal year in
upcoming quarters.
Net Loss from Operations
For the reasons disclosed above, during the nine months ended September
30, 2006 we realized a net loss from operations of $73,944 compared to a net
loss of $137,521 during the first nine months of 2005. While we expect net
losses to decrease in upcoming quarters, we do expect to continue to realize net
losses through the balance of the current fiscal year.
13
Interest Expense
As a result of the Company carrying more debt during the nine months
ended September 30, 2006, the Company recognized interest expense of $143,048,
which represents a 129% increase in interest expense compared to the nine months
ended Septembers 30, 2005.
Liquidity and Capital Resources
Our capital resources have consisted of revenues from operations, funds
raised through the sale of our common stock and debt. During the fourth quarter
2005 we completed a public offering of our securities pursuant to an effective
SB-2 registration statement. The funds raised in the SB-2 have since been used
to fund our operations. As shown in our financial statements, we have an
accumulated deficit of $2,388,279, and negative working capital of $1,533,803.
These factors raise substantial doubt about our ability to continue as a going
concern.
During the current fiscal quarter we realized net income from
operations before interest payments. As noted above, we have also been making
changes in operations to reduce expenses and improve our margins. We have been
working to obtain additional debt financing to help cover shortfalls in revenue.
We may also seek additional equity financing through the sale of our shares as
we deem appropriate, although we currently have no commitments for additional
equity financing and there is no guarantee that we can obtain equity financing
on acceptable terms or at all.
During the first nine months of 2006 and 2005 cash was primarily used
to fund operations. See below for additional discussion and analysis of cash
flow.
Nine Months Ended
September 30, 2006 September 30, 2005
------------------ ------------------
Net cash used in operating activities ($363,475) ($343,448)
Net cash used in investing activities - ($7,748)
Net cash provided by financing activities $331,330 $284,131
-------- --------
NET INCREASE (DECREASE) IN CASH $ 32,137 $ 23,027
======== ========
As discussed herein, during the nine months ended September 30, 2006
compared to the nine months ended September 30, 2005 product sales decreased
leading to a reduction in net income of $16,879, from a net loss of $200,113. In
addition to the reduction in cash from operating activities resulting from the
net loss of $216,992, we also realized decreases in accounts payable, accrued
liabilities and customer deposits and an in increase in accounts receivable.
These factors resulted in an increase in net cash used in operating activities
of $20,027 during the nine months ended September 30, 2006 as compared to the
nine months ended September 30, 2005.
14
We used $0 net cash in investing activities during the nine months
ended September 30, 3006. By comparison, we spent $7,748 to acquire equipment
during the first nine months of 2005.
Net cash provided from financing activities was $331,330 during the
nine months ended September 30, 2006 compared to $284,131 during the nine months
ended September 30, 2005, a 17% increase. During the current year we have
borrowed $399,200 from a related party, through the first nine months of fiscal
2005, we had borrowed $210,361. During the nine months ended September 30, 2006
we repaid $67,870 in long term debt compared to $127,823 during the first nine
months of 2005. During the first nine months of 2005 $201,593 of the cash
provided from financing activities came from the sale of our equity securities.
By contrast, during the nine months ended September 30, 2006, cash flow from
financing activities was the result of borrowing on a line of credit extended by
a related party.
At September 30, 2006 and 2005, we had cash on hand of $32,137 and
$23,027, respectively.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of September
30, 2006.
Payments Due by Fiscal Year
Contractual Commitments Total 2006 2007 2008 2009 Thereafter
- ----------------------------------------------------------------------------------------------------------------
Related Party Loans 1,604,925 1,604,925 -- -- -- --
Note Payable-Related Party 71,928 20,555 51,373 -- -- --
Notes Payable 474,133 22,593 47,344 50,575 353,621 --
Capital Leases 11,156 2,377 8,819 -- -- --
Operating Leases 657,160 42,444 149,338 152,170 155,098 158,110
---------- ---------- -------- -------- -------- --------
TOTAL $2,819,302 $1,692,854 $256,874 $202,745 $508,719 $158,110
========== ========== ======== ======== ======== ========
Off-Balance Sheet Financing Arrangements
As of September 30, 2006 we had no off-balance sheet financing
arrangements.
Critical Accounting Policies
Revenue Recognition
We recognize revenues in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin (SAB) number 104, "Revenue Recognition in
Financial Statements." SAB 104 clarifies application of U. S. generally accepted
accounting principles to revenue transactions. Accordingly, revenue is
recognized when an order has been received, the price is fixed and determinable,
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the order is shipped and installed, collection is reasonably assured and we have
no significant obligations remaining. Licensing fees are royalties paid to us
for licensing the use of the name The Flooring Zone. The royalties range from
1-2% of the licensee's commercial sales volume.
We record accounts receivable for sales which have been delivered but
for which money has not been collected. An allowance for doubtful accounts is
provided for accounts deemed potentially uncollectible based on analysis and
aging of accounts. For customer purchases or deposits paid in advance, we record
a liability until products are shipped or installed.
Merchandise Inventory
We record inventory at the lower of cost or market, cost being
determined on a first-in, first-out method. We do not believe our merchandise
inventories are subject to significant risk of obsolescence in the near-term,
and we have the ability to adjust purchasing practices based on anticipated
sales trends and general economic conditions.
Vendor Funds
We receive funds from vendors in the normal course of business for
purchase-volume-related rebates. Our accounting treatment for these
vendor-provided funds is consistent with Emerging Issues Task Force (EITF) 02-16
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received From a Vendor." Under EITF 02-16, purchase volume rebates should be
treated as a reduction of inventory cost, unless they represent a reimbursement
of specific, incremental and identifiable costs incurred by the customer to sell
the vendor's product. The purchase volume rebates that we receive do not meet
the specific, incremental and identifiable criteria in EITF 02-16. Therefore,
they are treated as a reduction in the cost of inventory and we recognize these
funds as a reduction of cost of sales when the inventory is sold.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officers and our principal financial officer
(the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Such officers have concluded (based upon their evaluations of
these controls and procedures as of the end of the period covered by this
report) that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by it in this report is accumulated and
communicated to management, including the Certifying Officers as appropriate, to
allow timely decisions regarding required disclosure. Based on this evaluation,
our Certifying Officers have concluded that our disclosure controls and
procedures are effective as of September 30, 2006.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting
during the quarter ended September 30, 2006 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
Item 6. Exhibits
Exhibits. The following exhibits are included as part of this report:
Exhibit 31.1 Certification of Principal Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Principal Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Principal Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned
thereunto duly authorized.
THE FLOORING ZONE, INC.
November 13, 2006 /s/ Michael Carroll
----------------------------------------
Michael Carroll, Chief Executive Officer
November 13, 2006 /s/ Michael Carroll
----------------------------------------
Michael Carroll, Chief Financial Officer
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