House of Taylor Jewelry 10QSB/A 2005 Q2 Quarterly report (small business) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB/A

Amendment no.3

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

For the quarterly period ended June 30, 2005

Commission File Number 0-25377

HOUSE OF TAYLOR JEWELRY, INC.

(Exact name as specified in its charter)


Nevada	33-0805583
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
9200 Sunset Blvd., Suite 425. West Hollywood, CA (Address of principal executive office)	90069 (Zip Code)

Registrant’s telephone number: (310) 860-2660

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the last 12 months (or for 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 ( )

Outstanding common stock, $.0001 par value as of August 12, 2005: 36,753,801 shares

EXPLANATORY NOTE

This amendment No. 3 to this Quarterly Report on Form 10-QSB/A is being filed in response to comments received by us from the Staff of the Securities and Exchange Commission (the “staff”). The Balance Sheet has been restated to reflect the capitalization of 3,000,000 shares originally recorded as merger consideration as costs associated with license agreements. The Condensed Consolidated Statements of Stockholders’ Equity has also been restated to reflect this change. Additionally, the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statement of Cash Flows have been restated to reflect the amortization expense associated with the licenses for the periods. is amendment also provides disclosure of the Company’s Significant Accounting Policies relating to the license agreements.

House of Taylor Jewelry, Inc.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1

Financial Statements (Unaudited)

Condensed consolidated balance sheet – June 30, 2005

Condensed consolidated statements of operations – Three months and six months ended June 30, 2005 and 2004

Condensed consolidated statement of stockholders’ equity – Six months ended June 30, 2005

Condensed Consolidated statements of cash flows – Six months ended June 30, 2005 and 2004

Notes to condensed consolidated financial statements – June 30, 2005

Item 2

Management’s Discussion and Analysis or Plan of Operation.

Item 3

Controls and Procedures

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

PART I – FINANCIAL INFORMATION

House of Taylor Jewelry, Inc.

Condensed Consolidated Balance Sheet

(Unaudited)

June 30, 2005


ASSETS	(Restated)
Current assets:
Cash and cash equivalents	$156,133
Accounts receivable – trade	1,188,215
Inventory	2,086,263
Prepaid expenses	96,300
Total current assets	3,526,911

Property and equipment, less accumulated depreciation and amortization	121,630
Intellectual property – related party, less accumulated amortization	245,500
License agreements – related party, less accumulated amortization	5,886,792
Other assets – deposits	20,265
Total assets	$9,801,098
LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities:
Line of credit	$600,000
Accounts payable	321,176
Accrued liabilities	469,955
Deferred rent expense	29,000
Note payable – related party	302,396
Current portion of notes payable – related parties, subordinated	355,000
Due for purchase of intellectual property – related party	125,000
Total current liabilities	2,202,527

Notes payable – related parties, less current portion, subordinated	1,022,090
Commitments and contingencies Stockholders’ Equity: Preferred stock, $.0001 par value, authorized 1,000,000 shares, none issued and outstanding Common stock, $.0001 par value, authorized 2,000,000,000 shares, issued and outstanding
36,753,801 shares	3,676
Additional paid-in capital	6,817,388
Retained deficit	(244,583)
Total stockholders’ equity	6,576,481
Total liabilities and stockholders’ equity	$9,801,098

The accompanying notes are an integral part of the condensed consolidated financial statements.

House of Taylor Jewelry, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three months ended June 30,		Six months ended June 30,
	2005	2004	2005	2004
	(Restated)		(Restated)

Net sales	$809,488	$1,733,013	$1,868,270	$3,424,399

Cost of goods sold	703,551	1,159,186	1,513,983	2,293,734
Gross profit	105,937	573,827	354,287	1,130,665

Expenses:
Selling, shipping and general and administrative	1,527,964	464,268	2,083,489	827,371
Interest	43,661	49,387	88,290	101,660
	1,571,625	513,655	2,171,779	929,031

Other income – discount received on settlement of payable to vendor	981,980	-	981,980	-

Income (loss) before income taxes	(483,708)	60,172	(835,512)	201,634
State income taxes	3,000	1,000	-	3,500
Net income (loss)	($486,708)	$59,172	($835,512)	$198,134

Pro forma adjustment – additional income taxes as if Company was taxed as a C corporation	-	$23,000	-	$78,000

Pro forma net income (loss)	($486,708)	$36,172	($835,512)	$120,134

Pro forma net income (loss) per share: basic and diluted	($0.01)	$0.00	($0.02)	$0.00

Weighted average shares outstanding:
Basic and diluted	34,626,647	30,000,000	33,813,324	30,000,000

The accompanying notes are an integral part of the condensed consolidated financial statements.

House of Taylor Jewelry, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

Six Months Ended June 30, 2005

(Unaudited)


	Common Stock		Due from Stockholders	Additional Paid-in Capital	Retained earnings (accumulated deficit)	Total
	No. Shares	Amount	Due from Stockholders	Additional Paid-in Capital	Retained earnings (accumulated deficit)	Total
Balance at December 31, 2004
adjusted for recapitalization	28,500,000	2,850	(95,000)	2,203,150	590,929	2,701,929

Shares and warrants issued for cash	1,500,000	150	-	229,850		230,000

Outstanding and treasury shares of House of Taylor Jewelry, Inc. at date of merger	3,753,801	376	-	499,624	-	500,000

Additional shares issued (restated)	3,000,000	300		5,999,700		6,000,000

Distributions (unaudited)	-	-	-	(2,114,936)	-	(2,114,936)

Reduction of amount due from stockholders (unaudited)	-	-	95,000	-	-	95,000

Net loss for the six months ended June 30, 2005 (restated)	-	-	-	-	(835,512)	(835,512)

Balance at June 30, 2005 (restated)	36,753,801	$3,676	-	$6,817,388	($244,583)	$6,576,481

The accompanying notes are an integral part of the condensed consolidated financial statements.

House of Taylor Jewelry, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended June 30,
	2005	2004
Operating activities:	(Restated)
Net income (loss)	($835,512)	$198,134
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	133,577	7,289
Reduction of allowance for bad debts and returns	-	(50,000)
Changes in assets and liabilities:
Accounts receivable	639,808	653.391
Inventory	111,275	(400,095)
Prepaid expenses, etc	(102,000)	(27,704)
Line of credit	-	-
Accounts payable	(1,706,670)	700,212
Accrued liabilities	361,743	(85,679)
Deferred rent expense	4,000	-
Net cash provided by (used in) operating activities	(1,393,779)	995,548

Investing activities:
Additions to property and equipment	-	(85,800)
Cash acquired at capitalization	500,000	-
Acquisition of intellectual property	(125,000)	-
Net cash used in investing activities	375,000	(85,800)

Financing activities:
Decrease in line of credit	-	(550,000)
Issuance of common stock	230,000	-
Decrease in loans receivable from stockholders	95,000	-
Decrease in advance to affiliate	56,350	-
Decrease in loan from stockholder	(11,844)	-
Distributions, less non cash distributions	(447,450)	(130,000)
Net cash provided by (used in) financing activities	(77,944)	(680,000)

Net increase (decrease) in cash	(1,096,723)	229,748

Cash and cash equivalents at beginning of period	1,252,856	671,361

Cash and cash equivalents at end of period	$156,133	$901,109

Supplemental disclosure of cash flow information:

Non-cash investing and financing activities:
Debt issued for purchase of intellectual property	$125,000
Shares issued for license agreements	$6,000,000
Note issued in payment of distributions	$1,667,486

The accompanying notes are an integral part of the condensed consolidated financial statements.

House of Taylor Jewelry, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2005

1.Organization and business

In May 2005, a newly formed subsidiary of House of Taylor Jewelry, Inc. (formerly Nurescell Inc. – an inactive development stage public shell company – “Company”) issued 30,000,000 shares of its common stock in exchange for 100% of the outstanding common stock of House of Taylor Jewelry, Inc. (“HOTJ”) – name changed to Global Jewelry Concepts, Inc. (“Global”). The Company’s balance sheet at the date of the exchange consisted principally of cash. As a result, the shareholders of Global owned approximately 90% of the Company’s outstanding common stock. The transaction has been accounted for as a reverse acquisition and the statements of operations and cash flows consist of those of the Global’s operating subsidiary, Tech Line Jewelry, Inc.(“Tech Line”).

Global was organized in May 2005 and its stockholders consisted of the former stockholders of Tech Line and two other companies who entered into licensing agreements with Global. The operating company was organized in November 2001 in California and designs and distributes fine jewelry principally to wholesale and retail companies in the United States.

In accordance with the merger agreement, the Company issued an additional 2,000,000 shares to Interplanet and 1,000,000 shares to Sandbox when a contingency was satisfied. The Company determined that these shares should be capitalized as costs associated with the license agreements.

Through June 30, 2005, the Company manufactured substantially all its products from one independent entity with factories in Hong Kong and China.

As a result of the new intellectual properties, the Company is adding products under its Elizabeth Taylor and Kathy Ireland brands to its existing products. The Company is required to pay royalties at varying rates based on sales with a required minimum over the seven year period of the agreement, subject to minimum royalties over the period.

2. Significant accounting policies

Interim financial statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements pursuant to Regulation S-B. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

These statements should be read in conjunction with the historical statements for the years ended December 31, 2004 and 2003 included in the for 8-K/A filed by House of Taylor Jewelry, Inc. under date of May 20, 2005.

Estimates and assumptions

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires management to make estimates and assumptions that effect the accounting for and recognition of assets, liabilities, stockholders’ equity, revenue and expenses. Estimates and assumptions are made because certain information is dependent on future events. The most significant estimates used in preparing the financial statements are those relating to the collectibility of receivables and the market value used in valuation of inventory. Actual results could differ from those estimates.

Comprehensive income (loss)

For the three months and six months ended June 30, 2005, comprehensive income consists only of net income (loss) and, therefore, a Statement of Other Comprehensive Income (Loss) has not been included in these financial statements.

Per share information

Basic earnings (loss) per share are determined by dividing the net earnings or (loss) by the weighted average shares of common stock outstanding during the period. Diluted earnings or (loss) per share are determined by dividing the net earnings or (loss) by the weighted average shares of common stock outstanding plus the dilutive effects of stock options and warrants. Shares issuable upon the exercise of outstanding options and warrants are not included in the computation of loss per share for the three months and six months ended June 30, 2005 because the effect would be anti-dilutive. There were no outstanding options or warrants during 2004.

Revenue recognition

The Company recognizes revenue upon shipment of products to customers except when products are shipped to customers on consignment. In the latter situation, revenue is recognized when the customers report sales of the products to the Company.

No customer accounted for more than 10% of revenues for the six months ended June 30, 2005 or 2004. Two customers accounted for 60% of accounts receivable at June 30, 2005.

Cash and cash equivalents

The Company considers all highly liquid debt instruments with original maturity dates of three months or less when purchased to be cash equivalents. At June 30, 2005, there were no cash equivalents. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Inventory

Inventory consists principally of finished products and is stated at the lower of cost (first-in, first-out) or replacement market.

Allowance for receivables

The Company’s management reviews receivables on an ongoing basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of previously written off receivables are recorded when received. No interest is charged on past due accounts.

An allowance for returns is provided based on an ongoing review of returns and management expectation of returns based on their evaluation of current business conditions. The Company does not have a policy of allowing customers to return products, but may accept returns where the customer concurrently purchases additional products or where the Company considers the likelihood of collection to be remote.

Allowances are adjusted on a quarterly basis based on the above review and analysis.

Costs and expenses

Cost of goods sold consists of the cost of merchandise (principally finished products), freight and duty. The Company does not have significant warehouse costs.

Property and equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized. Minor replacements, maintenance and repairs are expensed. Depreciation is provided on the straight-line basis over the estimated useful life (five years) of the related assets.

Intellectual property

The property is stated at cost and was acquired from a related party. It is being amortized over the six year period of the related agreement.

License agreements

The license agreements have been recorded at the fair market value of the shares issued as consideration and are being amortized over their initial term of 79.5 months.

Income taxes

Through May 20, 2005, the Company’s only operating subsidiary had elected to be taxed under the provisions of Sub-Chapter S of the Internal Revenue Code. Under those provisions, the Company did not pay federal corporate income taxes on its taxable income and incurred a liability for California income taxes at the rate of 1 1/2 %. The Company’s stockholders were liable for individual federal and California income taxes on the Company’s taxable income. Since that date, the Company is taxable as a C corporation.

Stock options and warrants

The Company has elected to adopt SFAS 123, (Accounting for Stock-Based Compensation,” for disclosure purposes only and applies the provision of APB No.25. The Company did not recognize any compensation expense related to the issuance of stock options in 2005 (no options were outstanding in 2004), as the amounts are immaterial. Had compensation expense for all options granted to employees and directors been recognized in accordance with SFAS 123, the effect on the Company’s net loss would be immaterial.

Recent accounting pronouncements

In May 2005, the FASB issued SFAS No.154, :Accounting Changes and Error Corrections” (“SFAS 154”) which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements – An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, for the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company is currently evaluating the effect that the adoption of SFAS 154 will have on its consolidated results o f operations and financial condition but does not expect it to have a material impact.

In March 2005, the staff of the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). The interpretations in SAB 107 expresses views of the staff regarding the interaction between SFAS 123 ® and certain SEC rules and regulations and provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non GAAP financial measures, first-time adoption of SFAS 123 ® in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income t ax effects of share-based payment arrangements upon adoption of SFAS 123 ®, the modification of employees share options prior to adoption of SFAS 123R and disclosures in Management’s Discussion and Analysis subsequent to

adoption of SFAS 123R

Restatement of net loss

In the three months ended June 30, 2005, the Company had originally recorded $60,000 of expense which was incurred by Nurescell, the accounting acquiree prior to the recapitalization. The Company has restated this expense so that it is properly not reflected in the historical financial statements. This resulted in a restatement (reduction) of net loss by $60,000, from $433,500 to $373,500 and from $782,304 to $722,304 for the three months and six months ended June 30, 2005, respectively. This restatement did not result in any change in asset, liability or equity totals, nor did it change the net loss per share.

In June 2005, the Company issued 2,000,000 shares of common stock to Interplanet and 1,000,000 shares of common stock to Sandbox in accordance with the merger agreement. These shares were originally recorded as part of the merger consideration and as such, had no impact on assets, liabilities or earnings. The Company has restated this issuance to reflect the recording of the license agreements as intangible assets which are being amortized over their initial terms of 79.5 months. This restatement resulted in an increase to the net loss of $113,208 for the amortization incurred during the six months and three months ended June 30, 2005. There was no effect on loss per share (basic and diluted) for either the three or six month periods.

4. Property and equipment


Property and equipment consists of:

Machinery and equipment	$13,891
Furniture and fixtures	92,318
Leasehold improvements	52,484
	158,693
Accumulated depreciation
and amortization	37,063
	$121,630

5. Line of credit

The line of credit provides for maximum borrowings based on a percentage of eligible receivables and inventory up to a maximum borrowing of $600,000. The loan agreement requires, among other things, that the Company to maintain tangible net worth of not less than $2,000,000 and to maintain a specified debt to net worth ratio. At June 30, 2005 the Company was in compliance with the requirements. Borrowings bear interest at 1% above the bank’s reference rate (6 1/4% at June 30, 2005), are guaranteed by certain of the Company’s stockholders and are collateralized by substantially all assets of the Company. The agreement expires in September 2005.

6. Commitments and contingencies

The Company leases its office under a lease which provides for minimum annual rent of

starting at $123,000 a year and increasing 3% a year through March 2009 (total $654,000). A stockholder has guaranteed payments under the lease.

The Company has employment agreements with three officers providing for aggregate minimum annual compensation of $580,000 through 2012.

The Company has a consulting agreement providing for the payment of $3,000 a month to May 2006.

The Company is the licensee under agreements with affiliates which provide for the payment of royalties on products sold. The licenses are for seven years (renewable under certain circumstances) and provide for minimum royalties over the period of approximately $12,000,000.

7. Related party transactions

In connection with the merger in May 2005, the shareholders of Tech Line Jewelry, Inc. received distributions which included a note for $1,365,090 (subordinated to the line of credit and collateralized by a security interest in the assets of the subsidiary, subject to the first security interest held by a bank) payable over three years with interest at 8% a year. Further, the shareholders agreed to repurchase any of the accounts receivable at May 20, 2005 which remained outstanding over a specified period. The shareholders also loaned the Company $302,396, payable on demand with interest at 8% a year.

The amount due for purchase of intellectual property is to a major shareholder and is payable in installments through December 31, 2005.

During the quarter ended June 30, 2005, the Company incurred approximately $15,000 of royalty expense to a related party.

8. Common Stock

On May 18, 2005, (prior to the recapitalization) the Company sold 1,500,000 Class A common shares for $225,000 and warrants to purchase 1,750,000 Class A common shares for $5,000. The warrants are exercisable from May 24, 2006 to May 24, 2009 at an exercise price of $1.00

9. Options and warrants

At June 30, 2005, there are outstanding options and warrants for the purchase of common stock as follows:

1,750,000 shares at $1 per share from May 2006 to May 2009

80,000 shares at $1 per share to May 2009

125,000 shares at $3.50 to 2009

25,000 shares at $0.15 to 2010

5,000 shares at $0.15 to 2008

Pro forma information for compensation expense for options granted to employees and directors is not presented because the effect is not material.

10. Subsequent events

Subsequent to June 30, 2005, the Company sold approximately 1,524,000 units at $4.25 per unit in a private placement. The total amount raised, net of selling commissions and estimated expenses, amounted to approximately $5,800,000. Each unit consists of one share of common stock and a warrant to purchase one share of common stock at $7.00 per share at any time to 2010.

The Company is required to file a registration statement with the Securities and Exchange Commission (“SEC”) with respect to these securities within a specified period from closing of the transaction. Further, the Company is required to file responses to comments from the SEC within specified periods and is required to have the registration effective within a specified period from closing. Significant penalties may be imposed for the Company’s failure to meet these requirements.

On June 29, 2005, the Company entered into a Fulfillments Agreement. The services provided under the agreement did not commence until subsequent to June 30, 2005. The agreement provides for services to be provided to the Company, consisting of warehousing, inspecting, shipping, billing, collecting and other services. The fulfillment house will be entitled to a commission of 5% on products sold by its sales people. Further the agreement also provides that the Company be paid a distribution fee for products included in the Company’s line which are manufactured and sold by the fulfillment house. The fulfillment house will be entitled to recover from the Company its actual incremental expenses incurred in providing fulfillment services subsequent to January 1, 2006 and will not be entitled to such recovery for services provided prior thereto

The agreement terminates in June 2009. However, the Company may terminate on 90 day’s notice.

Item 2.Management’s Discussion and Analysis or Plan of Operation

This discussion, other than historical financial information, may consist of forward-looking statements that involve risks and uncertainties, including when and if the Company has significant operations. Consequently, actual results may vary from management’s expectations.

Management believes that developing new products and maximizing the opportunities to market them under the Elizabeth Taylor and Kathy Ireland brands are critical challenges it faces. Management’s experience in the industry is significant; however, the new requirements in designing, marketing, advertising and selling branded products are different.

Results of operations for the three months and six months ended June 30, 2005 as compared to the three months and six months ended June 30, 2004.

Net sales for the three months and for the six months ended June 30, 2005 amounted to $809,488 and $1,868,270, respectively, a decrease of $923,525 and $1,556,129 from the same periods last year. For the three months and six months ended June 30, 2004, net sales were $1,733,013 and $3,424,399, respectively.

During 2005, the Company expended much of its efforts in designing new products and developing marketing programs. In anticipation of the product launch at the jewelry show, the Company focused on the new products to be incorporated into the Elizabeth Taylor and Kathy Ireland lines rather than its existing products. These activities were the primary reasons for decreased sales in the first and second quarters of 2005 as compared to the previous year.

Gross profit declined in the current three month and six month periods from that of the previous year as a result of decreased sales. Gross profit as a percentage of sales were 13% (three months June 30, 2005), 19% (six months June 30, 2005), and 33% (three months and six months June 30, 2004). The gross profit percentage in the current periods was less because the Company was selling products from its previous product line at lower prices to reduce inventories of the non-branded generic product lines.

Selling, shipping and general and administrative expenses were $1,527,964 (three months ended June 30, 2005) and $2,083,489 (six months ended June 30, 2005), compared to $464,268 (three months ended June 30, 2004) and $827,371 (six months ended June 30, 2004). The increase amounted to $1,063,696 and $1,256,118 for the three month and six month periods, respectively. The increases were the result of accounting and legal fees associated with the reorganization and merger which took place in May 2005. Further, the Company incurred significant additional costs for personnel and expenses for the jewelry show which were needed for the introduction of the new Elizabeth Taylor and Kathy Ireland lines and the launch of the new products.

Interest expense amounted to $43,661 for the three months and $88,290 for the six months ended June 30, 2005 compared to $49,387 and $101,660 for the same periods in the prior year. Interest expense relates principally to the line of credit, the imputed interest on an obligation to a vendor which was due after three years from purchase without interest, and in the quarter ended June 30, 2005, interest on related party notes.

Other income amounted to $981,980 in the three and six months ended June 30, 2005. This was the result of the settlement at a discount of the obligation to the vendor discussed in the previous paragraph.

The Company incurred net losses of $373,500 for the three months ended June 30, 2005 and $722,304 for the six months ended June 30, 2005 compared to net income of $59,172, for the three months ended June 30, 2004 and $198,134 for the six months ended June 30, 2004. The significant decease in operating results was due to the reduced sales and gross margin and increased expenses as discussed in the preceding paragraphs.

Liquidity and Capital Resources

For the six months ended June 30, 2005, the Company incurred negative cash flow from operations of $1,393,779. This was funded from stockholder advances, issuance of common stock in May 2005 and existing working capital. The Company believes it will be able to obtain additional funds required for its operations from cash flow generated from operations and by issuing equity and debt as required. In August 2005, the Company raised approximately $5,800,000 from the sale of units consisting of common stock and warrants.

The principal uses of funds from operations for the six months ended June 30, 2005 include the net loss of $835,512 and a decrease in accounts payable of $1,706,670 due to the settlement of a payable to a vendor of approximately $1,000,000 and reduced buying of inventory. The increase in prepaid expenses of $102,000, of which $100,000 was a prepaid marketing expense, was also a use of funds. These were offset by a decrease in accounts receivable of $639,808 due to decreased sales and price markdowns on existing inventory, a decrease in inventory of $111,275 because we had just begun buying our new product lines and an increase in accrued liabilities of $361,743 primarily related to professional fees in connection with our reverse acquisition.

Investing activities provided $375,000 in the six months ended June 30, 2005. The Company purchased intellectual property for $250,000 using $125,000 of cash and issuing a note for $125,000 and acquired $500,000 in the recapitalization.

Critical Accounting Policies and Use of Estimates

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States which requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue recognition

The Company’s management reviews receivables on an ongoing basis. An allowance for doubtful accounts is provided for accounts where collection is considered doubtful.

Allowances are adjusted on a quarterly basis based on the above review and analysis.

Item 3. Controls and Procedures.

As of June 30, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in the Securities Act of 1934 Rules 13a-15 (e) and 15d-15(e). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005. No changes in internal controls over financial reporting identified in connection with its evaluation occurred during the quarterly period covered by this report that materially affected, or were reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II

This Form 10-QSB and our other filings with the Securities and Exchange Commission and public announcements contain “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and other factors that may cause our actual results or performance to differ materially from any results of performance expressed or implied by those statements. Examples of forward-looking statements include predictive statements, statements that depend on or refer to future events or conditions, which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “should,” “would,” “may” or similar expressions, or statements that involve hypothetical events.

Item 1. Legal Proceedings

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Other than as reported in the Company’s filings - None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5 Other Information

None

Item 6. Exhibits and Reports on Form 8-K

Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

Exhibit 32 – Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Report on Form 8-K

Form 8-K filed April 22, 2005 with respect to Item 7.01

Form 8-K filed April 29, 2005 with respect to Item 1.01, 1.02 and 3.02

Form 8-K filed May 26, 2005 with respect to Item 1.01, 1.02, 2.01, 3.02, 5.01, 5.02, 7.01 and

9.01

Form 8-K/A filed June 10, 2005 with respect to Item 2.01

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.

HOUSE OF TAYLOR JEWELRY, INC.

Dated: February 22, 2006

/s/ Jack Abramov

Chief Executive Officer and

Dated: February 22, 2006

/s/ Pauline Schneider

Chief Financial Officer

(Principal Accounting Officer)

House of Taylor Jewelry (HOTJ) Inactive 10QSB/A2005 Q2 Quarterly report (small business) (amended)