UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-QSB

 

x

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

For the Quarterly Period Ended September 30, 2007

 

o

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

For the Transition Period From ________ to _________

 

Commission File Number 333-119234

 

THE FLOORING ZONE, INC.

(Exact name of registrant as specified in its charter)

                

Nevada

 

20-0019425

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3441 Cypress Mill Road, Suite 103

 

 

Brunswick, Georgia

 

31520

(Address of principal executive offices)

 

(Zip Code)

 

(912) 279-1642

(Registrant’s telephone number, including area code)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No x

 

As of November 15, 2007, the registrant had 19,569,750 shares of common stock, par value $0.001, issued and outstanding.

 

Transitional small business disclosure format.

Yes o No x

 

 


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, 2007

2

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the

three and nine month periods ended September 30, 2007 and 2006

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the

nine month periods ended September 30, 2007 and 2006

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

 

 

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

 

 

 

1

 


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Information

 

The Flooring Zone, Inc.

 

Condensed Consolidated Balance Sheet

September 30, 2007

(Unaudited)

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

 

605

 

Inventory

 

 

 

45,758

 

Total current assets

 

 

 

46,363

 

 

 

 

 

 

 

Property & equipment, net

 

 

 

150,656

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Intangible assets, net

 

 

 

4,144

 

Deposits

 

 

 

6,061

 

Total other assets

 

 

 

10,205

 

 

 

 

 

 

 

TOTAL ASSETS

$

 

207,224

 

 

 

See accompanying notes to financial statements

 

2

 


 

The Flooring Zone, Inc.

Condensed Consolidated Balance Sheet-[continued]

September 30, 2007

(Unaudited)

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

 

185,889 

 

Bank overdraft

 

 

29,898 

 

Line of credit-related party

 

 

944,710 

 

Accrued liabilities

 

 

 

20,428 

 

Current portion long-term debt

 

 

 

280,556 

 

Total current liabilities

 

 

 

1,461,481 

 

Long-term liabilities:

 

 

 

 

 

Note payable-related party

 

 

 

1,050,916 

 

Long-term debt

 

 

 

437,748 

 

Current portion long-term debt

 

 

 

(280,556)

 

Total long-term liabilities

 

 

 

1,208,108 

 

Total liabilities

 

 

 

2,669,589 

 

Stockholders’ deficit:

 

 

 

 

 

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

 

 

 

(3,109,192)

 

Total stockholders’ deficit

 

 

 

(2,462,365)

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

 

207,224 

 

See accompanying notes to financial statements

 

3

 


 

The Flooring Zone, Inc.

 

Condensed Consolidated Statements of Operations

 

For the three month and nine month periods ended September 30, 2007 and 2006.

(Unaudited)

 

 

 

Three months ended

September 30,

 

 

 

Nine months ended

September 30,

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

Sales

 

$       294,688 

 

 

 

$        616,391 

 

 

 

$         742,780 

 

 

$     1,761,514 

 

Related Party Sales

 

11,289 

 

 

 

22,760 

 

 

 

210,925 

 

 

 

273,215 

 

Net revenues

 

305,977 

 

 

 

639,151 

 

 

 

953,705 

 

 

 

2,034,729 

 

Less cost of sales

 

191,099 

 

 

 

417,403 

 

 

 

605,789 

 

 

 

1,521,498 

 

Gross profit

 

114,878 

 

 

 

221,748 

 

 

 

347,916 

 

 

 

513,231 

 

General and administrative expenses

 

78,409 

 

 

 

208,995 

 

 

 

342,594 

 

 

 

587,175 

 

Loss on sale of asset

 

 

 

 

 

6,579 

 

 

 

Net income (loss) from operations

 

36,469 

 

 

 

12,753 

 

 

 

(1,257)

 

 

 

(73,944)

 

Other income (expense):

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(39,700)

 

 

 

(55,755)

 

 

 

(105,269)

 

 

 

(143,048)

 

Total other income(expense)

 

(39,700)

 

 

 

(55,755)

 

 

 

(105,269)

 

 

 

(143,048)

 

Net income (loss) before taxes

 

(3,231)

 

 

 

(43,002)

 

 

 

(106,526)

 

 

 

(216,992)

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$        (3,231)

 

 

 

$        (43,002)

 

 

 

$        (106,526)

 

 

 

$       (216,992)

 

 

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 

 

 

 

 

19,569,750 

 

 

 

 

19,569,750 

 

 

 

 

19,569,750 

 

See accompanying notes to financial statements

 

4

 


The Flooring Zone, Inc.

Condensed Consolidated Statements of Cash Flows

For the nine month periods ended September 30, 2007 and 2006

(Unaudited)

 

 

 

9/30/2007

 

9/30/2006

CASH FLOWS FROM OPERATING ACTIVITES

 

 

 

 

Net income (loss)

$

(106,526)

$

(216,992)

Adjustments to reconcile net income (loss) to net
  cash used in operating activities:

 

 

 

 

Depreciation and amortization

 

23,221 

 

17,871 

Loss on disposal of asset

 

6,579 

 

Decrease (increase) in accounts receivable

 

53,575 

 

(13,431)

Decrease (increase) in inventories

 

110,503 

 

(72,557)

Decrease (increase) in deposits

 

(30)

 

Increase (decrease) in accounts payable

 

(38,484)

 

(42,466)

Increase (decrease) in accrued liabilities

 

3,423 

 

(4,206)

Increase (decrease) in customer deposits

 

(32,727)

 

(31,694)

Increase in bank overdraft

 

29,898 

 

Net cash provided by (used in) operating activities

 

49,432 

 

(363,475)

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Proceeds from sale of equipment

 

6,000 

 

Net cash provided by investing activities

 

6,000 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Net borrowing (payments) on line of credit-related party

 

33,912 

 

399,200 

Net borrowing (payments) on long term debt

 

(114,219)

 

(67,870)

Net cash provided by (used in) financing activities

 

(80,307)

 

331,330 

NET INCREASE (DECREASE) IN CASH

 

(24,875)

 

32,145 

CASH AT BEGINNING OF PERIOD

 

25,480 

 

64,282 

CASH AT END OF PERIOD

$

605 

$

32,137 

 

SUPPLEMENTAL DISCLOSURES

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

105,279 

 

$

 

143,103 

 

 

Cash paid for income taxes

 

 

 

-

 

 

 

 

 

 

See accompanying notes to financial statements

 

5

 


The Flooring Zone, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2007

 

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 the applicable regulations of the Securities and Exchange Commission’s rules 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, 2007. 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, 2007 and 2006 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, 2006 filed with the Securities and Exchange Commission.

 

Note 2

INVENTORY

 

 

Inventories are stated at lower of cost or market and consist of the following:

                

 

 

 

 

 

9/30/07

 

Flooring material

 

 

 

45,758

 

Total

 

 

 

$                    45,758

 

6


The Flooring Zone, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2007

(Unaudited)

 

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 $3,109,192 and a negative working capital of $1,415,118. 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. If we are unsuccessful in obtaining additional funding, we may be unable to continue operations as we have insufficient working capital necessary to meet its expenses and service our debt. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Note 4

RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities.”  This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently  required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement requires a business entity to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. An entity may decide whether to elect the fair value option for each eligible item on its election date, subject to certain requirements described in the statement. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the requirements of this statement and, at this point in time, have not determined the impact, if any, that this statement may have on our results of operations and financial position.

 

7

 


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, 2007 and 2006. This discussion should be read in conjunction with the financial statements and financial statement footnotes included in this report.

 

Forward-Looking Statements

 

Certain statements of our expectations contained herein, including, but not limited to statements regarding sales, commodity price, inflation and deflation, and capital expenditures, among other things, 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 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 a retail store in Brunswick, Georgia.

 

Going Concern

 

We will need additional working capital to service our debt and fund our operations. We have not generated sufficient revenue from operations to meet our operating expenses, have accumulated a deficit of $3,109,192 since inception and have a negative working capital of $1,415,118. These factors raises substantial doubt about our ability to continue as a going concern. To continue operations, we will need to obtain additional funding. This funding may be sought by means of private equity or debt financing. We currently have no commitments from any party to provide funding and there is no way to predict when, or if, any such funding could materialize. There is no assurance that we will be successful in obtaining additional funding on attractive terms or at all. If we are unsuccessful in obtaining additional funding, we may be unable to continue operations as we have insufficient working capital necessary to meet our expenses and service our debt.             

 

8

 


Results of Operations

 

Comparison of the three months ended September 30, 2007 and 2006.

 

Our business plan when we commenced operations was to build a network of company-owned retail stores throughout the southeastern United States beginning in Georgia and Florida and spreading from the smaller markets where our existing stores were located into larger, more profitable markets. Based on that business model, we spent a great deal of time and effort developing infrastructure and personnel to support a much larger network of stores than we had at the time. We had planned to fund the first phase of our expansion into several larger markets through a public offering of our equity securities. We undertook this public offering during 2005. The public offering, which closed in September 2005, however, did not provide sufficient funds to implement our business plan. As a result, during the latter part of 2005 and throughout 2006 and into 2007 we have undertaken various measures to consolidate our operations, to reduce redundant staffing and to eliminate unnecessary infrastructure in an effort to control costs, decrease losses and move toward profitability. While these efforts have led to decreased sales volumes and revenue, they have also led to decreased cost of sales, operating expenses and net loss during the three and nine months ended September 30, 2007.

 

 

Net Revenues

 

During the three months ended September 30, 2007, we realized a 52% decrease in net revenues. This decrease in net revenues is primarily attributable to the closing of our Yulee, Florida store during the fourth quarter 2006 and the resulting decrease in sales volume coupled with an overall slow down in construction in southeastern Georgia, where our store is located. As a result of the closing of our Yulee store and the slow down in construction, we anticipate that sales volume and correspondingly revenue will be lower throughout the 2007 fiscal year as compared to the 2006 fiscal year. We closed the Yulee store because it was under-performing. While the closing of the Yulee store will result in lower revenue, we believe we will realize a corresponding decrease in expenses that will offset the lost revenue.

 

 

Gross Profit

 

Our gross profit is directly affected by our cost of sales. Cost of sales includes all direct costs of floor coverings, materials used in installation and installers’ pay. Our cost of sales and gross profits are directly affected by the prices we pay for the products we sell. If we are able to purchase product at lower prices, we are able to improve our gross profit. Our gross profit is also influenced by changes in the percentage of products sold to retail customers versus contractors. 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 typically also realize profit from the sale of materials used in installation. Contractors typically use their own subcontractors to install the floor covering products they purchase. Some subcontractors will provide their own materials for installation rather than purchase it from us.

 

9

 


Cost of sales during the three months ended September 30, 2007 was 54% lower than during the three months ended September 30, 2006. This decrease in cost of sales is partially attributable to the 52% decrease in net revenues from sales resulting from the closing of our Yulee store. As a percentage of net revenues, cost of sales was 62% during the third quarter 2007 compared to 65% during the third quarter 2006. At the end of the 2006 fiscal year and to throughout the first nine months of 2007 we have taken a number of steps to decrease our cost of sales as a percentage of revenue and to hopefully improve our margins. We negotiated agreements with several new vendors to supply our hardwood and tile needs. Under these agreements we will be able to purchase hardwood and tile products at lower cost that we were paying during 2006. We also increased our retail prices to our customers for most flooring products by an average of 10%. We believe these steps should lead to improved gross margins on product sales. We expect cost of sales as a percentage of net revenue to continue to be lower throughout 2007. During the third quarter 2007 our gross profit decreased 48%, but as a percentage of revenue, improved to 38% from 35% during the third quarter 2006.

 

 

General and Administrative Expenses

 

General and administrative expenses for the quarter ended September 30, 2007, decreased $130,586, or 62%, to $78,409. As a percentage of sales revenue, general and administrative expenses decreased to 26% during the third quarter 2007 from 33% during the second quarter 2006. During the three months ended September 30, 2007 and 2006, general and administrative costs consisted of:

 

 

Three months ended

 

 

September 30, 2007

 

September 30, 2006

 

 

 

 

 

Salaries & benefits costs

 

$   45,903

 

$     88,858

Advertising & display costs

 

1,819

 

2,319

Occupancy costs & utilities

 

10,103

 

78,294

Legal & accounting costs

 

5,000

 

5,000

Other

 

15,584

 

34,524

Total

 

$   78,409

 

$  208,995

 

The 48% reduction in salaries and benefits costs during the three months ended September 30, 2007 is the result of a reduction in our work force from the closing of our Yulee store. At this time we do not anticipate additional reductions to our workforce. Nor do we anticipate an increase in our workforce until such time as revenue from operations, need and market conditions justifies expansion of our operations. We anticipate, that salaries and benefits costs will continue to be lower throughout fiscal 2007 as a result of closing our Yulee store.

 

During the quarter ended September 30, 2007, we decreased our advertising and display costs by 22% compared to the same period of 2006. As explained above, this decrease is primarily attributable to the closing of our Yulee store. We anticipate advertising and display costs will remain lower throughout the rest of 2007.

 

10

 


            Occupancy costs and utilities during the third quarter 2007 compared to the second quarter 2006 decreased 87% as a result of closing our Yulee store. As part of our effort to decrease overhead and operating expenses, we no longer inventory product. Rather, we now order product for our customers as it is ordered. Our store location in Brunswick, Georgia, which included warehouse space, was much larger than we needed. Therefore, during August 2007 we negotiated a termination of the lease at our Brunswick store and moved to a smaller location in Brunswick. As a result of the closing of our Yulee store and the relocation of our Brunswick store to a smaller, less expensive location, we anticipate occupancy costs and utilities will continue to be lower throughout 2007.

 

Legal and accounting costs remain unchanged during the three months ended September 30, 2007 and 2006. While these costs were unchanged during the current quarter, we anticipate they will increase in upcoming quarters.

 

Other costs decreased 55% during the three months ended September 30, 2007 as we continued our efforts to control expenses. We anticipate other costs will to remain fairly constant throughout the rest of 2007.

 

 

Net Income from Operations

 

As a result of the closing of our Yulee store during the fourth quarter 2006 with its associated costs and our other efforts to decrease expense, we were able to realize net income from operations of $36,469 during the third quarter 2007 compared to net income from operations of $12,753 during the third quarter 2006. We plan to continue our efforts to improve product sales and reduce costs and expenses in an effort to increase net income from operations.       

 

 

Interest Expense

 

During the third quarter 2007 we incurred interest expense of $39,700 compared to interest expense of $55,755 during the third quarter 2006. Interest expense decreased 29% as a result of as a result of loans from a shareholder at significantly lower rates than we were previously paying.    

 

 

Net Loss

 

Our net loss during the third quarter 2007 was $3,231 compared to $43,002 during the third quarter 2006. As discussed above, this decrease in net loss is primarily the result of decreases in the costs of goods sold and general and administrative expenses even in spite of decreased revenue during the third quarter 2007 compared to the third quarter 2006.

 

 

For the nine months ended September 30, 2007 and 2006

 

We incurred a net loss of $106,526 through the nine months ended September 30, 2007, compared to a net loss of $216,992 during the nine months ended September 30, 2006.          

 

11

 


 

Revenues

 

During the first nine months of 2007, we realized a 53% decrease in net revenues, despite the fact that average retail product prices during the first nine months of 2007 were approximately 10% higher than during the nine months ended September 30, 2007. This decrease in net revenues is primarily attributable to the closing of our Yulee, Florida store during the fourth quarter 2006 and the resulting decrease in sales volume coupled with an overall slowdown in construction in southeastern Georgia, where our store is located. As a result of the closing of our Yulee store and the slowdown in construction, our sales volume and correspondingly revenue have been lower throughout the 2007 fiscal year as compared to the 2006 fiscal year. We closed the Yulee store because it was under-performing. While the closing of the Yulee store has resulted in lower revenue, we have also realized a decrease in expenses that will offset the lost revenue.

 

 

Gross Profit

 

Gross profit during the first nine months of 2007 was $347,916, 32% lower than the $513,231 gross profits realized during the first nine months of 2006. During the first nine months of 2007, we realized a 53% decrease in net revenue. We also realized a 60% decrease in cost of sales during the first nine months of 2007 compared to the first nine months of 2006. As a result of decreased revenue and decreased cost of products sold, cost of sales as a percentage of net revenues decreased from 75% during the first nine months of 2006 to 64% during the first nine months of 2007.

 

 

General and Administrative Expenses

 

General and administrative expenses for the nine months ended September 30, 2007, decreased $244,581, or 42% to $342,594 compared to the nine months ended September 30, 2006. As a percentage of net revenue, however, general and administrative expense increased to 36% during the nine months ended September 30, 2007 from 29% during the nine months ended September 30, 2006. During the nine months ended September 30, 2007 and 2006, general and administrative costs consisted of:

 

 

Nine months ended

 

 

September 30, 2007

 

September 30, 2006

 

 

 

 

 

Salaries & benefits costs

 

$ 144,601

 

$ 235,349

Advertising & display costs

 

7,164

 

18,325

Occupancy costs & utilities

 

85,319

 

212,263

Legal & accounting costs

 

38,978

 

29,505

Other

 

66,532

 

91,733

Total

 

$ 342,594

 

$ 587,175

 

 

The 39% reduction in salaries and benefits costs in the nine months ended September 30, 2007 compared to 2006 is the result of a reduction in our work force from the closing of our Yulee store. At this time we do not anticipate additional reductions to our workforce. Nor do we anticipate an increase in our workforce until such time as revenue from operations, need and market conditions justifies expansion of our

 

12

 


operations. We anticipate, that salaries and benefits costs will continue to be lower throughout fiscal 2007 as a result of closing our Yulee store.

 

During the nine months ended September 30, 2007 we decreased our advertising and display costs by 61% compared to the same period of 2006. This decrease is primarily attributable to the closing of our Yulee store. We anticipate advertising and display costs will remain lower throughout the rest of 2007.

 

Occupancy costs and utilities during the nine months ended September 30, 2007 compared to the same period of 2006, decreased 60% as a result of the closing of our Yulee store and relocating our Brunswick store. We expect costs will be lower throughout the remainder of 2007.

 

Legal and accounting costs increased 32% to $38,978 during the nine month period ended September 30, 2007 compared to the nine month period ended September 30, 2006. We anticipate legal and accounting expenses will remain consistent or increase in upcoming fiscal quarters in connection with our reporting obligations.

 

Other costs decreased 27% to $66,532 during the nine month period ended September 30, 2007 compared to the nine month period ended September 30, 2006 as we continued our efforts to control expenses. We anticipate other costs will to remain fairly constant in upcoming quarters.

 

 

Net Loss

 

For the reasons disclosed above, during the nine months ended September 30, 2007 we realized a net loss of $106,526 compared to a net loss of $216,992 during the first nine months of 2006. 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.          

 

 

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 $3,109,192 and negative working capital of $1,415,118. These factors raise substantial doubt about our ability to continue as a going concern.

 

We have been working to obtain additional debt financing to cover the shortfalls in revenue. As noted above, we have also been making changes in operations to reduce expenses. We may seek additional equity financing through the sale of our shares, 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. As noted above, these factors raise substantial doubt about our ability to continue as a going concern. Given the foregoing, we may also investigate other business opportunities that will allow us to realize the highest value for our shareholders.

 

13

 


During the nine months ended September 30, 2007 and 2006 cash was primarily used to fund operations. See below for additional discussion and analysis of cash flow.

 

 

Nine months ended September 30, 2007

 

Nine months ended September 30, 2006

 

 

 

 

Net cash provided by (used in) operating
    activities

$       49,432

 

$   (363,475)

Net cash provided by investing activities

$         6,000

 

$               - 

Net cash provided by (used in) financing
    activities

$    (80,307)

 

$     331,330

 

 

 

 

NET INCREASE (DECREASE) IN CASH

$    (24,875)

 

$      32,145

 

 

As discussed herein, during the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, product sales, cost of sales and general and administrative expenses decreased leading to a decrease in net loss from $216,992 to $106,526. We also realized decreases in accounts payable and inventory as we made a conscious effort to reduce amounts owed to vendors in an effort to improve our relations and hopefully the pricing we receive from the vendors we work with coupled with our efforts to eliminate inventory and to order product only when it is ordered by the customer.

 

During the nine months ended September 30, 2007 total liabilities increased to $2,669,589 from $2,459,775 as we continued to rely on loans and a credit line from a related-party to fund the short falls in our operating revenue.

 

As of September 30, 2007 and 2006, we had cash on hand of $605 and $32,137, respectively.

 

Summary of Material Contractual Commitments

 

 

The following table lists our significant commitments as of September 30, 2007.

 

 

 

 

 

 

Payments Due by Fiscal Year

Contractual Commitments

 

Total

 

Less than 1 year

 

2-3 years

 

4-5 years

 

After

5 years

 

 

 

 

 

 

 

 

 

 

 

Lines of Credit-Related Party

 

$   944,710

 

$   944,710

 

$         -0-

 

$          -0-

 

$           -0-

Notes Payable – Related Party

 

1,050,916

 

 3,424

 

29,612

 

33,963

 

983,917

Long-term Debt

 

437,748

 

173,426

 

264,322

 

-0-

 

-0-

Operating leases

 

 44,000

 

44,000

 

       -0-

 

-0-

 

-0-

Total

 

$2,477,374

 

$1,165,560

 

$ 293,934

 

$   33,963

 

$  983,917

 

 

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Off-Balance Sheet Financing Arrangements

 

As of September 30, 2007 and 2006, we had no off-balance sheet financing arrangements.

 

Critical Accounting Policies

 

 

Revenue Recognition

 

We recognize revenue according to Staff Accounting Bulletin 104, Revenue Recognition which clarifies U.S. generally accepted accounting principles for revenue transactions. Accordingly, revenue is recognized when an order has been received, the price is fixed and determinable, 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.

 

Recently Issued Financial Accounting Standards

 

In February 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities.”  This statement permits entities to choose to

 

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measure many financial instruments and certain other items at fair value that are not currently  required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement requires a business entity to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. An entity may decide whether to elect the fair value option for each eligible item on its election date, subject to certain requirements described in the statement. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the requirements of this statement and, at this point in time, have not determined the impact, if any, that this statement may have on our results of operations and financial position.

Item 3. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met.

 

As of the end of the period covered by this Report we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2007.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2007 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

 

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf, thereunto duly authorized.

 

THE FLOORING ZONE, INC.

 

 

Date:

November 19, 2007

 

By:

/s/ Michael Carroll

 

 

 

 

 

Michael Carroll

 

 

 

 

 

Chief Executive Officer and

Chief Financial Officer

 

 

 

 

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