SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended August 31, 2006
oTransition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to ______________
Commission file number: 333-129910
TANK SPORTS, INC.
(Exact name of small business issuer as specified in its charter)
| California | 95-4849012 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | 10925 Schmidt Road El Monte, California 91733 | |
| | (Address, including zip code, of principal executive offices) | |
| | | |
| | Issuer’s telephone number : (626) 350-4039 | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE
Check whether the Registrant: (1) 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 reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
The number of outstanding shares of the Registrant's common stock, $0.001 par value, as of August 31, 2006 was 8,125,700.
TANK SPORTS, INC.
TABLE OF CONTENTS
This Form 10-QSB contains forward-looking statements within the meaning of the "safe harbor" provisions under Section 21E of the Securities Exchange Act of 1934. We use forward-looking statements in our description of our plans and objectives for future operations and assumptions underlying these plans and objectives. Forward-looking terminology includes the words "August," "expects," "believes," "anticipates," "intends," "projects," or similar terms, variations of such terms or the negative of such terms. These forward-looking statements are based on management's current expectations and are subject to factors and uncertainties, which could cause actual results to differ materially from those, described in such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Form 10-QSB to reflect any change in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. Factors, which could cause such results to differ materially from those described in the forward-looking statements, and elsewhere,, are incorporated by reference into this Form 10-QSB.
Item1. Financial Statements
TANK SPORTS, INC. |
BALANCE SHEET |
AUGUST 31, 2006 |
(Unaudited) |
| | | | | |
ASSETS |
| | | | | |
CURRENT ASSETS | | | | |
| Cash & cash equivalents | | $ | 552,490 | |
| Certificate of deposit | | | 1,500,000 | |
| Accounts receivable, net | | | 315,138 | |
| Loans receivable - current | | | 189,097 | |
| Inventory | | | 1,880,707 | |
| Prepaid expenses | | | 42,454 | |
| Total current assets | | | 4,479,886 | |
| | | | | |
PROPERTY AND EQUIPMENT, NET | | | 70,524 | |
| | | | | |
LOANS RECEIVABLE - NON CURRENT | | | 55,629 | |
| | | | | |
TOTAL ASSETS | | $ | 4,606,039 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS' DEFICIT |
| | | | | |
CURRENT LIABILITIES | | | | |
| Accounts payable and accrued expenses | | $ | 206,975 | |
| Due to affiliate | | | 3,173,805 | |
| Note payable | | | 1,500,000 | |
| Loan payable - current | | | 7,313 | |
| Customer deposit | | | 78,287 | |
| Total current liabilities | | | 4,966,380 | |
| | | | | |
LONG TERM LIABILITIES | | | | |
| Loan payable - Non current | | | 23,218 | |
| Total liabilities | | | 4,989,598 | |
| | | | | |
STOCKHOLDERS' DEFICIT | | | | |
| | | | | |
| Common stock (authorized 50,000,000 shares, par value $0.001, | | | | |
| issued and 8,125,700 shares outstanding) | | | 8,126 | |
| Paid in capital | | | 127,574 | |
| Accumulated deficit | | | (519,259 | ) |
| Total stockholders' deficit | | | (383,559 | ) |
| | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 4,606,039 | |
| | | | | |
See accompanying notes to unaudited financial statements
|
STATEMENTS OF OPERATIONS |
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED AUGUST 31, 2006 AND 2005 |
(Unaudited) |
| | | | | | | | | | | | | | |
| | | | Three month periods ended | | | Six month periods ended | |
| | | | August 31, | | | August 31, | |
| | | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | |
NET REVENUE | | $ | 3,130,003 | | $ | 1,567,329 | | $ | 6,054,910 | | $ | 2,622,360 | |
| | | | | | | | | | | | | | |
COST OF REVENUE | | | 2,276,997 | | | 983,072 | | | 4,372,507 | | | 1,817,637 | |
| | | | | | | | | | | | | | |
GROSS PROFIT | | | 853,006 | | | 584,257 | | | 1,682,403 | | | 804,723 | |
| | | | | | | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | | | | | |
| Selling expenses | | | 210,285 | | | 153,250 | | | 491,843 | | | 257,496 | |
| General and administrative expenses | | | 440,058 | | | 276,496 | | | 937,803 | | | 511,447 | |
| Total operating expenses | | | 650,343 | | | 429,746 | | | 1,429,646 | | | 768,943 | |
| | | | | | | | | | | | | | |
INCOME FROM OPERATIONS | | | 202,663 | | | 154,511 | | | 252,757 | | | 35,780 | |
| | | | | | | | | | | | | | |
NON-OPERATING INCOME (EXPENSES) | | | | | | | | | | | | | |
| Other income (expense) | | | 12,595 | | | (7,874 | ) | | 22,649 | | | 258 | |
| Interest expense | | | - | | | (976 | ) | | - | | | (829 | ) |
| Total non-operating income (expenses) | | | 12,595 | | | (8,850 | ) | | 22,649 | | | (571 | ) |
| | | | | | | | | | | | | | |
NET INCOME | | $ | 215,258 | | $ | 145,661 | | $ | 275,406 | | $ | 35,209 | |
| | | | | | | | | | | | | | |
WEIGHTED AVERAGE SHARES OF COMMON STOCK | | | | | | | | | | | | | |
OUTSTANDING, BASIC AND DILUTED | | | 8,125,700 | | | 8,000,000 | | | 8,125,700 | | | 8,000,000 | |
| | | | | | | | | | | | | | |
BASIC AND DILUTED NET INCOME PER SHARE | | $ | 0.026 | | $ | 0.018 | | $ | 0.034 | | $ | 0.004 | |
See accompanying notes to unaudited financial statements
|
STATEMENTS OF CASH FLOWS |
FOR THE SIX MONTH PERIODS ENDED AUGUST 31, 2006 AND 2005 |
(Unaudited) |
| | | | Six month periods ended | |
| | | | August 31, | |
| | | | 2006 | | | 2005 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
| Net income | | $ | 275,406 | | $ | 35,209 | |
| Adjustments to reconcile net income to net cash | | | | | | | |
| used in operating activities: | | | | | | | |
| | | | | | | | |
| Depreciation and amortization | | | 9,110 | | | 4,921 | |
| | | | | | | | |
| (Increase) decrease in current assets: | | | | | | | |
| Certificate of deposit | | | (1,500,000 | ) | | - | |
| Accounts receivable | | | (44,555 | ) | | (82,437 | ) |
| Inventory | | | (454,615 | ) | | (475,947 | ) |
| Prepaid expense | | | 24,436 | | | 602 | |
| Other assets | | | 11,600 | | | (300 | ) |
| | | | | | | | |
| Increase (decrease) in current liabilities: | | | | | | | |
| Accounts payable, other payables, and accrued liabilities | | | 125,689 | | | 169,450 | |
| | | | | | | | |
| Net cash used in operating activities | | | (1,552,929 | ) | | (348,502 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
| Payment on purchase of property | | | (13,894 | ) | | (42,954 | ) |
| Decrease in loans receivable | | | 531 | | | - | |
| | | | | | | | |
| Net cash used in investing activities | | | (13,363 | ) | | (42,954 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
| Payments to loans for auto and equipment | | | (4,923 | ) | | - | |
| Increase of due to affiliate | | | 460,177 | | | 629,002 | |
| Increase in note payable | | | 1,500,000 | | | - | |
| | | | | | | | |
| Net cash provided by investing activities | | | 1,955,254 | | | 629,002 | |
| | | | | | | | |
NET INCREASE IN CASH & CASH EQUIVALENTS | | | 388,962 | | | 237,546 | |
| | | | | | | | |
CASH & CASH EQUIVALENTS, BEGINNING BALANCE | | | 163,528 | | | 40,941 | |
| | | | | | | | |
CASH & CASH EQUIVALENTS, ENDING BALANCE | | $ | 552,490 | | $ | 278,487 | |
See accompanying notes to unaudited financial statements
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
Tank Sports, Inc. (“Tank” or “the Company”) was incorporated in the state of California on March 5, 2001. The Company is located in the city of El Monte, California, U.S.A. The Company is engaged in the sales and distribution of high quality recreational and transportation motorcycles, all-terrain vehicles (“ATVs”), dirt bikes, scooters, and Go Karts. The Company’s motorcycles and ATVs products are manufactured in China and Mexico.
Basis of Preparation
The unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s Annual Report on Form 10-KSB. The results of the six months ended August 31, 2006 are not necessarily indicative of the results to be expected for the full year ending February 28, 2007.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
2. | SUMMARY OF SIGNIFICANT ACCOUTING POLICIES |
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Certificate of Deposit
The company has $1,500,000 certificate of deposit at August 31, 2006. The certificate of deposit has a twelve month term, with an interest of 5.25%, and is used as collateral for line of credit. The company did not have any amount outstanding against the line of credit as of August 31, 2006.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary from COD through a credit term up to 9 to 12 months. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful debts amounted to $65,000 as at August 31, 2006.
TANK SPORTS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - continued |
Accounts Payable and Accrued liabilities
Accounts payable and accrued liabilities includes accounts payable to suppliers amounting $55,440, accrued payable to vendors amounting $105,880, accrued payroll amounting $31,956, and payroll tax payable amounting $13,699 at August 31, 2006.
Revenue Recognition and Customer Deposit
The Company’s revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue (customer deposit). Customer deposit was $78,287 at August 31, 2006.
Income Taxes
The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Segment Reporting
Statement of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. SFAS 131 has no effect on the Company’s consolidated financial statements as the Company consists of one reportable business segment. All of the Company’s assets are located in one segment in its facility in California.
Recent Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." This statement applies to all voluntary changes in accounting principle and requires retrospective application to prior periods' financial statements of changes in accounting principle, unless this would be impracticable. This statement also makes a distinction between "retrospective application" of an accounting principle and the "restatement" of financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006.
TANK SPORTS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - continued |
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
In June 2005, the EITF reached consensus on Issue No. 05-6, determining the Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively and is effective for periods beginning after June 29, 2005. EITF 05-6 is not expected to have a material effect on its consolidated financial position or results of operations.
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company's first fiscal year that begins after September 15, 2006. The Company has not evaluated the impact of this pronouncement its financial statements.
In March 2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
| | 1. | Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. |
| | 2. | Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. |
| | 3. | Permits an entity to choose ‘Amortization method’ or ‘Fair value measurement method’ for each class of separately recognized servicing assets and servicing liabilities. |
| | 4. | At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. |
Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
TANK SPORTS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
| 2. | SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - continued |
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements.
On January 10, 2004, the Company loaned $146,451 to an unrelated party at an interest rate of 6% per annum. The loan is unsecured, both principal and interest are payable on May 31, 2007. Interest income has been accrued and recorded in loan receivable. As of August 31, 2006, the loan receivable is $163,679.
On December 20, 2004, the Company loaned $50,167 to an unrelated party at interest rate of 6% per annum. The loan is unsecured, both principal and interest are payable on December 20, 2007. Interest income has been accrued and recorded in loan receivable. As of August 31, 2006, the loan receivable is $55,629.
On July 27, 2004, the Company loaned $23,000 to an unrelated party at interest rate of 5% per annum. The loan is unsecured, and both principal and interest are due on demand. Interest income has been accrued and recorded in loan receivable. As of August 31, 2006, the loan receivable is $25,418.
Prepaid expenses amounted to $42,454 as of August 31, 2006. Prepaid expenses mainly include prepaid insurances and deposits.
5. | PROPERTY, PLANT & EQUIPMENT |
Property, Plant & Equipment consist of the following as of August 31, 2006:
| | | | |
| Leasehold improvement | | | 4,500 | |
| Office furnitures | | | 19,413 | |
| Equipment | | | 37,288 | |
| Automobile | | | 40,036 | |
| Accumulated depreciation | | | (30,713 | ) |
| | | | | |
| | | $ | 70,524 | |
| | | | | |
Depreciation expenses for the six months ended August 31, 2006 and 2005 were $9,110 and $4,921, respectively.
TANK SPORTS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
On June 1, 2005, the company signed a five year note payable against auto loan. The loan was unsecured, with an interest of 5.90% with monthly payment of $743. As of August 31, 2006, the loan payable amounted to $30,531.
On August 30, 2006, the company borrowed $1,500,000 from an unrelated party. The note is unsecured, with an interest rate of 5.25%, and due on August 15, 2007. The note payable is subordinated to the loan payable to United Commercial bank. (Refer to note 15).
On October 10, 2005, Tank Sports, Inc. amended its articles to increase its number of authorized shares from 1,000,000 to 50,000,000 shares, at par value of $0.001 and a forward split of 800 shares for one. The financial statements have been retroactively restated for the effects of forward stock splits.
On October 10, 2005, Tank Sports, Inc. board consented a Regulation S offering of 300,000 shares of common stock at $1.00 per share. As of October 30, 2005, Tank Sports, Inc. closed the Regulation S offering, 125,700 shares were issued and collected $125,700 from 34 shareholders.
On November 23, 2005, the Company filed a registration statement under the Securities Act of 1933 (SB-2) to register 1,446,500 shares of its common stock. The registration statement is under the review of Security and Exchange Commission. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities.
Through August 31, 2006, the Company incurred net operating losses for tax purposes of approximately $454,259. Differences between financial statement and tax losses consist primarily of bad debts allowance of $65,000 as of August 31, 2006. The net operating loss carry forward may be used to reduce taxable income through the year 2026. Net operating loss for carry forward for the State of California is generally available to reduce taxable income through the year 2011. The availability of the Company's net operating loss carry forward is subject to limitation if there is a 50% or more positive change in the ownership of the Company's stock. The provision for income taxes consists of the state minimum tax imposed on corporations.
The gross deferred tax asset balance, due to net operating loss carry forward and allowance for bad debts, as of August 31, 2006 was $2,181,704. A 100% valuation allowance has been established against the deferred tax assets, as the utilization of the loss carry forward cannot reasonably be assured. Components of deferred tax assets at August 31, 2006 are as follows:
| Net operating loss | | $ | 207,704 | |
| Allowance for bad debt | | | (26,000) | ) |
| Deferred tax asset | | | 181,704 | |
| Less: valuation allowance | | | (181,704) | ) |
| | | $ | - | |
TANK SPORTS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
| 9. | INCOME TAXES - continued |
The following is a reconciliation of the provision for income taxes at the U.S. federal and California state income tax rate to the income taxes reflected in the Statements of Operations:
| | | | August 31, | | | August 31, | |
| | | | 2006 | | | 2005 | |
| Tax expense (credit) at statutory rate-federal | | | 34 | % | | (34 | )% |
| State tax expense net of federal tax | | | 6 | | | ( 6 | ) |
| Changes in valuation allowance | | | (40 | ) | | 40 | |
| Tax expense at actual rate | | | - | | | - | |
10. | BASIC AND DILUTED NET INCOME (NET LOSS) PER SHARE |
Net income (net loss) per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), “Earnings per share”. Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Weighted average number of shares used to compute basic and diluted net income (loss) per share is the same since there are no dilutive securities. The basic and diluted net income per share were $0.034 and $0.004 for the six month periods ended June 30, 2006 and 2005, respectively.
11. | SHIPPING AND HANDLING EXPENSES |
Tank has included $395,213 and $185,473 freight out shipping and handling expenses into selling expenses for the six month periods ended August 31, 2006 and 2005, respectively.
12. | SUPPLEMENTAL DISCLOSURE OF CASH FLOWS |
The Company prepares its statements of cash flows using the indirect method as defined under the Financial Accounting Standard No. 95.
The Company paid $0 for income tax during the six month periods ended August 31, 2006 and 2005. The Company paid $0 for interest during the six month periods ended August 31, 2006 and 2005, respectively.
Lease
On August 1, 2005, Tank entered into a lease agreement for the new facilities in which they operate. The lessors are Tank’s 2 shareholders who are also Tank’s directors. The term of the lease is 60 months with monthly payments of $19,900. As of August 31, 2006, the amount due was $0.
Minimum annual rent expense for Tank for the year subsequent to August 31, 2006 is as follows:
Period Amount
1 year after August 31, 2006 $ 179,100
Rent expenses were $119,400 and $44,350 for the six month periods ended August 31, 2006 and 2005, respectively.
Credit card payable
Tank and its affiliated company share one credit card. The credit card is a commonly held card under Tank’s 2 shareholders who are also Tank’s directors. The credit card is for business related purposes only. Tank and its affiliated company will make payments for each company’s share of the expenses accordingly directly to the credit card company. As of August 31, 2006, the amount due was $2,333. The amount is due on demand, interest free and unsecured.
TANK SPORTS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Due to affiliate
The Company issues purchase orders to third party vendors in China. However, most of the third party vendors are paid by a US company owned by some of the shareholders of the Company. This affiliated company issues letter of credit in favor of vendors when the Company issues purchase order to the vendors. The Company makes payment to this affiliated company, which in turn pays to the vendors. As of August 31, 2006, the amount due to this affiliate was $3,173,805. The amount is due on demand, interest free, and unsecured.
14. | COMMITMENT AND CONTIGENCIES |
Lease
On August 1, 2005, Tank entered into another lease agreement for the new facilities in which they operate. The lessors are Tank’s 2 shareholders who are also Tank’s directors. The term of the lease is 60 months with monthly payments of $19,900.
Line of Credit
The company has entered into a revolving line of credit agreement dated September 3, 2006 with United Commercial Bank for a total of $5,500,000. This loan is secured by the business assets of the Company and its affiliate Steady Star, Inc, (related by common major officer) by three personal properties owned by its president amounting at appropriate $4,400,000, by a certificate of deposit of $1,500,000 in the name of the Company, by two certificates of deposits in the name of the CEO and an unrelated party, and partially by a certificate of deposit in the name of an unrelated party. The above loan is also guaranteed by the Company’s president, CEO, and its affiliate Steady Star, Inc. The interest rate is 8.5%. Interest on advances is due and payable monthly. The loan is due on July 31, 2007. The outstanding balance was $0 for the line of credit as of August 31, 2006.
The following discussion is intended to provide an analysis of our financial condition and Plan of Operation and should be read in conjunction with our financial statements and the notes thereto set forth herein. The matters discussed in this section that are not historical or current facts, deal with potential future circumstances and developments. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
Plan of Operation
Since our inception, we commenced the sale and distribution of motorcycles and ATV’s under the brand name of TANK. In order to succeed, we intend to do the following:
1. Generate Dealer Interest and Recruit Dealers. We have used our power sports vehicles to create awareness within the power sports industry. We have also displayed these vehicles at trade shows and events to generate dealer interest in TANK products. We intend to continue our promotional efforts through public relations program, attending and displaying our products at dealer trade shows, direct mail efforts and direct solicitations of prospective customers. As of August 31, 2006, we have dealer agreements with 199 dealers and have identified 50 new dealers that we expect will enter into dealer agreements with us. We believe our dealer qualification criteria are strict and they include experience, reputation, ability to serve the geographic territory and financial strength.
2. Generate Consumer Interest and Develop the TANK Brand. To date, our products have appeared in over 10 publications. We believe this publicity is critical to creating awareness of the TANK brand. We intend to continue our public relations efforts to create additional consumer interest and to support our dealers in targeted advertising and marketing efforts in their geographic territories. We also plan to continue to attend trade shows and events targeted to consumers to provide them with opportunities to see, and in some cases ride, our products. We believe these efforts, as well as mailing information to persons who have inquired about our products, will generate the customer awareness we believe is necessary to sell our products, and to develop the TANK brand.
Our focus in the next 12 months has been to seek necessary working capital, and to develop our marketing plan. Our marketing plan focuses on dealers and the retail market, through comprehensive print advertising, participation in trade shows and other direct marketing efforts. Our marketing strategy is based on a reliable product, consistent quality and the delivery of a unique name and image. We estimate the necessary proceeds to implement this marketing campaign to be $180,000. We do not plan to carry out these actions until we have secured funds from our cash flows to fully fund this marketing plan. At this time, it is uncertain as if we can secure necessary financing.
Item 2. Management’s Discussion and Analysis of Financial Condition and Plan of Operations - continued
Results of Operation
Six Months Ended August 31, 2006 and August 31, 2005.
We generated revenues of $6,054,910 for the six month period ending August 31, 2006, 131 percent increase as compared to $2,622,360 in revenues for the same period ended August 31, 2005. The increase is primarily attributable to favorable fluctuation in gasoline prices during June and July, improved brand recognition, the success of the launch of two new special edition VISIONTM 250E motorcycle models and the 150T-12 engine scooter. Additionally, improvement in the dealer network is contributing to the higher sales.
Our gross profit for the six month period ended August 31, 2006, was $1,682,403, a 109 percent increase as compared to $804,723 in gross profit for the same period ended August 31, 2005. Gross profit, as a percentage of revenue, was twenty-eight percent for the six month period ended August 31, 2006, a two percent decrease from thirty percent in the comparable period of 2005. The decreased growth profit margin was primarily due to increased cost of raw materials and manufacturing costs in China affected by fluctuations in Chinese currency (RMB) exchange rates and the increased trucking costs.
Our net income for the six month period ended August 31, 2006 was $275,406, a 682 percent increase as compared to net income of $35,209 for the same period ended August 31, 2005. The increase in our net income is primarily attributable to increased sales.
During the six month period ended August 31, 2006, we recorded operating expenses of $1,429,646, consisting primarily of (i) $491,843 in selling expenses; and (ii) $937,803 in general and administrative expenses. During the six month period ended August 31, 2005, we recorded operating expenses of $768,943, consisting primarily of (i) $257,496 in selling expenses; and (ii) $511,447 in general and administrative expenses. General and administrative expenses generally include corporate overhead, financial and administrative services.
During the six month period ended August 31, 2006, net cash flow used in operating activities was $1,522,929. Our net cash flows used in operating activities consisted primarily of $464,615 in Inventory, and a Certificate of Deposit of $1,500,000. During the six month period ended August 31, 2005, net cash flow used in operating activities was $348,502. Our net cash flows used in operating activities consisted primarily of $475,947 in Inventory.
During the six month period ended August 31, 2006, net cash flows used in investing activities was $13,363, which was primarily the result of purchases of computers, other office equipments and interior modification of an office space. During the six month period ended August 31, 2005, net cash flows used in investing activities was $42,954, which was primarily the result of purchases of computers, other office equipments.
During the six month period ended August 31, 2006, net cash flow provided by financing activities was $1,955,254, consisting primarily of (i) $1,500,000 increase in a note payable; (ii) $460,177 increase of due to affiliate. During the six month period ended August 31, 2005, net cash flow provided by financing activities was $629,002, consisting primarily of increase in a note payable.
Liquidity and Capital Resources.
At August 31, 2006, our current assets were $4,479,886, current liabilities were $4,966,380, resulting in a working capital deficit of $486,494.
At August 31, 2006, we had cash and cash equivalents of $552,490.
The Company anticipates the future cash flow from revenue and existing financing facilities would be adequate to fund our operations over the next twelve (12) months. As of September 3, 2006, we entered into a revolving line of credit with United Commercial Bank of a total of $5,500,000. This loan is secured by our business assets and the assets of an affiliate company, Steady Star, Inc., and the three personal properties owned by our president amounting at approximately $4,400,000 and a certificate of deposit of $1,500,000 in the name of Tank Sports, Inc., and other certificates of deposits by our CEO and unrelated parties. (SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS). The interest rate of this credit agreement is 8.5%, due and payable monthly. The loan is due on July 31, 2007.
Item 2. Management’s Discussion and Analysis of Financial Condition and Plan of Operations - continued
Generally, we have financed operations to date through cash flow and shareholder loans. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to advertisement and marketing of our brand name and the expansion of dealership networks. We intend to finance these expenses from current and future revenues from operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
MATERIAL COMMITMENTS
We have no material commitments as at the date of this report.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve (12) months.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act of 1934 are recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Principal Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Within the 90 days prior to the filing date of this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of our Principal Executive Officer/Principal Accounting Officer. Based upon that evaluation, we have concluded that our disclosure controls and procedures are effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Exchange Act.
Changes in Internal Controls
There were no significant changes in our internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls.
None
None
None
None
None
(a) Exhibits
(b) Reports on Form 8-K
None
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TANK SPORTS, INC.
(Registrant)
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| Date: October 14, 2006 | By: | /s/ Jing Jong Long |
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Jing Jong Long |
| | Title: Principal Executive Officer |
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| Date: October 14, 2006 | By: | /s/ Jing Jong Long |
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Jing Jong Long |
| | Title: Principal Accounting Officer |
| | Principal Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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| Date: October 14, 2006 | By: | /s/ Jing Jong Long |
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Jing Jong Long |
| | Title: Director |
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| Date: October 14, 2006 | By: | /s/ Jiangyong Ji |
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Jiangyong Ji |
| | Title: Director |
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| Date: October 14, 2006 | By: | /s/ Jim Ji |
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Jim Ji |
| | Title: Director |
