UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarter Ended: JUNE 30, 2003
[X] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from ______________ to _____________
Commission File Number: 333-46114
KUBLA KHAN, INC.
-----------------------------------------------
(Name of Small Business Issuer in its Charter)
Utah 87-0650976
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6990 So. Park Centre Drive, Suite 315, Salt Lake City, Utah 84121
- -----------------------------------------------------------------------------
(Address of principal executive offices and Zip Code)
(801) 567-0111, Ext. 315
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has 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. (1) Yes [ X] No [ ]
(2) Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Par Value $0.001 111,744
----------------------------------- ---------------------------------
Title of Class Number of Shares Outstanding as of
June 30, 2003
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
June 30, 2003
(UNAUDITED)
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
However, in the opinion of management, all adjustments (which include only
normal recurring accruals) necessary to present fairly the financial position
and results of operations for the periods presented have been made. These
financial statements should be read in conjunction with the accompanying
notes, and with the historical financial information of the Company.
2
KUBLA KHAN, INC.
(A Development Stage Company)
BALANCE SHEETS
June 30, December 31,
2003 2002
------------- -------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash in Bank $ 4,896 $ 9,138
Accounts Receivable 591 -
Inventory 9,521 9,830
Deposit 10 10
Prepaid Expenses - 500
------------- -------------
Total Current Assets 15,018 19,478
------------- -------------
Property & Equipment- Net of Depreciation
of $1,357 and $1,003 236 590
------------- -------------
TOTAL ASSETS $ 15,254 $ 20,068
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 50 $ 199
------------- -------------
Total Current Liabilities 50 199
Shareholders' equity
Common Stock, $0.001 par value
authorized 50,000,000 shares; 111,744 and
111,744 shares issued and outstanding 112 112
Paid in Capital 77,588 75,814
Accumulated deficit (62,496) (56,057)
------------- -------------
Total Stockholders' Equity 15,204 19,869
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,254 $ 20,068
============= =============
See accompanying notes to financials statements.
3
KUBLA KHAN, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
Period from
For the Three For the Three For the Six For the Six Inception
Months Ended Months Ended Months Ended Months Ended (March 28,2000)
June 30, June 30, June 30, June 30, to June 30,
2003 2002 2003 2002 2003
-------------- ------------- ------------- ------------- -------------
<s> <c> <c> <c> <c> <c>
Revenues $ - $ 417 $ 390 $ 1,287 $ 6,805
Cost of Goods Sold - (281) (309) (983) (5,218)
-------------- ------------- ------------- ------------- -------------
Gross Profit - 136 81 304 1,587
Costs and Expenses:
General administrative 2,307 2,725 4,889 5,343 43,188
Travel and entertainment 112 1,652 829 2,819 13,235
Professional fees 502 273 802 2,669 6,660
Organizational expenses - - - - 1,000
-------------- ------------- ------------- ------------- -------------
Total Expenses 2,921 4,650 6,520 10,831 64,083
-------------- ------------- ------------- ------------- -------------
NET LOSS $ (2,921) $ (4,514) $ (6,439) $ (10,527) $ (62,496)
============== ============= ============= ============= =============
Net loss per share,
basic and diluted $ (0.03) $ (0.04) $ (0.06) $ (0.09)
============== ============= ============= =============
Weighted average shares
outstanding 111,744 111,744 111,744 111,744
============== ============= ============= =============
See accompanying notes to financial statements
4
KUBLA KHAN, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
For the six For the six Inception
Months Ended Months Ended (March 28,2000)
June 30, June 30, to June 30,
2003 2002 2003
------------- ------------- --------------
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (6,439) $ (10,527) $ (62,496)
Non-cash expenses:
Depreciation 354 295 1,357
Capital contribution of services
and facilities by officers 1,774 - 5,717
------------- ------------- --------------
Net Cash Used in Operations (4,311) (10,232) (55,422)
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable (149) (83) 50
Increase in accounts receivable (591) (97) (591)
Decrease (increase) in inventory 309 1,035 (9,521)
Decrease (increase) in prepaid expenses 500 (500) -
Decrease (increase) in deposits - - (10)
------------- ------------- --------------
Net Cash Used By Operating Activities (4,242) (9,877) (65,494)
------------- ------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of office equipment - - (1,593)
------------- ------------- --------------
Net Cash Used in Investing Activities - - (1,593)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock for cash - - 82,500
Offering costs charged to capital - - (10,517)
Increase (decrease) in advances by shareholders - 284 -
------------- ------------- --------------
Net Cash From Financing Activities - 284 71,983
------------- ------------- --------------
Net Increase (Decrease)in Cash (4,242) (9,593) 4,896
Cash, at Beginning of Period 9,138 27,101 -
------------- ------------- --------------
Cash at End of Period $ 4,896 $ 17,508 $ 4,896
============= ============= ==============
Supplemental Cash Flow Disclosures:
Interest paid $ - $ - $ -
============= ============= ==============
Income taxes paid $ - $ - $ -
============= ============= ==============
See accompanying notes to financial statements
5
KUBLA KHAN, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at June 30, 2003 and June 30,
2002 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2002
audited financial statements. The results of operations for the period ended
June 30, 2003 are not necessarily indicative of the operating results for the
full year.
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Kubla Khan, Inc. was incorporated on March 28,
2000 in the state of Utah. The Company began conducting operations on
May 4, 2001 and prior to that incurred only expenses for travel and
entertainment for the review of various business opportunities and marketing
strategies.
Intangibles - Organizational costs consisting of legal fees of $1000
have been expensed in accordance with the AICPA's Statement of Position (SOP)
98-5 which requires that costs incurred in the organization of a new entity be
expensed rather than amortized over a period of years.
Income Taxes - The Company has no deferred tax assets or liabilities.
A tax loss carryforward of $62,496 has occurred and is available for
carryforward to offset future profits for the next 20 years. No tax benefit
for the loss carryforward has been established due to the Company's lack of
operating history and it's ability to demonstrate that it can realize a profit
from future operations.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amount os revenue and
expenses during the reporting period. Actual amounts could differ from those
estimates.
Per Share Information - Per share information has been computed using
the weighted average number of common shares outstanding during the period.
6
NOTE 3 - RELATED PARTY TRANSACTIONS - ADVANCES FROM OFFICER/STOCKHOLDER AND
RENTAL OF PERSONAL RESIDENCY
Prior to May 4, 2001 the President of the company paid all company
travel and entertainment costs which was reimbursed by the company without
interest. Since inception to May 4, 2001, the Company's president provided
190.7 hours of service valued at $2,860 (capital contribution) to the
formation and initial marketing efforts of the Company; he also provided the
office facilities for the use of the Company valued at $1,083 from inception
through April 30, 2001. Both the services and facilities use have been
reflected as a capital contribution by the president as he will not receive
reimbursement for these services and expenses. The Company has been paying
$500 cash per month for the space. The Company began paying rent and salaries
effective May 1, 2001. Effective April 1, 2003, the Company's president has
agreed to donate office rent and expenses to the Company each month. From
April 1, 2003 through June 30, 2003 the total amount was $1,773 ($1,500 rent
and $273 telephone) which was recorded on the books of the Company as donated
capital.
NOTE 4 - COMMON STOCK/PREPAID LEGAL FEES/DEFERRED OFFERING COSTS
The Company issued 36,744 shares for $7,500 in cash from four
shareholders. The Company advanced $7,000 to its legal counsel, who then
incurred organizational costs of $1,000 which was recorded as an expense. The
balance of $6,000 was recorded as deferred offering costs. During the fourth
quarter of 2000, an additional $1,350 in offering costs were recorded as
deferred offering costs; during the quarter ended March 31, 2001, an
additional $1,933 in deferred offering costs were recorded by the Company.
During the second quarter $1,234 in offering costs were incurred. All
deferred offering costs were charged to Paid in Capital at the completion of
the offering which was May 4, 2001.
NOTE 5 - PUBLIC STOCK OFFERING
On November 29, 2000 the Company filed a Form SB-2 with the United States
Securities and Exchange Commission in anticipation of a proposed public stock
offering. The Offering was for the sale of a total of 75,000 shares of
previously unissued common stock at a price of $1.00 per share. On March 28,
2001 the Company was notified by the Securities and Exchange Commission that
the Registration Statement and proposed public stock Offering were effective
on that date. On May 4, 2001 the public stock offering was sold out and the
Company received gross offering proceeds totaling $75,000. The Company has
offset the offering costs of $10,517 against the proceeds of the offering to
paid in capital.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This periodic report contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition , results of operations, business
strategies, operating efficiencies or synergies, competitive positions, growth
opportunities for existing products, and plans and objectives of management.
Statements in this periodic report that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the safe harbor
provided by Section 21E of the Exchange Act and Section 27A of the Securities
Act.
General
We were incorporated under the laws of the state of Utah on March 28,
2000 as Kubla Khan, Inc., for the purpose of engaging in the business of the
sale of "distressed" merchandise (closeouts, factory overruns and retail
overstocks) primarily to retailers. Upon completion of our public stock
offering on May 4, 2001, we commenced acquiring closeout merchandise and
selling it to retailers or individuals. During our third quarter 2001, we
began realizing minimal revenues. Management continues to investigate
potential sources of revenues and merchandise.
Financial Condition
Since inception we have operated at a loss with a loss of $6,439 in our
first half of 2003; $2,921 of that loss occurred in the current quarter. Up
through our second quarter of 2001, our losses were a result of expenses
associated with finding product sources and retail clients, rent and service
expenses, as well as professional fees. During our third quarter of 2001, we
began incurring expenses associated with purchase of inventory as a result of
commencement of operations. We have realized only minimal revenues and have
conducted limited operations since our inception; we are therefore considered
a development stage company.
We had $15,254 in assets at June 30, 2003: $4,896 in cash, inventory of
$9,521 consisting mainly of leather jackets; accounts receivable of $591;
office equipment of $236 (net after depreciation of $1,357); and deposits of
$10. As of the end of the second quarter all funds raised in our offering had
been expended. As of June 30, 2003, our liabilities of $50 were comprised of
professional fees payable.
Results of Operations - Comparable periods
We have never had a profitable quarter since the commencement of actual
operations during the third quarter of 2001. During the second quarter of
2003, the company realized no sales. During the first half of 2003, sales were
only $390 and cost of goods sold was $309 resulting in a gross profit margin
of approximately 21%. All of these limited sales occurred in the first
quarter. In the first half of 2002, we had sales of $1,287. As opposed to this
years sales, most of our revenues last year were generated in the second
quarter. Cost of sales for the first six months of 2002 were $983 with an
approximate gross profit margin of 24%. We have, therefore, experienced both
an overall reduction in our already nominal revenues and an increase of
associated costs of those sales. This can be attributed to a weaker economy
resulting in less consumer spending and more cautious purchases by retailers.
We are also experiencing more competition for purchasers of our distressed
merchandise and our current focus on pre-sales has made sales generation much
more difficult.
8
Expenses during the first half of 2002 were considerably higher when
comparing 2002 and 2003, $10,831 for the six months ended June 30, 2002 as
opposed to $6,520 in first half of 2003. The first half of 2003 demonstrated
general and administrative expenses which were nearly similar to the first
half of 2002, with large reductions in travel related expenses and
professional fees between the comparable periods.
Liquidity
Since the commencement of actual operations, our sales have totaled
$6,805 with cost of goods sold totaling $5,218 resulting in a gross profit
margin of approximately 23%. This is not indicative of a positive cash flow
situation since we operated at a net loss of $7,132 and $3,971 for the third
and fourth quarters of 2001 respectively, a net loss of $21,189 for the year
ended December 31, 2002 and a net loss of $6,439 for the first half of 2003.
In addition, despite our efforts to increase our cash flows, we had no
revenues in our current quarter. Unless we are able to gear up our operations
significantly, the approximate 23% gross profit margin experienced since the
inception of sales is not sufficient to cover our other costs and expenses
especially if our 2003 first half results of operations are indicative of what
our future cash flows will be in 2003. Nor will our current situation be
sufficient to provide us with the ability to purchase sufficient merchandise
to increase our cash flows.
Management believes that it will be difficult to increase our sales
volume sufficiently to achieve a profit in the coming year. Although better
than average prices on wholesale goods are available to us, we do not have
sufficient cash resources to take advantage of these lower prices. Our lack
of cash flows has dictated that we make inventory purchases based on pre-
sales, which is difficult to achieve in a cautious economy.
Uncertainties and Trends Affecting our Business
There is no assurance that we will ever be successful in our current
business of acquiring factory overruns or overstock merchandise for resale at
discount prices. We do not know whether we will ever be able to operate
profitably in the business we have chosen to develop. So far we have had
difficulty locating customers for our merchandise. Since September 11, 2001,
the economy has suffered downturns and world events have also contributed to
an uncertain economy which has been both good and bad for us. Although we are
seeing a more plentiful supply of closeout, overstock and overrun merchandise,
retailers have been extremely cautious about ordering inventory due to
softened public demand. During our last fiscal year, any potential benefits of
an increase in available overstock merchandise have been far outweighed by our
inability to attract retailers to our products. We presently have inventory
acquired at very favorable costs but it has been hard to convince retailers to
purchase this inventory for resale. Our inability to establish a customer base
has dictated our decision to purchase inventory primarily only if it is pre-
sold. Two main factors make this very difficult. First of all, when closeout
merchandise is made available to us, it is generally gone within a day or two
which is not enough time for us to pre- sell those items to retailers. The
majority of retailers we have been in touch with do not make snap judgements
in their purchasing process and typically take days or even weeks to make a
decision. The other factor making success in this industry difficult to
achieve is the fact that our decisions are made by a management team that has
had no prior experience in the industry. With our limited financial resources
we anticipate that we could possibly be out of liquid resources by year end
unless we look at other alternatives. If management is made aware of any
opportunities that we feel should be adopted, we will notify our shareholders
and present any such proposal to our shareholders for their approval. In
9
short, at this point in time management has less than an optimistic outlook in
regards to our near term results.
Plan of Operation
Our plan of operation for the next 12 months is to continue to vigorously
pursue sources of bargain priced closeout, overstock and overrun merchandise
and retail outlets seeking such merchandise. We will minimize acquiring
inventory on "speculation" and will focus primarily on matching buyers with
what sellers have to offer. In this way we shall focus on conserving our
financial resources. We will also investigate other business opportunities if
they become known to us and we remain open to a change of business direction.
During the next 12 months, our only foreseeable cash requirements will
relate to overhead items. We have approximately $4,896 in cash available to us
for the next 12 months. Our president, Bill Roberts, has agreed to donate
future office rental, telephone expenses, office expenses and travel expenses
which, accordingly beginning April 1, 2003 and henceforth, will be shown as
capital contributions by Mr. Roberts. We can expect minimum day to day cash
operating expenses during the next year of approximately $1,260 consisting of
storage fees; in addition, we will require approximately $5,000 for legal and
accounting necessary to maintain compliance with our reporting obligations
under the Exchange Act. Accordingly, based on these estimates, we believe the
funds available to us will not be sufficient to conduct operations as well as
pursue our business purpose for the coming twelve months. We will be
dependent upon cash flow generated from the sale of our current inventory to
continue implementing our business plan through the purchase and sale of
additional inventory. Management will use every effort to minimize expenses
and has no plans for additional employees until or unless warranted due to
business needs.
If we cannot increase our limited revenues in the next twelve months, we
could be forced to discontinue operations unless we are able to raise
additional capital. It may be difficult to secure additional financing. We may
be able to attract some private investors, or our officers and directors may
be willing to make additional cash contributions, advancements or loans.
However, there are no agreements with our officers and directors obligating
them to make additional cash contributions. We could also attempt some form
of debt or equity financing. There is no guarantee that any of the foregoing
methods of financing would be successful.
ITEM 3: CONTROLS AND PROCEDURES
Our President, who is our Chief Executive Officer and acts in the
capacity of our principal financial officer, caused disclosure controls and
procedures to be designed and established to ensure that material information
is made known to him in a timely manner by others within the company. Our
President reevaluated the effectiveness of these disclosure controls and
procedures as of the end of the period covered by this report and determined
that there continued to be no significant deficiencies in these procedures.
Also, our President evaluated the design and operation of our internal
control over financial reporting which relates to our ability to record,
process, summarize and report financial information. He did not find any
significant deficiency or material weakness which would require changes to be
made or corrective actions to be taken related to our internal control over
financial reporting. Nor did he identify fraud that involved management or
other employees who had a significant role in our internal control over
financial reporting.
10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES
We have not issued any unregistered securities during the three months
ended June 30, 2003.
The following information is provided in accordance with Rule 701(f)
regarding Use of Proceeds of a quarter being reported on.
During our second quarter of 2003 we completed the expenditure of
funds raised pursuant to our registration statement filed on Form SB-2 and
declared effective on March 28, 2001, file number 333-46114. Pursuant to the
registration statement, we registered a maximum of 75,000 shares of common
stock for sale to the public through our President, Mr. William Roberts, in a
self-underwritten offering. No selling shareholders participated in the
offering which commenced on March 29, 2001, and closed on May 4, 2001 with
maximum proceeds. The offering price was $1.00 per share.
Between March 29, 2001 (commencement of offering) and June 30, 2003 we
incurred approximately $10,517 in expenses in connection with the issuance and
distribution of securities in the offering for the following items:
. underwriting discounts and commissions................ -0-
. finders' fees......................................... -0-
. expenses paid to or for underwriters.................. -0-
. other expenses: prepaid offering expenses
including legal, accounting and EDGAR fees............$ 9,283
. other offering expenses (not prepaid).................$ 1,234
-------
TOTAL OFFERING EXPENSES........$10,517
All of these expenses were incurred to parties other than:
. our directors, officers, or general partners or their associates;
. persons owning 10% or more of any class of our equity securities; or
. our affiliates.
The net offering proceeds available to us after deducting expenses of the
offering were $64,483. During the quarter ended June 30, 2003, we had
completed the use of the remaining actual net offering proceeds which is as
follows:
. Merchandise Inventory........................$ 9,521
. Storage Unit.................................$ 2,407
. Rent(1)......................................$11,500
. Working Capital (including travel)(2)........$29,066
. Salaries(3)..................................$10,396
. Office equipment.............................$ 1,593
-------
Total net proceeds expended at June 30,2003..$64,483 (4)
(1) Paid to Mr. William Roberts from 5/01/01 through 3/31/03 as agreed
upon at a rate of $500 per month for use of his home as our office
(2) Most of these expenses were incurred by Mr. Roberts in his efforts to
locate suppliers and acquire inventory
11
(3) Paid to Mr. Roberts and Kristine Ramsey, an officer, for services
performed at a rate of $15.00 per hour until the maximum allowable $10,000 was
reached.
(4) All offering proceeds have been expended as of our second quarter
2003.
Except those expenses footnoted above, all other expenses were incurred
to parties other than:
. our directors, officers, or general partners or their associates;
. persons owning 10% or more of any class of our equity securities, or
. our affiliates.
Management believes that those expenses paid to or incurred by Mr.
Roberts/Ms. Ramsey are equal to or less than if the same were incurred or paid
to a non-related party.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS AN FORM 8-K
(a) Exhibits.
3.1.1 Articles of Incorporation *
3.1.2 Amendment to Articles of Incorporation*
3.2 By-laws*
31.1 Section 302 Chief Executive Officer Certification
31.2 Section 302 Principal Financial Officer Certification
32.1 Section 906 Certification - Chief Executive and Financial
Officer
* Filed with the Securities and Exchange Commission on September 19, 2000 as
part of the Company's initial Registration Statement on Form SB-2.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2003.
12
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 thereunto duly authorized.
KUBLA KHAN, INC.
[Registrant]
Dated: August 14, 2003 BY: /s/ William S. Roberts
_________________________________________
President, Chief Executive Officer, and
Chief Financial Officer
13