UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-50471
General Red International, Inc.
(formerly known as "Paradise Tan, Inc.")
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction of incorporation or organization)
Suite 1501, Plaza B, Jianwai SOHU
No. 39, Eastern Three Ring Middle Road
Chaoyang District, Beijing, China
Postal Code: 100020
(Address of principal executive offices, including zip code.)
86-10-58699681
(telephone number, including area code)
Copy of Communication to:
Bernard & Yam, LLP
Attention: Man Yam, Esq.
401 Broadway Suite 1708
New York, NY 10013
Phone: 212-219-7783
Fax: 212-219-3604
Check whether the issuer (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 last 90 days. YES [ ] NO [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer, "accelerated filer,"
"non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
1
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Number of shares of common stock outstanding as of September 30, 2006:
23,384,114
Number of shares of preferred stock outstanding as of September 30, 2006:
135,998
On this Form 10Q quarterly report, the registrant, General Red International,
Inc (formerly "Paradise Tan, Inc."), is hereinafter referred as "we", or
"Company", or "Paradise Tan".
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL RED INTERNATIONAL, INC.
FORMERLY "PARADISE TAN, INC."
Consolidated Balance Sheet
At September 30, 2006
================================================================================
ASSETS
- ------
CURRENT ASSETS
- --------------
Cash (unrestricted) $ (13,777)
Cash (restricted) 475,717
Accounts receivable --
Inventory 10,052
-----------
TOTAL CURRENT ASSETS 471,992
FIXED ASSETS
- ------------
Tanning equipment 142,913
Transportation equipment 23,369
Accumulated depreciation (96,381)
-----------
NET FIXED ASSETS 69,901
OTHER ASSETS
- ------------
Deposits 40,803
-----------
TOTAL OTHER ASSETS 40,803
-----------
TOTAL ASSETS $ 582,696
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $ 197,276
Accounts payable - related parties 630
Excess of outstanding checks over bank balance --
Current portion of notes payable --
Current portion of capitalized lease obligation 1,098,025
-----------
TOTAL CURRENT LIABILITIES 1,295,931
-----------
LONG-TERM LIABILITIES
- ---------------------
Accrued interest on preferred stock 516,793
-----------
TOTAL LONG-TERM LIABILITIES 516,793
-----------
TOTAL LIABILITIES 1,812,724
-----------
STOCKHOLDERS' DEFICIT
- ---------------------
Common stock (100,000,000 shares authorized, 23,384,114
shares issued and outstanding, par value $.01) 233,841
Preferred stock 8% cumulative (1,000,000 shares authorized,
135,998 shares issued and outstanding, par value $10) 1,359,980
Additional paid-in capital 3,350,493
Retained deficit (6,174,342)
-----------
TOTAL STOCKHOLDERS' DEFICIT (1,230,028)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 582,696
===========
See notes to financial statements.
3
GENERAL RED INTERNATIONAL, INC.
FORMERLY "PARADISE TAN, INC."
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2006 and 2005
================================================================================
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES AND RELATED COSTS
- --------------------------
Tanning services from company operated $ 89,002 $ 104,631 $ 262,710 $ 662,743
salons
Product sales from company operated salons 38,004 101,113 111,136 144,123
----------- ----------- ----------- -----------
NET REVENUES 127,006 205,744 373,846 806,866
----------- ----------- ----------- -----------
Cost of product sales from company operated
salons -- -- -- (52,583)
----------- ----------- ----------- -----------
GROSS PROFIT 127,006 205,744 373,846 754,283
----------- ----------- ----------- -----------
EXPENSES:
Salaries and related taxes $ 44,392 $ 83,577 $ 131,610 $ 299,308
Consulting fees -- 10,000 -- 10,000
Depreciation 6,473 66,500 19,419 199,500
Rent 33,616 63,942 100,848 175,516
Other selling, general and administrative 49,007 95,535 143,410 348,903
----------- ----------- ----------- -----------
TOTAL EXPENSES 133,488 319,554 395,287 1,033,227
----------- ----------- ----------- -----------
OPERATING (LOSS) (6,482) (113,810) (21,441) (278,944)
----------- ----------- ----------- -----------
See notes to financial statements.
4
GENERAL RED INTERNATIONAL, INC.
FORMERLY "PARADISE TAN, INC."
Consolidated Statements of Operations (Cont.)
For the Three and Nine Months Ended September 30, 2006 and 2005
==============================================================================================================
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
OPERATING (LOSS) (6,482) (113,810) (21,441) (278,944)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain on sale of equipment -- -- -- --
Other income (expense) -- 27,957 -- (778)
Interest expense (47,437) (20,874) (142,311) (34,448)
------------ ------------ ------------ ------------
(47,437) (7,083) (142,311) (35,22)
------------ ------------ ------------ ------------
NET LOSS $ (53,919) $ (106,727) $ (163,752) $(314,17)
============ ============ ============ ============
Basic Loss per Share $ (0.002) $ (0.005) $ (0.01) $ (0.013)
============ ============ ============ ============
Fully Diluted Loss per Share $ (0.002) $ (0.005) $ (0.007) $ (0.013)
============ ============ ============ ============
Weighted Average Shares Outstanding 23,384,114 23,384,114 23,384,114 23,384,114
============ ============ ============ ============
See notes to financial statements.
5
GENERAL RED INTERNATIONAL, INC.
FORMERLY "PARADISE TAN, INC."
Consolidated Statement of Stockholders' Deficit
For the Nine Months Ended September 30, 2006
================================================================================
Additional
Common Common Preferred Preferred Paid in Retained
Stock Shares Stock Shares Capital Deficit
----------- ----------- ----------- ----------- ----------- -----------
Balances, January 1, 2006 $ 233,841 23,384,114 $ 1,359,980 135,998 $ 3,350,493 $(6,010,590)
Net loss for the nine months
ended September 30, 2006 -- -- -- -- -- (163,752)
----------- ----------- ----------- ----------- ----------- -----------
Balances, September 30,
2006 $ 233,841 23,384,114 $ 1,359,980 135,998 $ 3,350,493 $(6,174,342)
=========== =========== =========== =========== =========== ===========
See notes to financial statements.
6
GENERAL RED INTERNATIONAL, INC.
FORMERLY "PARADISE TAN, INC."
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and 2005
================================================================================
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net loss $(163,752) $(314,170)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 19,419 199,500
Gain on sale of fixed assets -- --
Accrued interest on preferred stock 81,600 81,600
(Increase) decrease in operating assets:
Accounts receivable -- (26,644)
Inventory -- (30)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 21,509 13,601)
Accounts payable - related parties -- (3,152)
--------- ---------
NET CASH (USED IN) OPERATING ACTIVITIES (41,224) (49,295)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Decrease in deposits -- --
Proceeds from disposal of fixed assets -- --
Purchases of fixed assets (73,426)
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES -- (73,426)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings of notes payable -- 126,297
Repayments of notes payable -- (32,835)
Excess of outstanding checks over bank balance -- 7,903
Collection of note receivable -- 26,996
Principal repayments on capitalized lease obligation -- (20,329)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES -- 108,032
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (41,224) (14,689)
--------- ---------
CASH AND CASH EQUIVALENTS:
- --------------------------
Beginning of period 503,164 665,953
--------- ---------
End of period $ 461,940 $ 651,264
========= =========
See notes to financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL RED INTERNATIONAL, INC.
FORMERLY "PARADISE TAN, INC." & SUBSIDIARY
SEPTEMBER 30, 2006 (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments consisting only of normal recurring accruals
considered necessary to present fairly our financial position at September 30,
2006, the results of operations for the three and nine month periods ended
September 30, 2006 and 2005, and cash flows for the nine months ended September
30, 2006 and 2005. The results for the period ended September 30, 2006 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 2006. These financial statement should be read in
conjunction with the financial statements and notes for the year ended December
31, 2005 appearing in our annual report on Form 10-KSB as filed with the
Securities and Exchange Commission.
Revenue Recognition - We currently operate tanning salons in and around the
Dallas/Fort Worth, Texas metropolitan area and in Arizona. All salons are
operated by us, or under the terms of franchise and license agreements, by
franchisees who are independent entrepreneurs or by licensees operating under
license agreements between local business people and us.
8
Management's Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Income Per Share - Basic income (loss) per share is computed by dividing income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the periods. Diluted income per share is computed
similar to basic income (loss) per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. There were 5,739,995 common stock equivalents (CSE)
excluded from the computation of diluted loss per share.
Fixed Assets - Fixed assets are recorded at cost and include expenditures that
substantially increase the productive lives of the existing assets. Maintenance
and repair costs are expensed as incurred. Depreciation is provided using the
straight-line method. Depreciation of property and equipment is calculated over
the management prescribed recovery periods, which range from 5 years for
equipment to 7 years for tanning beds.
When a fixed asset is disposed of, its cost and related accumulated depreciation
are removed from the accounts. The difference between undepreciated cost and
proceeds from disposition is recorded as a gain or loss.
Long-lived assets - In accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", long-lived assets and certain identifiable
intangible assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For purposes of evaluating the recoverability of
long-lived assets, the recoverability test is performed using undiscounted net
cash flows related to the long- lived assets. We review long-lived assets to
determine that carrying values are not impaired.
Fair value of financial instruments - Statement of Financial Accounting
Standards No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires certain disclosures regarding the fair value of financial instruments.
The carrying amounts of financial instruments including inventory, notes
receivable, accounts payable and accrued expenses approximated fair value
because of the immediate short-term maturity of these instruments.
NOTE 2 - SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" requires companies to report
information about operating segments in interim and annual financial statements.
It also requires segment disclosures about products and services, geographic
areas and major customers. The Company determined that it did not have any
material, separately reportable operating segments as of September 30, 2006 and
2005.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
In prior years, we entered into a Finance Agreement with an unrelated consulting
entity. As part of the agreement, we retained the services of this entity on a
90 day exclusive basis for the purpose of raising debt capital in the initial
request of $10,000,000. We are committed to paying this entity a success fee of
seven percent on the amount of funds received as a result of its efforts on the
initial request and ninety percent of this aforementioned fee on funds in excess
of the initial request. The initial amount under contract was increased to
$20,000,000 in 2003.
In prior years, we also entered into an agreement with an unrelated merchant
banking entity. As part of the agreement, we retained the exclusive services of
this entity for the purpose of providing financial advisory, investment banking
and other consulting services in connection with our efforts to raise capital.
9
We are committed to paying this entity a cash fee of five percent on the amount
of loans received as a result of its efforts and an additional common stock fee
of two percent of the common shares outstanding at the signing of the agreement,
payable upon success only.
In prior years, we also entered into a $10,000,000 Stock Purchase Agreement with
an unrelated entity. As part of the agreement, we agreed to sell up to
$10,000,000 of its common stock to this entity. This agreement supersedes the
previous $3,000,000 equity agreement entered into in 2003. No specific terms
such as discounts, etc. were set forth. All common shares must be registered and
approved as free trading with the Securities and Exchange Commission. As of the
date of this report, no actual common stock has been sold pursuant to this
agreement.
Pursuant to a unanimous vote at the Board of Directors meeting dated April 16,
2003, we approved and are committed to pay a related entity of one of our
directors an amount equal to fifty percent of the monies collected from equity
financings to be applied towards consulting work.
We are committed to three employment agreements that expire through various
dates.
Pursuant to one of the agreements, our Co-Treasurer shall receive an annual base
salary of $6,000 originally through September 1, 2004. The term was
automatically extended for an additional two year period. Upon the successful
completion of a certain financing package with Chuckanut Capital Group, Ltd.,
this executive's base salary will be increased to $8,000 within three months
following the successful completion date.
Pursuant to one of the other agreements, our Vice President shall receive an
annual base salary of $6,000 through August 5, 2004. The term was automatically
extended for an additional two year period. Upon the successful completion of a
certain financing package with Chuckanut Capital Group, Ltd., this executive's
base salary will be increased to $8,000 within three months following the
successful completion date.
Pursuant to one of the other agreements, the our President shall receive an
annual base salary of $75,000 for a three year term through August 5, 2006. Upon
the successful completion of a certain financing package with Chuckanut Capital
Group, Ltd., this executive's base salary will be increased to $120,000 within
three months following the successful completion date. The base salary will be
increased by a minimum of 5% on each anniversary of the commencement date.
We are also committed to a consulting agreement. Pursuant to the agreement and
related addendum dated September 1, 2004, we are obligated to pay a monthly
payment of $10,000 to a related party corporation in exchange for financial
consulting services. This corporation's officer is our former Director. The
agreement expires on May 15, 2008.
Operating lease commitments
We lease office space from third parties under various operating leases which
expire on varying dates through September 2009 at various monthly rental
payments. As of September 30, 2006, we have outstanding commitments with respect
to the above non-cancelable operating leases.
Capital lease commitments
We are leasing salon equipment under three separate noncancelable capital leases
that expire on various dates through April, 2007. The obligations under these
capital leases have been recorded in the accompanying consolidated balance sheet
at the net present value of the future minimum lease payments, discounted at an
interest rate of 10%. The book value of the collective equipment was
approximately $99,000 at September 30, 2006.
NOTE 4 - GOING CONCERN
We have suffered recurring losses from operations, have negative working
capital, have a stockholders' deficit, and has material restrictions on its cash
as of September 30, 2006. In addition, we have yet to generate an internal cash
flow from its business operations and has generated operating losses since its
inception. These factors raise substantial doubt as to our ability to continue
as a going concern.
10
Management's plans with regard to these matters encompass the following actions:
1) obtain funding from new investors to alleviate our working deficiency, and 2)
implement a plan to increase cash flows. Our continued existence is dependent
upon its ability to resolve it liquidity problems and increase profitability in
our current business operations. However, the outcome of management's plans
cannot be ascertained with any degree of certainty. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these risks and uncertainties.
NOTE 5 - COMMON STOCK AND RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2006, we did not issue any common or
preferred shares or warrants.
NOTE 6 - LITIGATION
In prior years, we received a notice from the National Association of Securities
Dealers requesting certain information about us. In our opinion, the effects of
any negative ramifications to us are remote and immaterial.
We have a judgment filed against it in the amount of $63,881. This amount, along
with unpaid interest, is included in accounts payable in the accompanying
consolidated balance sheet at September 30, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements. Forward
looking statements are identified by words and phrases such as "anticipate",
"intend", "expect" and words and phrases of similar import. We caution investors
that forward-looking statements are only predictions based on our current
expectations about future events and are not guarantees of future performance.
Our actual results, performance or achievements could differ materially from
those expressed or implied by the forward-looking statements due to risks,
uncertainties and assumptions that are difficult to predict, including those set
forth in Item 1A above. We encourage you to read those risk factors carefully
along with the other information provided in this Report and in our other
filings with the SEC before deciding to invest in our stock or to maintain or
change your investment. We undertake no obligation to revise or update any
forward-looking statement for any reason, except as required by law.
You should read this MD&A in conjunction with the Consolidated
Financial Statements and Related Notes in Item 1. Unless otherwise noted, all
currency figures in this filing are in U.S. dollars.
Overview
- --------
We develop, market, franchise, license, and operate retail locations offering
indoor tanning services and related products to the general public under the
Paradise Tan name. "Indoor tanning" refers to the use of specially designed
fluorescent lamps emitting specific wavelengths of ultraviolet light to cause a
customer's skin to develop a tan in response. We are a Texas corporation formed
in 1994.
We opened our first tanning center in 1994. During the first two years of
operations, we opened three more tanning centers in the Dallas/Fort Worth, Texas
area, bringing the total to four. In 1997, we opened its first concept indoor
tanning center that would become the prototype for future locations. With the
prototype center, we started its franchising program under Paradise Franchising
International, Inc. (the "Franchise Company"), and our wholly owned subsidiary.
Franchised locations pay us an initial franchise fee of $24,000 and monthly fees
ranging from $250 to $350, based on gross revenues. Franchisees receive
training, assistance in maintaining profitable operations and join in
cooperative advertising programs. In 2001, we also started a licensing program.
Licensees pay a flat monthly fee of $350; in return licensees are allowed to use
the Paradise Tan name and logo and are part of the cooperative advertising
program. Licensees do not receive training or operational assistance unless they
pay additional consulting fees on a fee-for-service basis.
We currently have seven company-owned and operated indoor tanning centers and
four franchised or licensed centers in the Dallas/Fort Worth and Phoenix Arizona
metropolitan areas. Our current strategy is to repurchase all of the franchised
11
or licensed locations in the Dallas/Fort Worth area and convert them to
company-owned locations. The average Paradise Tan indoor tanning center consists
of between 1,600 and 2,600 square feet of leased space located in retail
shopping areas, with each location containing between eleven to twenty tanning
beds and booths. In addition to providing tanning services, our locations sell
private label lotions, shirts and other items. We are considering sales of other
products we believe would be attractive to our customers, including nutritional
bars and supplements. We can give no assurances that it will expand its product
line or that any new products would be successful.
Most of our revenues are from sales of memberships in its indoor tanning
centers. We also earn revenue from the sales of lotions and apparel, franchise
fees and license fees. There are many levels of memberships and each entitles
the member to use our facilities as often as desired, commensurate with safety
considerations and level of the membership. See "Government Regulations."
Memberships are sold on a pre-paid basis with a monthly payment option, but
terms and conditions of memberships can be modified from time to time to reflect
special offers, new store promotions and other discounts.
Industry Overview. The U.S. indoor tanning industry began in 1979. According to
industry sources, the total U.S. indoor tanning industry is estimated to have
annual revenues of over $5 billion in 2003, with an estimated 20,000 to 25,000
locations that concentrate strictly on tanning. The three largest segments of
the indoor tanning industry are tanning sessions (services), the manufacture of
tanning devices and the manufacture and sale of tanning lotions specifically
designed for indoor tanning. Industry sources estimate that approximately 10,000
tanning beds are sold annually in the United States to retail indoor tanning
locations, with a total installed base of approximately 178,000 units, at an
average price of $7,000 per bed. These sales do not include home sales or other
equipment and accessories. Currently, there are approximately 32 to 42 tanning
lotion manufacturers, although that number varies. According to industry
sources, the largest manufacturer of tanning products, ETS, Inc., produces
revenues in excess of $40 million annually. The Company has targeted the largest
segment of the indoor tanning industry, tanning services, as its primary
business and the retail sale of indoor tanning lotions as its secondary
objective.
Small independent operators currently dominate the indoor tanning service
industry, the average operator having one or two locations in a single
metropolitan area. These operators are traditionally undercapitalized and rely
primarily upon their personal financial resources. Independently operated
tanning centers usually offer limited choices to customers as to hours of
operation and tanning devices and do not have standardized operating or
marketing procedures. Most marketing by such operators is by word of mouth,
local print advertising and couponing. After research, we have been unable to
identify any single entity that accounts for more than 1% of the national indoor
tanning services market. The Company believes the growing number of tanning
centers, together with greater consumer acceptance of indoor tanning, has
resulted in significant increases in industry sales, with steady revenue growth
over the past three years.
Business Strategy. Our business strategy is designed to achieve further growth
in the indoor tanning services industry, to utilize its concept store to
dominate any market area it enters, to establish a national corporate presence
and to develop consumer recognition of the Paradise Tan and Paradise Tanning
Centers names.
The tanning services segment of the market consists almost exclusively of small
independently owned indoor tanning centers that offer limited hours of access
with two to ten tanning beds. Management believes that the current state of the
indoor tanning industry is comparable to the videotape rental industry
approximately ten years ago. During the early 1980's, independent videotape
rental stores dominated that industry and offered a limited number of movie
titles from small shops during limited operating hours. Since that time, the
videotape rental industry has become dominated by a small number of large
companies offering larger stores, substantially larger product inventories and
increased hours of operation, along with a wide variety of related products and
services (videotape sales, used tape sales, equipment, popcorn, candy and the
like). These larger and better capitalized operators have eliminated much of the
independent competition and captured significant market share.
We already developed a standard concept for providing indoor tanning services.
Since we opened our first indoor tanning center in 1994, we have refined the
concept through a number of evolutionary changes. These refinements have
included more sophisticated management and operational control systems than
found in typical tanning stores, distinctive interior and exterior designs,
standardized color schemes, uniform store layouts and facilities. We are
confident that the concept store has been sufficiently refined for introduction
into new markets.
12
The concept store is an integrated marketing approach evident in both the
exterior and interior of the stores. Each new Paradise Tan indoor tanning center
has a standardized design and color scheme that combine to give each store a
consistent architectural look. Each 1,600 to 2,600 square foot concept store is
equipped with eleven to twenty state of the art tanning beds and booths. With
average tanning sessions of ten to twenty minutes, members have continuous
access and availability of equipment to fit individual tanning needs and
schedules. A typical Paradise Tan ? indoor tanning center will operate somewhat
longer hours than a typical family owned tanning center. Location hours vary by
season. We believe that implementation of the concept store will force
competitors within a market area to compete on a similar level, requiring them
to raise significant capital within a short period of time or withdraw from the
market.
Along with a standardized interior design, color scheme and upscale atmosphere,
our Paradise Tan locations use a consistent set of management and financial
information and control systems that we have developed. These control systems
include the use of a computerized database to ensure that customers are tanning
within safe limits for their age and skin type. We also require training of its
employees and managers and those of its franchisees. The Company has the right
to require its management, employees and those of its franchisees to attend
continuing training if necessary. The use of management and financial control
systems allows us to monitor the financial health of our company-owned locations
and those of its franchisees; these controls include daily and weekly gross
sales reports, monthly and quarterly profit and loss statements and annual
financial statements for each Paradise Tan company-owned and franchised
location.
Our next phase is to rapidly expand the number of indoor tanning centers in
existing markets to increase market penetration and expand its market areas.
Within the next fifteen months, we plan to open or acquire, on average,
approximately one company-owned and operated store per quarter for the next six
quarters, for a total of up to six new stores. Further expansion beyond this
period will depend upon (i) our ability to generate sufficient cash flow from
its operations to open additional stores, (ii) the use of franchising, (iii)
successfully obtaining additional debt or equity capital through institutional
borrowings or additional offerings or (iv) a combination of the above.
We currently estimate that the cost to construct and equip a Paradise Tan
concept store is approximately $150,000 to $175,000. Of this amount,
approximately $65,000 is required for leasehold improvements and equipment
meeting our specifications and $85,000 to purchase tanning beds, booths and
related equipment, inventory and miscellaneous expenses. The cost of acquisition
of an existing indoor tanning center from a competitor and refurbishing it as a
Paradise Tan indoor tanning center will vary from location to location.
One of the latest innovations in the tanning industry is UV Free Tanning. UV
Free Tanning allows a person to get a tan with the application of a mist sprayed
onto the skin to produce a tan. We are in talks with a manufacturer to utilize
their equipment to supply our Paradise Tanning Centers locations. We currently
operate seven UV Free Tanning units with plans to expand this to all of our
current and future locations.
We also plan to capitalize on growing consumer awareness of the Paradise Tan
brand by offering a full line of tanning products, including lotions and
accelerators. We do not currently plan to manufacture its own product lines, but
intends to utilize contract manufacturers that will private label our
formulations. We believe that offering its own tanning products on a national
basis will promote brand recognition and benefit sales of its indoor tanning
services.
Seasonality. The indoor tanning business is seasonal, with most memberships sold
in the period from January through June. Paradise Tan uses an "autodraft"
system, which automatically deducts monthly payments from a customer's bank
account. This allows for cash flow throughout the year, but also allows the
customer to cancel at any time. Customers may also put memberships "on hold,"
which allows the customer to remain as a member without having fees deducted for
a set period of time.
Advertising and Promotion. We currently use several methods of advertising and
promotion, including print and broadcast media in the two markets that it
serves. Franchisees are required to participate in chain-wide advertising and
local advertising. Most of our advertising dollars are spent in the local area
through direct mail coupon offers. Each mailing is targeted by zones containing
several postal zip codes that coincide with the market area of a particular
store or group of stores. We place our direct mail advertising primarily with
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national direct mail advertising companies. As we expand, we can benefit from
price reductions and preferential bookings offered by its advertising companies
for larger mass mailings. We also uses billboards to target specific demographic
market areas and as a general promotion to increase brand recognition with the
general public. We have used television advertising on a seasonal basis. The
main chain-wide advertising today consists of the expenses for developing and
maintaining our website and related efforts to gain wider recognition of the
Paradise Tan brand name in the industry and with consumers .
As the number of Paradise Tan indoor tanning centers in a market area becomes
sufficient to justify an increase in the amount of the advertising budget
devoted to broadcast advertising, we intend to expand its use of radio and
television advertising. We also offer referral promotions to existing members,
which has proven to be an effective low-cost marketing tool.
Trademarks. We have filed trademark applications with the United States Patent
and Trademark Office (the "PTO") to obtain exclusive use of its trademarks
Paradise Tan and Paradise Tanning Centers and associated artwork. We regard our
trademarks as valuable assets and believes they have significant value in the
marketing of its services and associated products. We intend to protect its
intellectual property vigorously against infringement. Since, however, we have
yet received approval of its applications from the PTO, there can be no
assurance that we will obtain the right of exclusive use of its trademarks. If
the PTO fails to grant such trademark registrations, it could have a material
adverse effect on our business, financial condition and results of operations.
Competition. Competition within the tanning services industry is extremely high,
with an estimated 20,000 to 25,000 tanning centers nationwide. The indoor
tanning services market is highly fragmented, with no one company having a
national presence. When the Company opens a Paradise Tanning Center in a new
market area, it must compete against established local operators that have
gained name recognition with local consumers. Because the Company competes
against numerous operators, there is a substantial likelihood that competitors
in some markets will have significantly greater financial, advertising and
marketing resources than the Company.
We compete on the basis of convenience, variety and quality of services offered,
price, value, name recognition, advertising and marketing. In addition, we
believe that its concept, which sets us apart from other competitors, will be an
important factor in its ability to compete on a regional and national basis.
Although significant new competitors may enter a market in which we operate, we
believe this risk is somewhat mitigated by barriers to entry, such as high start
up costs and lead times necessary to develop management systems and to
adequately train managerial personnel. We believe that our most significant
competitive limitation has been the lack of capital necessary to implement its
business strategy. Our limited capital has affected the scope of its advertising
and promotional activities and the ability to expand its business through the
opening of new locations within its current markets and to open centers in new
markets.
Governmental Regulation. Both state and federal laws and regulations affect the
indoor tanning services industry. The applicable federal laws and regulations do
not affect us directly, but are primarily targeted at manufacturers of tanning
booths, beds and other devices used by us in its day-to-day operations. The
principal federal laws regulating the manufacture of indoor tanning devices are
the Federal Food, Drug and Cosmetic Act administered by the Federal Food and
Drug Administration (the "FDA"), the Public Health Service Act and the Radiation
Control for Health and Safety Act. Because of the potential for injury and
misuse of tanning devices, the FDA has issued stringent rules and regulations
governing the manufacture and use of indoor tanning devices. These regulations
include limits on the ultraviolet light emitted by indoor tanning devices, safe
operation of such devices, timers, warning labels and the like.
We believe that the laws governing the manufacture and use of tanning devices
are both necessary and appropriate. We purchase only indoor tanning devices that
meet or exceed the standards required by the FDA. For the personal safety of its
customers, our employee monitor the use of its tanning beds and booths to assure
compliance with the FDA guidelines. Our tanning beds and booths are installed,
maintained and repaired by qualified employees or contractors in accordance with
manufacturer's specifications.
State regulation of the indoor tanning industry varies from state to state. Many
states have no laws or regulations regarding indoor tanning. As of the date of
this registration statement, twenty-eight states have either adopted or are in
the process of adopting laws and regulations dealing with the indoor tanning
industry. State laws primarily regulate the health and safety aspects of indoor
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tanning operations rather than regulating the indoor tanning devices used. Both
Texas and Arizona have adopted the FDA rules regarding indoor tanning devices.
Typically, states require a minimum customer age of 13 (with parental consent
and supervision), use of protective eyewear during any tanning session,
maintenance of proper exposure distance and maximum exposure time as recommended
by the manufacturer and availability of suitable physical aids such as
handrails. Texas requires a minimum age of 13 years, with parental consent.
Arizona does not have an age limit. Our internal policies require that customers
be at least 14 years old. Customers aged 14 and 15 years must be accompanied by
a parent and have written parental consent. Customers that are 16 or 17 years
old require written parental consent. Violation of the federal or state laws or
regulations could result in criminal or civil penalties. Our internal controls
allow us to monitor the compliance of our company-owned, franchised and licensed
locations with the existing state regulations.
We currently operate in the states of Texas and Arizona, both of which have
adopted laws and regulations regarding the indoor tanning industry. Both states
require the licensing of indoor tanning facilities. In Texas, the indoor tanning
regulations are administered by the Texas Department of Health. The Arizona
Radiation Regulatory Agency enforces Arizona's indoor tanning regulations. Our
locations meet or exceed the regulatory standards required by the Texas and
Arizona laws and regulations.
We have designed its Paradise Tanning Center concept, including management
controls and operating systems, to comply with applicable federal and state
regulations and to monitor each location's compliance. Management believes that
our operations meet or exceed the requirements of all applicable or proposed
statutes and regulations.
RESULTS OF OPERATIONS
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Net Loss
We had a net loss of $53,919, $106,727, $163,752 and $314,170, or $.002, $005,
$01 and $.013 per common share for the three months ended September 30, 2006 and
2005, and the nine months ended September 30, 2006 and 2005, respectively. The
change in net loss was primarily due to decreased advertising and salaries in
the 2006 periods compared to the same periods in 2005.
Sales
Revenues decreased $78,738 or 38% to $127,006 for the three months ended
September 30, 2006, from $205,744 for the three months ended September 30, 2005.
The decrease was attributable to poor customer retention and decreased
advertising that generated fewer customers.
Expenses
Other selling, general, and administrative expenses for the three months ended
September 30, 2006 decreased $186,066 or 58% to $133,488. In comparison with the
three month period ended September 30, 2005, selling, general and administrative
expenses decreased due to decreases in administrative and office expenses in
2006 compared to the same period in 2005.
Liquidity and Capital Resources
On September 30, 2006, we had cash of $461,224 and a working capital deficit of
$823,939. This compares with cash of $665,953 and a working capital deficit of
$978,596 at December 31, 2005. The decrease in cash and working capital deficit
was due to an decrease in net loss for the nine months ended September 30, 2006
less the effects of depreciation. Operating activities had negative cash flow in
the amount of $41,224 during the nine months ended September 30, 2006 reflecting
an excess of expenditures over revenues and increased depreciation as mentioned
above.
15
Net cash provided by investing activities for the nine months ended September
30, 2006 was $0 as compared with net cash used in investing activities of
$73,426 for the nine months ended September 30, 2005. The change in investing
activities is attributable to fewer purchases of property and equipment during
the nine months ended September 30, 2006 compared to the comparable period in
2005.
Net cash used by financing activities for the nine months ended September 30,
2006 was $0 as compared with net cash provided by financing activities of
$108,032 for the nine months ended September 30, 2005. The decrease in net cash
provided by financing activities is attributable to no borrowings of principal
of notes payable in 2006 compared to 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the information
under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such term is defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Principal Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. We conducted an evaluation under the supervision and with the
participation of our Principal Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report
pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our
Principal Executive Officer and Principal Financial Officer concluded that our
Disclosure Controls were effective as of the end of the period covered by this
report.
Changes in Internal Controls
We have also evaluated our internal controls for financial reporting, and
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For the period reported on this Form 10Q quarterly report, we are not
involved in any pending litigation or legal proceeding.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the information
under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following documents are filed as a part of this report or are incorporated
by reference to previous filings, if so indicated:
Incorporated by reference
Filed
Exhibit Document Description Form Date Number herewith
3.1 Articles of Incorporation. 10SB-12G/A 11/13/2003 3.1
3.2 Bylaws. 10SB-12G/A 11/13/2003 3.2
31.1 Certification of Principal Executive Officer pursuant
to 15d-15(e), promulgated under the Securities and
Exchange Act of 1934, as amended. X
31.2 Certification of Principal Financial Officer pursuant
to 15d-15(e), promulgated under the Securities and
Exchange Act of 1934, as amended. X
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chief Executive Office). X
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chief Financial Office). X
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 25, 2009 GENERAL RED INTERNATIONAL, INC.
/s/Xingping Hou
---------------
Xingping Hou
President, Chairman of the Board