UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2007.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _____________
Commission file number: 0-50046
KMA GLOBAL SOLUTIONS INTERNATIONAL, INC.
----------------------------------------
(Name of Small Business Issuer in its Charter)
NEVADA (State or other jurisdiction of incorporation or organization) | 88-0433489 (I.R.S. Employer Identification No.) |
5570A KENNEDY ROAD MISSISSAUGA ONTARIO, CANADA L4Z2A9 (Address of principal executive offices, zip code) | |
Issuer’s telephone number, including area code: (905) 568-5220 | |
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.Yes [ ] No [ X ]
The number of shares outstanding of the issuer's stock, $0.001 par value per share, as of December 18, 2007 was 75,333,319.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KMA GLOBAL SOLUTIONS INTERNATIONAL, INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2007
(unaudited)
(expressed in U.S. dollars)
INDEX | PAGE |
| Interim Consolidated Balance Sheets | 1 - 2 |
| Interim Consolidated Statements of Income and Deficit | 3 |
| Interim Consolidated Statements of Cash Flows | 4 |
| Notes to the Interim Consolidated Financial Statements | 5 - 13 |
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 1 | ||
| INTERIM CONSOLIDATED BALANCE SHEETS | |||
| (expressed in U.S. dollars) | |||
As at Oct 31, 2007 (unaudited) $ | As at Jan 31, 2007 (audited) $ | |||||||
ASSETS | ||||||||
CURRENT | ||||||||
| Cash | 66,929 | 22,710 | ||||||
| Accounts receivable | 184,844 | 287,701 | ||||||
| Inventories (Note 3) | 465,566 | 303,117 | ||||||
| Prepaid expenses | 226,013 | 340,210 | ||||||
TOTAL CURRENT ASSETS | 943,352 | 953,738 | ||||||
DEPOSITS ON EQUIPMENT AND PATENTS | 312,352 | 57,342 | ||||||
EQUIPMENT AND PATENTS (Note 5) | 957,105 | 641,178 | ||||||
FUTURE INCOME TAXES (Note 6) | 1,087,223 | 335,958 | ||||||
DEFERRED COSTS (Note 8(b)) | 120,337 | 212,404 | ||||||
ADVANCES TO SHAREHOLDER (Note 4) | 53,601 | - | ||||||
| 3,473,970 | 2,200,620 | |||||||
APPROVED ON BEHALF OF THE BOARD:
_____________________________, Director
_____________________________, Director
The accompanying notes are an integral part of these interim consolidated financial statements.
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 2 | |
| INTERIM CONSOLIDATED BALANCE SHEETS | ||
| (expressed in U.S. dollars) |
As at Oct 31, 2007 (unaudited) $ | As at Jan 31, 2007 (audited) $ | |||||||
LIABILITIES | ||||||||
CURRENT | ||||||||
| Accounts payable and accrued liabilities | 1,081,944 | 1,062,297 | ||||||
| Current portion of capital lease obligation (Note 7) | 18,542 | 55,804 | ||||||
TOTAL CURRENT LIABILITIES | 1,100,486 | 1,118,101 | ||||||
ADVANCES FROM SHAREHOLDER (Note 4) | - | 87,053 | ||||||
CAPITAL LEASE OBLIGATION (Note 7) | - | 207 | ||||||
| 1,100,486 | 1,205,361 | |||||||
SHAREHOLDERS' EQUITY | ||||||||
CAPITAL STOCK (Note 8) | ||||||||
| Preferred stock, $0.001 par value, 25,000,000 shares authorized and none issued and outstanding | ||||||||
| Common stock, $0.001 par value, 175,000,000 shares authorized and 75,333,319 shares issued and outstanding | 75,333 | 42,066 | ||||||
ADDITIONAL PAID-IN CAPITAL (Note 8) | 4,958,281 | 729,098 | ||||||
SUBSCRIPTIONS RECEIVABLE (Note 8) | (2,730,000 | ) | - | |||||
SHARES TO BE ISSUED (Note 8) | - | 826,485 | ||||||
ACCUMULATED COMPREHENSIVE INCOME (Note 8) | 551,669 | 51,031 | ||||||
WARRANTS (Note 9) | 1,149,000 | - | ||||||
(DEFICIT) (Note 8) | (1,630,799 | ) | (653,421 | ) | ||||
| 2,373,484 | 995,259 | |||||||
| 3,473,970 | 2,200,620 | |||||||
The accompanying notes are an integral part of these interim consolidated financial statements.
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 3 | |
| INTERIM CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT | ||
| (unaudited) (expressed in U.S. dollars) | ||
Three Months Ended Oct 31, | Nine Months Ended Oct 31, | |||||||||||||||
| $ | 2007 | $ | 2006 | $ | 2007 | $ | 2006 | |||||||||
SALES | 1,377,478 | 1,688,891 | 3,893,884 | 4,704,503 | ||||||||||||
COST OF SALES | ||||||||||||||||
| Inventories, beginning of period | 471,790 | 437,701 | 303,117 | 452,055 | ||||||||||||
| Purchases | 1,012,618 | 1,314,877 | 3,073,041 | 3,736,355 | ||||||||||||
| 1,484,408 | 1,752,578 | 3,376,158 | 4,188,410 | |||||||||||||
| Less: Inventories, end of period | 465,566 | 353,099 | 465,566 | 353,099 | ||||||||||||
| 1,018,842 | 1,399,479 | 2,910,592 | 3,835,311 | |||||||||||||
GROSS MARGIN | 358,636 | 289,412 | 983,292 | 869,192 | ||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE | ||||||||||||||||
EXPENSES (Schedule) | 1,044,383 | 478,703 | 2,552,792 | 1,688,822 | ||||||||||||
| (Loss) before income taxes | (685,747 | ) | (189,291 | ) | (1,569,500 | ) | (819,630 | ) | ||||||||
| Income taxes – future (Note 6) | (267,934 | ) | (74,373 | ) | (592,122 | ) | (266,384 | ) | ||||||||
NET (LOSS) FOR THE PERIOD | (417,813 | ) | (114,918 | ) | (977,378 | ) | (553,246 | ) | ||||||||
(DEFICIT), beginning of period (Note 8) | (1,212,986 | ) | (355,346 | ) | (653,421 | ) | 82,982 | |||||||||
(DEFICIT), end of period (Note 8) | (1,630,799 | ) | (470,264 | ) | (1,630,799 | ) | (470,264 | ) | ||||||||
(LOSS) PER SHARE | ||||||||||||||||
| Basic | (0.01 | ) | (0.00 | ) | (0.02 | ) | (0.01 | ) | ||||||||
| Diluted | (0.01 | ) | (0.00 | ) | (0.02 | ) | (0.01 | ) | ||||||||
| Weighted average number of common shares | 64,304,515 | 41,933,926 | 58,576,726 | 38,869,780 | ||||||||||||
The accompanying notes are an integral part of these interim consolidated financial statements.
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 4 | |
| INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS | ||
| FOR THE NINE MONTH PERIODS ENDED OCTOBER 31 | ||
| (unaudited) | ||
| (expressed in U.S. dollars) | ||
| $ | 2007 | $ | 2006 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) for the period | (977,378 | ) | (553,246 | ) | ||||
| Adjustments for: | ||||||||
| Amortization | 104,948 | 68,115 | ||||||
| Shares issued for services provided | 6,500 | 91,698 | ||||||
| Future income taxes | (592,122 | ) | (266,384 | ) | ||||
| (1,458,052 | ) | (659,817 | ) | |||||
| Changes in non-cash working capital: | ||||||||
| Decrease (increase) in accounts receivable | 151,502 | (209,015 | ) | |||||
| (Increase) decrease in inventories | (76,722 | ) | 104,760 | |||||
| (Increase) in research and development tax credits receivable | - | (66,434 | ) | |||||
| Decrease (Increase) in prepaid expenses | 172,668 | (131,665 | ) | |||||
(Decrease) increase in accounts payable and accrued liabilities | (210,821 | ) | 659,337 | |||||
| 36,627 | 356,983 | |||||||
| Cash flows from operating activities | (1,421,425 | ) | (302,834 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Issuance of capital stock | 700,000 | - | ||||||
| Exercise of warrants | 1,270,000 | - | ||||||
| (Decrease) in capital lease obligation | (44,719 | ) | (38,422 | ) | ||||
| (Decrease) increase in advances from shareholders | (141,430 | ) | 140,461 | |||||
| Increase in promissory note payable | - | 141,580 | ||||||
| Cash flows from financing activities | 1,783,851 | 243,619 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Decrease in advances to shareholders | - | 51,350 | ||||||
| Purchase of equipment and patents | (242,372 | ) | (232,359 | ) | ||||
| Deposits on equipment and patents | (210,243 | ) | 145,404 | |||||
| Cash flows from investing activities | (452,615 | ) | (35,605 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 134,408 | (5,501 | ) | |||||
| Increase (decrease) in cash | 44,219 | (100,321 | ) | |||||
| Cash, beginning of period | 22,710 | 126,727 | ||||||
| Cash, end of period | 66,929 | 26,406 |
SUPPLEMENTAL INFORMATION:
| Interest paid | 5,047 | 17,874 | ||||||
| Income taxes paid | - | - | ||||||
| Issuance of common stock- subscriptions receivable | 2,730,000 | - |
The accompanying notes are an integral part of these interim consolidated financial statements.
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 5 | |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | ||
| OCTOBER 31, 2007 | ||
| (unaudited) | ||
| (expressed in U.S. dollars) | ||
1. DESCRIPTION OF THE BUSINESS
| KMA Global Solutions International, Inc. (“KMA International” or the “Company”) is engaged in the supply of Electronic Article Surveillance (“EAS”) solutions, focusing on providing customized solutions in the apparel, multi media, sporting goods, food and pharmaceutical industries. |
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the requirements of item 310 (b) of Regulation S-B. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. There have been no significant changes of accounting policy since January 31, 2007. The results from operations for the period may not be indicative of the results expected for the full fiscal year or any future period.
3. INVENTORIES
October 31, 2007 $ | January 31, 2007 $ | |||||||
| Finished goods | 265,048 | 117,702 | ||||||
| Raw materials | 200,518 | 185,415 | ||||||
| 465,566 | 303,117 | |||||||
4. ADVANCES TO (FROM) SHAREHOLDERS
Advances to (from) shareholders are non-interest bearing, are unsecured and have no fixed terms of repayment.
Conti nued…
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 6 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
5. EQUIPMENT AND PATENTS
Cost $ | Accumulated Amortization $ | October 31, 2007 Net $ | ||||||||||
| Equipment | 1,264,076 | 654,589 | 609,487 | |||||||||
| Equipment under capital lease | 201,330 | 52,010 | 149,320 | |||||||||
| Patents | 101,124 | 28,337 | 72,787 | |||||||||
| Computer equipment | 79,549 | 34,692 | 44,857 | |||||||||
| Leasehold improvements | 75,339 | 11,078 | 64,261 | |||||||||
| Office furniture | 20,941 | 4,548 | 16,393 | |||||||||
| 1,742,359 | 785,254 | 957,105 | ||||||||||
Cost $ | Accumulated Amortization $ | January 31, 2007 Net $ | ||||||||||
| Equipment | 892,915 | 460,364 | 432,551 | |||||||||
| Equipment under capital lease | 161,594 | 29,626 | 131,968 | |||||||||
| Patents | 81,166 | 19,049 | 62,117 | |||||||||
| Computer equipment | 36,379 | 24,549 | 11,830 | |||||||||
| Office furniture | 4,720 | 2,008 | 2,712 | |||||||||
| 1,176,774 | 535,596 | 641,178 | ||||||||||
6. INCOME TAXES
The reconciliation of the income tax provision, calculated using the combined Canadian federal and provincial statutory income tax rate with the income tax provision in the consolidated financial statements, is as follows:
October 31, 2007 $ | October 31, 2006 $ | |||||||
Income tax provision at combined Canadian federal and provincial statutory rate of 36.12% (2006 - 36.12%) | (566,903 | ) | (296,050 | ) | ||||
| Increase due to: | ||||||||
| Change in statutory tax rate | - | 24,543 | ||||||
| Other | (25,219 | ) | 5,123 | |||||
| (592,122 | ) | (266,384 | ) | |||||
Conti nued…
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 7 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
6. INCOME TAXES (Continued)
| Significant components of the Company’s future income tax assets and liabilities are as follows: |
October 31, 2007 $ | January 31, 2007 $ | |||||||
Future income tax assets: Losses carried forward | 1,172,948 | 411,800 | ||||||
Future income tax liabilities: Equipment and patents | (85,725 | ) | (75,842 | ) | ||||
| Future tax asset | 1,087,223 | 335,958 | ||||||
7. OBLIGATIONS UNDER CAPITAL LEASE
The Company has entered into a leasing agreement for equipment dated March 15, 2005. The lease bears an effective rate of interest of 13.8% per annum, requires monthly payments of $5,893 Canadian dollars, and is secured by the equipment. The remaining amount of $18,542 is due within one year.
Continued…
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 8 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
8. SHAREHOLDERS’ EQUITY
Continuity of Shareholders’ Equity – KMA Global Solutions Inc. (“KMA Canada”)
prior to reverse merger
Common Shares $ | Par Value $ | Additional Paid-in Capital $ | Comp. Income $ | Accumulated Earnings $ | ||||||||||||||||
| January 31, 2006 | 32,136,800 | - | 461,901 | 43,547 | 82,982 | |||||||||||||||
| Issuance of shares for consulting services | 408,000 | - | 52,173 | - | - | |||||||||||||||
| Issuance of shares for finder’s fee | 1,700,000 | - | 217,391 | - | - | |||||||||||||||
| March 15, 2006 | 34,244,800 | - | 731,465 | 43,547 | 82,982 | |||||||||||||||
Continuity of Shareholders’ Equity - KMA Global Solutions International, Inc.
Common Shares $ | Par Value $ | Additional Paid-in Capital $ | Comp. Income $ | Accumulated Earnings/ (losses) $ | ||||||||||||||||
| January 31, 2006 | 4,920,250 | 4,920 | 166,421 | - | (171,341 | ) | ||||||||||||||
| Retired to treasury | (4,225,427 | ) | (4,225 | ) | 4,225 | - | - | |||||||||||||
| 17:1 share split | 11,117,168 | 11,117 | (11,117 | ) | - | - | ||||||||||||||
| Issuance of shares in reverse merger | 34,244,800 | 34,245 | 525,878 | 43,547 | 82,982 | |||||||||||||||
| Accumulated deficit acquired in reverse merger | - | - | - | - | 171,341 | |||||||||||||||
| Retirement of shares | (5,344,800 | ) | (5,345 | ) | 5,345 | - | - | |||||||||||||
| Issuance of replacement shares | 1,179,000 | 1,179 | (1,179 | ) | - | - | ||||||||||||||
| Currency translation adjustment | - | - | - | 4,601 | - | |||||||||||||||
| Issuance of shares for investor relations services | 25,000 | 25 | 11,025 | - | - | |||||||||||||||
| Issuance of shares for consulting services | 150,000 | 150 | 28,500 | - | - | |||||||||||||||
| Net loss January 31, 2007 | - | - | - | - | (736,403 | ) | ||||||||||||||
| January 31, 2007 | 42,065,991 | 42,066 | 729,098 | 48,148 | (653,421 | ) | ||||||||||||||
Continued…
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 9 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
8. SHAREHOLDERS’ EQUITY (Continued)
Continuity of Shareholders’ Equity - KMA Global Solutions International, Inc.
Common Shares $ | Par Value $ | Additional Paid-in Capital $ | Subscriptions Receivable $ | Comp. Income $ | Accumulated losses $ | |||||||||||||||||||
| Issuance of shares for financing, net | 10,000,000 | 10,000 | 965,000 | - | 2,883 | - | ||||||||||||||||||
| Warrant valuation allocation | - | - | (346,000 | ) | - | - | - | |||||||||||||||||
| Issuance of shares for agent fees | 1,000,000 | 1,000 | - | - | - | - | ||||||||||||||||||
| Issuance of agent warrants on financing | - | - | (90,000 | ) | - | - | - | |||||||||||||||||
| Issuance of shares for consulting services | 1,867,328 | 1,867 | 337,133 | - | - | - | ||||||||||||||||||
| Warrants exercised | 3,850,000 | 3,850 | 746,900 | - | - | - | ||||||||||||||||||
| Warrant valuation allocation | - | - | 188,610 | - | - | - | ||||||||||||||||||
| Warrants exercised | 7,150,000 | 7,150 | 1,387,150 | (930,000 | ) | - | - | |||||||||||||||||
| Warrant valuation allocation | - | - | 247,390 | - | - | - | ||||||||||||||||||
| Issuance of shares | 8,000,000 | 8,000 | 1,942,000 | (1,800,000 | ) | - | - | |||||||||||||||||
| Issuance of shares for agent fees | 1,400,000 | 1,400 | - | - | - | - | ||||||||||||||||||
| Warrant valuation allocation | - | - | (1,149,000 | ) | - | - | - | |||||||||||||||||
| Currency translation adjustment | - | - | - | - | 500,638 | - | ||||||||||||||||||
| Net loss October 31, 2007 | - | - | - | - | - | (977,378 | ) | |||||||||||||||||
| 75,333,319 | 75,333 | 4,958,281 | (2,730,000 | ) | 551,669 | (1,630,799 | ) | |||||||||||||||||
| During the period ended October 31, 2007, the following transactions occurred: |
| (a) | On February 15, 2006, KMA Canada issued 120,000 common shares (408,000 post split reorganization common shares) with a deemed value of Cdn $0.50 per share in exchange for services rendered by a group of consultants of KMA Canada. |
| (b) | On February 28, 2006, KMA Canada issued 500,000 common shares (1,700,000 post split reorganization common shares) with a deemed value of Cdn $0.50 per share as an advance on finders fees in relation to a planned equity financing. The advance was reflected as a deferred cost until such time as the planned equity financing is completed. During the nine month period ended October 31, 2007, $130,000 was recognized as a cost of issue. |
| (c) | On March 1, 2006, pursuant to a resolution of the Board of Directors, the issued and outstanding common shares of KMA Canada were subject to a reverse stock split at a ratio of five (5) shares to one (1), reducing the number of shares outstanding from 10,072,000 to 2,014,400 (34,244,800 post split reorganization common shares). |
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 10 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
8. SHAREHOLDERS’ EQUITY (Continued)
| (d) | KMA Canada and KMA International, a corporation organized under the laws of the State of Nevada entered into an acquisition agreement dated March 15, 2006. Pursuant to the terms of the agreement and upon the completion of satisfactory due diligence and receipt of applicable regulatory and shareholder approvals, KMA International acquired 100% of the outstanding shares of the capital stock of KMA Canada in exchange for 34,244,800 post split reorganization common shares. (34,244,800 post split reorganization shares being the aggregate of 28,900,000 owned by KMA LLC and 5,344,800 owned by KMA Canada shareholders.) Pursuant to an agreement between the KMA Canada shareholders and KMA International, the shares in KMA International owned by the KMA Canada shareholders were retired to treasury and cancelled and the KMA Canada shareholders received 1,179,000 post split reorganization shares. |
KMA International is the surviving corporation as a result of a merger transaction with Espo’s, Ltd., a corporation formed under the laws of the State of New York. The merger occurred March 15, 2006. At the time of the merger transaction, Espo’s, Ltd. was a non-SEC reporting corporation. As a result of the merger and acquisition transactions the former shareholders of Espo’s, Ltd. hold 11,811,991 or 28.2% of the post split reorganization common shares of KMA International. Pursuant to the merger agreement, the remaining 71,832,259 post split reorganization shares (4,225,427 pre split reorganization shares), held by individuals that were former shareholders of Espo’s, were retired to treasury effective March 15, 2006 and cancelled on May 19, 2006. |
| The terms of the merger transaction and the acquisition agreement provided that the mind and management of KMA International would be replaced by the officers and directors of KMA Canada and having had no significant business activity for a number of years, upon the effective time of the acquisition, KMA International adopted the business plan of KMA Canada. The transaction was therefore accounted for as a reverse acquisition with KMA Canada as the acquiring party and KMA International as the acquired party, in substance, a reorganization of KMA Canada. Generally accepted accounting principles in the United States of America require, among other considerations, that a company whose stockholders retain a majority interest in a business combination be treated as the acquirer for accounting purposes. Accordingly, the results of operations for the periods prior to the combination are those of KMA Canada. |
| (e) | On June 16, 2006, KMA International issued 25,000 common shares with a deemed value of Cdn $0.50 per share in exchange for investor relation services provided by a consulting company for KMA International. |
| (f) | On October 20, 2006, KMA International issued 150,000 common shares with a deemed value of USD $0.19 per share in exchange for consulting services. |
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 11 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
8. SHAREHOLDERS’ EQUITY (Continued)
| (g) | On December 12, 2006, KMA International agreed to issue 360,000 common shares at USD $0.15 per share with piggyback registration rights in exchange for consulting services. |
| (h) | On December 12, 2006, KMA International agreed to issue 300,000 common shares at USD $0.15 per share with piggyback registration rights in exchange for consulting services. |
| (i) | On January 19, 2007, KMA International agreed to issue 1,000,000 common shares at $0.20 per share with piggyback registration rights in exchange for consulting services. |
| (j) | On January 31, 2007, KMA International issued 207,328 common shares for consulting services. The shares were valued as follows; 71,429 common shares at $0.14 per share, 59,701 common shares at $0.17 per share, 57,471 common shares at $0.17 per share and 18,727 common shares at $0.53 per share. |
| (k) | On January 31, 2007, a group of investors agreed to purchase 10,000,000 shares of the company’s common stock at a price of USD $0.10 per share. The total purchase price of $1,000,000 was paid to KMA International as follows: (i) $500,000 payable upon closing and (ii) $500,000 payable within 30 days of the effective date of the Registration Statement. The agreement includes 10,000,000 Warrants issued to the investors, which shall be exercisable only within 2 years of the effective date of the Registration Statement, at an exercise price of $0.20 per share. Upon closing, the Agent was paid a fee of 10% of the gross value received or 1,000,000 common shares, together with Warrants exercisable within 2 years of the effective date of the Registration Statement, at an exercise price of $0.20 per share. The shares of common stock were registered on March 12, 2007. |
| (l) | During the nine month period ended October 31, 2007, KMA International issued 11,000,000 common shares pursuant to the exercise of warrants at an exercise price of $0.20 per share. The company received $1,270,000 and $930,000 has been recorded as a subscription receivable at October 31, 2007. |
| (m) | On September 21, 2007, KMA International agreed to issue 8,000,000 shares of common stock at $0.25 per share in connection with a private offering. The purchase price of the shares is $2,000,000 which will be paid as follows: (i) $200,000 shall be due upon the filing of the registration statement; (ii) a payment of $600,000 shall be due 60 days after the effective date of the registration statement; (iii) an additional payment of $600,000 shall be due 90 days after the effective date of the registration statement; and (iv) a final payment is due 120 days after the effective date of the registration statement. As of October 31,2007, the company received $200,000 and recorded $1,800,000 as a subscription receivable. The purchasers of the shares also will receive warrants to acquire an additional 8,000,000 shares of common stock at an exercise price of $0.30 per share for a period of 2 years. The agent for the investors received a fee of 1,400,000 shares of common stock at $0.43 per share and warrants to acquire 1,400,000 of common stock at an exercise price of $0.30 per share for a period of 2 years. |
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 12 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
9. WARRANTS
Warrant transactions during the periods were as follows:
October 31, 2007 | October 31, 2006 | |||||||||||||||
| Number of warrants | Weighted Average Exercise Price $ | Number of warrants | Weighted Average Exercise Price $ | |||||||||||||
| Balance, January 31, 2007 | - | - | - | - | ||||||||||||
| Granted, private placement | 10,000,000 | 0.20 | - | - | ||||||||||||
| Granted, agent warrants as share issue costs | 1,000,000 | 0.20 | - | - | ||||||||||||
| Warrants exercised | (11,000,000 | ) | 0.20 | - | - | |||||||||||
| Granted, private placement | 8,000,000 | 0.30 | - | - | ||||||||||||
| Granted, agent warrants as share issue costs | 1,400,000 | 0.30 | - | - | ||||||||||||
| Balance, end of period | 9,400,000 | 0.30 | - | - | ||||||||||||
At October 31, 2007, outstanding and exercisable warrants to acquire common shares of the Company were as follows:
Number of Warrants | Exercise Price | Expiry Date | Fair Value |
| $ | $ | ||
| 9,400,000 | 0.30 | September 21, 2009 | 1,149,000 |
The fair value of these warrants was estimated using the Black-Scholes option model with the following assumptions: dividend yield 0%, expected volatility of 100%, risk-free interest rate of 4.1% and an expected life of two years. The fair value assigned to these warrants during the period was $1,149,000.
As at October 31, 2007, the intrinsic value of the warrants was $0.04 per share.
| KMA GLOBAL SOLUTIONS INTERNATIONAL, INC. | Page 13 |
| NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | |
| OCTOBER 31, 2007 | |
| (unaudited) | |
| (expressed in U.S. dollars) |
10. COMMITMENTS
| (a) | The Company is committed to minimum annual rentals under a long-term lease for premises which expires October 31, 2008. Minimum rental commitments remaining under this lease approximate $122,049 which are due within one year. |
| The Company is also responsible for common area costs. |
| (b) | The Company has entered into various vehicle leases and has accounted for them as operating leases. Obligations due approximate $57,648 including $44,259 within one year and $13,389 due in 2009. |
| (c) | The Company is committed to minimum annual rentals under a long-term lease for premises which expires March 14, 2010. Minimum rental commitments remaining under this lease approximate $231,759 including $86,909 due within one year, $86,909 due in 2009 and $57,941 due in 2010. |
11. FINANCIAL INSTRUMENTS
Fair Value
Generally accepted accounting principles in the United States require that the Company disclose information about the fair value of its financial assets and liabilities. Fair value estimates are made at the balance sheet date, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties in significant matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
The carrying amounts for cash, accounts receivable and accounts payable and accrued liabilities on the balance sheet approximate fair value because of the limited term of these instruments.
Foreign Exchange Risk
Certain of the Company's sales and expenses are incurred in Canadian and Hong Kong currency and are therefore subject to gains and losses due to fluctuations in that currency.
Credit Risk
The Company is exposed, in its normal course of business, to credit risk from its customers. No one single party accounts for a significant balance of accounts receivable.
Interest Rate Risk
The Company has interest-bearing borrowings for which general rate fluctuations apply.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Unless otherwise indicated or the context otherwise requires, all references to the "Company," "we," "us" or "our" and similar terms refer to KMA Global Solutions International, Inc. and its subsidiaries.
The information contained in this report on Form 10-QSB and in other public statements by the Company and Company officers or directors includes or may contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "project," "estimate," "anticipate," or "believe" or the negative thereof or any variation thereon or similar terminology.
Such forward-looking statements are made based on management's beliefs, as well as assumptions made by, and information currently available to, management pursuant to the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Such statements are not guarantees of future performance or events and are subject to known and unknown risks and uncertainties that could cause the Company's actual results, events or financial positions to differ materially from those included within the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. Except as required by law, we undertake no obligation to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made, changes in internal estimates or expectations, or the occurrence of unanticipated events.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis is intended to help the reader understand our results of operations and financial condition. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto. The revenue and operating income (loss) amounts in this Management's Discussion and Analysis are presented in accordance with United States generally accepted accounting principles.
OVERVIEW
KMA Global Solutions International, Inc., which was formed on March 9, 2006 under the laws of the State of Nevada, through our operating subsidiary, KMA Global Solutions Inc. ("KMA (Canada)"), is an innovator and internationally recognized leader in the Electronic Article Surveillance ("EAS") market. We serve a diverse and geographically dispersed customer base consisting predominantly of retailer suppliers, branded apparel, multimedia, pharmaceutical companies and contract manufacturers, providing low cost and customized solutions to protect against retail merchandise theft. The retail industry generally refers to these losses as “inventory shrinkage” or “shrink”. On average, shrink represents nearly 2% of a retailer's revenue and can often be much more. Worldwide, retail losses due to shrinkage are a problem now exceeding $98 Billion USD. We have developed a suite of proprietary EAS products to address the specific needs of a changing marketplace, using patented processes to manufacture its tags at high speeds and deliver its products on a just in time basis. Our EAS solutions are designed to fit the needs of major suppliers to multinational retailers in the apparel, multimedia, sporting goods, food and over-the-counter (OTC) pharmaceutical and health supplement industries.
The Company is engaged in the supply of EAS solutions (including the Company's products, NEXTag™ and DUAL Tag™), with a focusing on customized solutions in the apparel, multi media, sporting goods, food and pharmaceutical industries. We will grow by executing a strategy as a global operating company, while maintaining a continued focus on providing customers with innovative products and solutions, outstanding service, consistent quality, on-time delivery and competitively priced products. Together with continuing investments in new product development, state-of-the-art manufacturing equipment, and innovative sales and marketing initiatives, management believes the Company is well-positioned to compete successfully as a provider of EAS tagging solutions to the retail apparel, multimedia and pharmaceutical industries, worldwide. The capital needed to fund our growth has been generated to date through investment by the founding shareholders and through reinvestment of profits and private placements of securities.
The use of EAS systems in the retail environment continues to generate significant cost savings for retailers. Our management believes that the extremely competitive retail environment, and the Company's low cost solutions relative to other EAS suppliers, places us in a favorable position for the future. The addition of new high-speed high volume equipment is expected to drive costs of production lower and may enable the Company to capture a larger share of the EAS market. With the completion of the implementation of new production equipment, we plan to open production facilities in high-demand locations, thus shortening supply lines on raw materials, and reducing operating costs through efficiencies, and shipping costs for finished goods. We anticipate increased demand for our products in international as well as North American markets. Management's ongoing strategy includes implementing process improvements to reduce costs in all of our manufacturing facilities, re-deploying assets to balance production capacity with customer demand, and seeking to expand our production in new and emerging markets to minimize labor costs and maximize operating performance efficiencies.
The Company has begun to execute its expansion plan, which includes relocation of our existing manufacturing capacity from our Canadian facilities, primarily to facilities in Hong Kong, India and Mexico, expanding our sales operation to include Europe and Asia, as well as relocating our headquarters from Ontario, Canada to a suitably located US city.
RESULTS OF OPERATIONS
The Company’s results of operations for the three and nine months ended October 31, 2007 and 2006 in dollars and as a percent of sales, are presented below:
Fiscal Years | ||||||||||||||||||||||||||||||||
Three Months ended October 31 | Nine Months ended October 31 | |||||||||||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||||||||||||||||||
Sales | 1,377,478 | 100 | % | 1,688,891 | 100 | % | 3,893,884 | 100 | % | 4,704,503 | 100 | % | ||||||||||||||||||||
| Cost of Sales | 1,018,842 | 74.0 | % | 1,399,479 | 82.9 | % | 2,910,592 | 74.7 | 3,835,311 | 81.5 | % | |||||||||||||||||||||
| Gross Profit | 358,636 | 26.0 | % | 289,412 | 17.1 | % | 983,292 | 25.3 | 869,192 | 18.5 | % | |||||||||||||||||||||
Selling General & Administrative Expenses | 1,044,383 | 75.8 | % | 478,703 | 28.3 | % | 2,552,792 | 65.6 | % | 1,688,822 | 35.9 | % | ||||||||||||||||||||
Income Before Income Taxes | (685,747 | ) | (49.8 | %) | (189,291 | ) | (11.2 | )% | (1,569,500 | ) | (40.3 | %) | (819,630 | ) | (17.4 | %) | ||||||||||||||||
| Net Income | (417,813 | ) | (30.3 | %) | (114,918 | ) | (6.8 | %) | (977,378 | ) | (25.1 | %) | (553,246 | ) | (11.8 | %) | ||||||||||||||||
Sales
The Company's sales decreased $311,413 or 18.4% to $1,377,478, for the three months ended October 31, 2007, compared to $1,688,891 for the three months ended October 31, 2006 and decreased $810,619 to $3,893,884 for the nine months ended October 31, 2007 compared to $4,704,503 for the nine months ended October 31, 2006, as a result the cancellation of a major retail program that had contributed to a strong quarter and year to date result last year in spite of winning the support of a number of new accounts and expanding our programs with some others. Our ability to realize the potential from those gains were hampered by delays in the receipt of actual orders and delays in the implementation of new production lines. Although sales results are lower than anticipated, the trend for the final quarter and the new fiscal year, appear to be significantly stronger. Therefore, we expect positive sales growth to return.
During the past fiscal year, we introduced a number of new feature sets to the NEXTag™ product line, including the use of new materials, greater printing capability, and precisely matching material and ink colors in order to faithfully recreate brand images and logos, all of which has been well received. We believe these added value items will eventually permit us to secure additional business, particularly from international accounts, as more and more specialty retailers and design groups throughout the world have demonstrated interest in initiating EAS source tagging programs using custom branded solutions.
The planned re-positioning of our production and operations, which will allow us to move further forward with larger apparel programs, has moved more slowly than expected; however, as we see various aspects of our plans realized, it is apparent that these steps will gradually help to deliver increased sales revenue. A major part of our strategic plan consists of placing manufacturing facilities and operations in the countries and regions generating product demand, increasing efficiencies and permitting a reduction in head office costs.
Although largely driven by North American retail accounts to date, a significant portion of our current NEXTag™ activity involves offshore fulfillment, as the majority of apparel manufacturing now takes place in overseas markets. In an effort to better serve these markets, we have, for a number of years now, maintained a local agency relationship in both Hong Kong and in Taiwan, while manufacturing the majority of its products in Canada. We believe that providing local representation has been important in helping to fuel growth in this segment, and as every indication suggests that this sector will continue to expand, earlier this year, we secured appropriate space to establish a manufacturing facility in Hong Kong, and have hired local sales and operations staff in order to better serve this important market.
Once the new Hong Kong facility is fully operational, we plan to turn our attention to another key apparel market by establishing a similar production facility in one of the principal garment manufacturing centers in India. Our plans have been modified so that we now plan to secure a site and bring the new Indian facility on line during the spring of 2008. When fully operational, these two facilities will allow us to benefit from a number of economies, by not only physically locating production in the geographical centers where most of our finished goods are used, but will permit significant savings in raw materials, freight and labor costs, by positioning our NEXTag product much more competitively. In addition, we plan to add local sales representation in these international locations to directly interact with the many apparel factories located in these regions, which will improve our ability to take advantage of opportunities as they become available.
Our DualTag™ involves supplying the only patented, dual-technology, label in the industry, containing the base elements of the two most popular EAS technologies in use today. By providing both technologies on a single adhesive label or non-adhesive, insertable card, we enable manufacturers of a variety of consumer packaged goods, to tag their entire production with a single device, permitting them to maintain a single inventory of each product, regardless of what EAS technology is in use at the store to which the product unit is eventually shipped. Without DualTag, manufacturers traditionally find it necessary to maintain multiple inventories of their products, differing only by label technology in order to comply with their retail customers’ requirements. We have also completed the necessary advance planning that will allow the incorporation of RFID into the DualTag product as specialty retailers begin to incorporate item-level RFID into their operations and begin to demand its inclusion in their suppliers products.
Introduced earlier this year, our insertable DualTag, suitable for such products as CD and DVD discs, or boxed products such as pharmaceuticals has received an enthusiastic initial response from a number of accounts, with a number of new opportunities pending. Although we anticipated bringing our new DualTag production equipment fully online earlier this year, we continue to be hampered by a number of supplier delays, which prevented us from benefiting from the increased capacity we anticipated, thereby affecting our ability to take advantage of certain DualTag opportunities that became available to us. Although this resulted in lost sales during the period, we do not expect it to negatively impact our relationship with the involved accounts and believe that we will benefit from future orders from these same clients.
Gross Profit
Gross profit was $358,636 or 26.0% of sales for the three months ended October 31, 2007, compared with $289,412 or 17.1% for the three months ended October 31, 2006, and $983,292 or 25.3% for the nine months ended October 31, 2007, as compared with $869,192 or 18.5% in the nine months ended October 31, 2006. Despite experiencing lower sales revenues, the gross profit for the three months and nine months ended October 31, 2007, as compared to the previous year, was considerably higher both in dollars and as a percentage of sales, primarily due to shifting production of our DualTag from an outsource to an in-house production line, realizing the benefits derived from a number of improvements to our production methods, an aggressive focus on raw material sourcing, and reduction in waste as a result of an increased focus on product quality.
Management's ongoing strategy to achieve and improve profitability continues to include implementing process and purchasing improvements to reduce the fundamental costs in manufacturing and transferring the majority of existing manufacturing capacity from our Canadian operations primarily to Hong Kong and other areas in order to minimize costs associated with labor, raw materials, and freight.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses were $1,044,383 or 75.8% of sales for the three months ended October 31, 2007, compared with $478,703 or 28.3% of sales for the three months ended October 31, 2006, and $2,552,792 or 65.6% for the nine months ended October 31, 2007, as compared to $1,688,822 or 35.9% for the nine months ended October 31, 2006.
The increase in the ratio of SG&A expenses to sales is primarily due to: (i) an unfavorable shift in exchange rates as the Canadian dollar rose strongly against its US counterpart, resulting in a significant foreign exchange loss; (ii) the impact of lower sales revenues and its effect on SG&A as a percentage of sales; and (iii) an increase in wages and benefits primarily as a result of the addition of experienced management, the full cost of which is included in the nine months ended October 31, 2007, versus only a portion of which was included in the period ended October 31, 2006. Furthermore, this increase was also due to the company implementing a full group benefits program earlier this year, in order to both attract and retain quality staff and management, and occupancy costs associated with our new Hong Kong facility. These higher expenses were offset to a degree through: (i) lower Production and warehouse expense; and (ii) reduced freight costs.
Operating Income (Loss)
Operating loss before taxes was $685,747 or 49.8% for the three months ended October 31, 2007, as compared with an operating loss before taxes of $189,291 or 11.2% for the three months ended October 31, 2006, and $1,569,500 or 40.3% for the nine months ended October 31, 2007 as compared to an operating loss of $819,630 or 17.4% for the nine months ended October 31, 2006.
Taxes on Income
The Company experienced an operating loss and therefore recognized a future tax benefit of $267,934 for the three months ended October 31, 2007 versus a future tax benefit of $74,373 for the three months ended October 31, 2006, and for the nine months ended October 31, 2007, experienced a future tax benefit of $592,122 as compared to a future tax benefit of $266,384 for the nine months ended October 31, 2006. The effective income tax rates of the future tax benefit for the three and nine months ended October 31, 2007 was 39% and 38% respectively. For the three and nine months ended October 31, 2006, the future tax benefit was 39% and 33%. The statutory income tax rate going forward for the Company, with all of its operating activities taxed in Canada, is approximately 36% as a result of applicable combined federal and provincial tax rates.
Liquidity and Capital Resources
The table below represents summary cash flow information for the nine months ended October 31, 2007, and 2006.
Nine Months ended October 31, | ||||||||
2007 | 2006 | |||||||
| Net cash from operating activities | $ | (1,421,425 | ) | $ | (302,834 | ) | ||
| Net cash from investing activities | $ | (452,615 | ) | $ | (35,605 | ) | ||
| Net cash from financing activities | $ | 1,783,851 | 243,619 | |||||
| Effect of currency translation adjustments | $ | 134,408 | $ | (5,501 | ) | |||
| Total change in cash and cash equivalents | $ | 44,219 | $ | (100,321 | ) | |||
Overview. The Company had, as of the end of October 31, 2007, current liabilities of $1,100,486 and current assets of $943,352. For the nine months ended October 31, 2007, cash flow was positive and management believes that we will generate sufficient cash from its operating activities for the foreseeable future, supplemented by the contracted infusion of capital, to fund its working capital needs, strengthen its balance sheet and support its growth strategy of expanding its geographic distribution and product offerings.
Operating Activities. Cash flow from operating activities for the nine months ended October 31, 2007 resulted in a negative cash flow of $1,421,425, as compared to the nine-month period ended October 31, 2006, which saw a negative cash flow of $302,834. For the nine months ended October 31, 2007, the net loss, as adjusted for amortization, shares issued for services provided and future income taxes, resulted in a negative cash flow of $1,458,052 and with changes in non-cash working capital of $36,627 our cash flows from operating activities decreased by $1,421,425. For the nine months ended October 31, 2006, the net income, as adjusted for amortization and future income taxes, resulted in a negative cash flow of $659,817, together with positive changes in non-cash working capital of $356,983, resulted in a negative cash flow from operating activities of $302,834. The variances in cash flow from operations between the nine months ended October 31, 2007 and October 31, 2006 are primarily the result of a net loss, a decrease in future income taxes and a decrease in accounts payable, which was offset to some degree by a decrease in accounts receivable and decrease in prepaid expenses.
Financing Activities. The Company's cash flow from financing activities for the nine months ended October 31, 2007 amounted to $1,783,851, as a result of an issuance of capital stock in the amount of $700,000, the exercise of warrants in the amount of $1,270,000, a decrease in capital lease obligations of $44,719 and a decrease in advances by shareholders of $141,430. By comparison, in the nine months ended October 31, 2006 the Company experienced a decrease in capital lease obligations of $38,422, an increase in advances from shareholders of $140,461, and an increase in a promissory note amounting to $141,580 resulting in a net cash flow from financing activities of $243,619.
Investing Activities. In the nine months ended October 31, 2007, the Company experienced an decrease in cash flow from investing activities of $452,615. This was due to an increase in purchase of equipment and patents of $242,372 and an increase in deposits on equipment and patents of $210,243. By comparison in the nine months ended October 31, 2006, the Company experienced an decrease in cash flow from investing activities of $35,605, in large part due to an increase in purchase of equipment and patents of $232,359, a decrease in deposits on equipment and patents that amounted to $145,404, and a decrease in advances to shareholders of $51,350.
Off-Balance Sheet Arrangements. The Company has no material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have or are reasonably likely to have a material current or future impact on its financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses.
Market Risk. In the normal course of its business, the Company is exposed to foreign currency exchange rate and interest rate risks that could impact its results of operations.
We sell our products worldwide, and a substantial portion of our net sales, cost of sales and operating expenses are denominated in foreign currencies. This exposes the Company to risks associated with changes in foreign currency exchange rates that can adversely impact revenues, net income and cash flow. In addition, the Company is potentially subject to concentrations of credit risk, principally in accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Our major customers are retailers, branded apparel companies and contract manufacturers that have historically paid their balances with the Company.
There were no significant changes in the Company's exposure to market risk in the past three years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management has identified the following policies and estimates as critical to the Company's business operations and the understanding of the Company's results of operations. Note that the preparation of this Form 10-QSB requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company's financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material.
Revenue Recognition
SAB No. 104 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for a reporting period could be adversely affected.
Sales Returns and Allowances
Management must make estimates of potential future product returns, billing adjustments and allowances related to current period product revenues. In establishing a provision for sales returns and allowances, management relies principally on the Company's history of product return rates which is regularly analyzed. Management also considers (1) current economic trends, (2) changes in customer demand for the Company's products and (3) acceptance of the Company's products in the marketplace when evaluating the adequacy of the Company's provision for sales returns and allowances. Historically, the Company has not experienced a significant change in its product return rates resulting from these factors. For the nine months ended October 31, 2007 and 2006, the provision for sales returns and allowances accounted for as a reduction to gross sales was not material.
Allowance for Doubtful Accounts
Management makes judgments, based on its established aging policy, historical experience and future expectations, as to the ability to collect the Company's accounts receivable. An allowance for doubtful accounts has been established. The allowance for doubtful accounts is used to reduce gross trade receivables to their estimated net realizable value. When evaluating the adequacy of the allowance for doubtful accounts, management analyzes customer-specific allowances, amounts based upon an aging schedule, historical bad debt experience, customer concentrations, customer creditworthiness and current trends. The Company's accounts receivable at October 31, 2007 was $184,844, net of an allowance of $0.
Inventories
Inventories are stated at the lower of cost or market value, and are categorized as raw materials, work-in-process or finished goods. The value of inventories determined using the first-in, first-out method at October 31, 2007 was $265,048 for finished goods and $200,518 for raw materials.
On an ongoing basis, we evaluate the composition of its inventories and the adequacy of our allowance for slow-turning and obsolete products. The market value of aged inventory is determined based on historical sales trends, current market conditions, changes in customer demand, acceptance of the Company's products, and current sales activities for this type of inventory.
Goodwill
The Company did not attribute any value to goodwill as at October 31, 2007.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements, management is required to estimate the income taxes in each jurisdiction in which the Company operates. This process involves estimating the actual current tax liabilities, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. Management must then assess the likelihood that the deferred tax assets will be recovered and, to the extent that management believes that recovery is not more than likely, the Company establishes a valuation allowance. If a valuation allowance is established or increased during any period, the Company records this amount as an expense within the tax provision in the consolidated statement of income. Significant management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recognized against net deferred tax assets. Valuation allowances are based on management's estimates of the taxable income in the jurisdictions in which the Company operates and the period over which the deferred tax assets will be recoverable.
Item 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The management of the Company, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are not effective in providing reasonable assurance that all material information relating to the Company that is required to be included in the reports that the Company files with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Based upon its evaluation, Management has revised and enhanced our accounting review and scheduling procedures as well as instituted new training and other support measures for its accounting personnel to ensure that material information relating to periodic Exchange Act reports, including information from our consolidated subsidiaries, will be made known to them by the staff and officers of those entities, particularly during the periods in which the preparation of our Quarterly Reports shall occur.
Changes in Internal Controls
With the exception of our revised accounting review and scheduling procedures, which are intended to eliminate any delays in the filing of our periodic financial reports, there have been no changes in our internal controls over financial reporting or in other factors identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Accordingly, the only corrective actions required or undertaken were for new and enhanced procedures for the review and filing of our periodic financial reports.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is unaware of any pending legal proceedings against it or any of its directors, officers, affiliates or beneficial owners of more than five percent (5%) of any class of voting securities.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company’s 2007 Annual Meeting of Stockholders (the “Annual Meeting”) was held on December 5, 2007. Represented at the Annual Meeting, either in person or by proxy, were 38,078,706 voting shares. The following actions were taken by a vote of the Company’s stockholders at the Annual Meeting:
| 1. | Messrs. Jeffrey D. Reid, Daniel K. Foster and Michael McBride were elected to serve as members of the Company’s Board of Directors; each receiving 38,030,411 votes in favor of election and 48,295 votes withheld. |
| 2. | The appointment of McGovern, Hurley, Cunningham, LLP to serve as the Company’s independent auditors for its fiscal year ending January 31, 2008 was ratified with 38,078,706 votes were cast for the ratification; 0 votes were cast against the ratification; and there were 0 abstentions. There were no broker non-votes. |
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
Exhibit No. | Exhibit Description |
31# | Certifications of Chief Executive Officer and Chief Financial Officer under Exchange Act Rule 13a-14(a) |
32# | Certifications of Chief Executive Officer and Chief Financial Officer under 18 U.S.C. 1350. |
# | Filed herewith. |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KMA GLOBAL SOLUTIONS INTERNATIONAL, INC.
| December 18, 2007 | By: /s/ Jeffrey D. Reid |
| Name: Jeffrey D. Reid |
| Title: Chief Executive Officer and President |
| (Principal Executive Officer and Principal Financial Officer) |