UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2005
Commission File Number: 000-50601
EZCOMM ENTERPRISES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 33-0827004
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
16-7 SMJUNG-DONG, OJUNG-GU, BUCHEON, KYONGGI-DO KOREA
(Address of principal executive offices)
82-32-676-6283
(Issuer's telephone number)
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 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|
As of November 21, 2005, 311,659,748 shares of the registrant's common
stock were outstanding.
Transitional Small Business Disclosure Format (Check One):
Yes |_| No |X|
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...............................................1
Item 2. Management's Discussion and Analysis or Plan of Operation.........19
Item 3. Controls and Procedures...........................................33
PART II - OTHER INFORMATION
Item 6. Exhibits.........................................................34
Signatures .................................................................35
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EZCOMM ENTERPRISES, INC.
Consolidated Balance Sheets
September 30, 2005 and 2004
2005 2004
------------ ------------
ASSETS
CURRENT
Cash and cash equivalents (note 3) ......... $ 49,809 $ 97,817
Accounts receivable (net of allowance for
doubtful accounts $46,287; 2004 -
$22,224) (note 15) ....................... 1,875,899 2,378,157
Inventory (note 4) ......................... 60,840 95,203
Advances to a related company (note 5) .... 1,476,055 601,509
Prepaid and sundry assets .................. 169,098 154,678
------------ ------------
3,631,701 3,327,364
PROPERTIES AND EQUIPMENT (note 6) .............. 9,147,716 8,858,947
INVESTMENTS (note 7) ........................... 509,482 616,714
INTANGIBLE ASSETS .............................. 164,107 170,963
------------ ------------
$ 13,453,006 $ 12,973,988
============ ============
LIABILITIES
CURRENT
Accounts payable ........................... $ 6,935,450 $ 4,773,734
Rental deposits (note 8) ................... 153,440 195,525
Loans payable - current portion (note 9) ... 10,154,011 5,309,094
Advances from shareholder and officer
(note 10) ............................... 307,535 8,105
------------ ------------
17,550,436 10,286,458
ACCRUED SEVERANCE .............................. 384,305 354,562
DEPOSIT (note 16) .............................. 1,403,497 1,575,932
LOANS PAYABLE (note 9) ......................... 310,961 1,675,827
CONVERTIBLE DEBENTURES (note 11) ............... -- 1,737,705
------------ ------------
19,649,199 15,630,484
------------ ------------
STOCKHOLDERS' DEFICIENCY
CAPITAL STOCK (note 12) ........................ 30,816 3,537
PAID IN CAPITAL ................................ 16,408,578 15,223,558
ACCUMULATED OTHER COMPREHENSIVE LOSS ........... (1,656,302) (1,200,607)
ACCUMULATED DEFICIT ............................ (20,979,285) (16,682,984)
------------ ------------
(6,196,193) (2,656,496)
------------ ------------
$ 13,453,006 $ 12,973,988
============ ============
-1-
EZCOMM ENTERPRISES, INC.
Consolidated Statements of Stockholders' Deficit
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
PAID IN ACCUMULATED
CAPITAL IN OTHER TOTAL
NUMBER OF CAPITAL EXCESS OF COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES STOCK PAR VALUE LOSS DEFICIT DEFICIT
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2004
(note 12) ............ 35,368,800 $ 3,537 $ 15,223,558 $ (1,167,171) $(14,293,380) $ (233,456)
Foreign exchange on
translation ....... -- -- -- (33,436) -- (33,436)
Net loss ............ -- -- -- -- (2,389,604) (2,389,604)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30,
2004 ................. 35,368,800 $ 3,537 $ 15,223,558 $ (1,200,607) $(16,682,984) $ (2,656,496)
============ ============ ============ ============ ============ ============
Balance, January 1, 2005
(note 12) ............ 35,368,800 $ 3,537 $ 15,223,558 $ (1,676,719) $(18,028,969) $ (4,478,593)
Issuance of common
shares by
subsidiary ......... -- -- 1,284,181 -- -- 1,284,181
Common shares issued
on acquisition of
Eugene Science, Inc.
(note 12) .......... 272,790,948 27,279 (99,161) -- -- (71,882)
Unrealized loss on
investments ........ -- -- -- (70,926) -- (70,926)
Foreign exchange on
translation ........ -- -- -- 91,343 -- 91,343
Net loss ............. -- -- -- -- (2,950,316) (2,950,316)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30,
2005 ................. 308,159,748 $ 30,816 $ 16,408,578 $ (1,656,302) $(20,979,285) $ (6,196,193)
============ ============ ============ ============ ============ ============
-2-
EZCOMM ENTERPRISES, INC.
Consolidated Statements of Operations
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
------------- -------------
REVENUE
Manufacturing ........................... $ 399,201 $ 1,849,542
Merchandise ............................. 391,278 496,170
------------- -------------
790,479 2,345,712
------------- -------------
COST OF SALES
Manufacturing ........................... 308,203 1,759,193
Merchandise ............................. 310,028 512,439
------------- -------------
618,231 2,271,632
------------- -------------
GROSS PROFIT ................................ 172,248 74,080
------------- -------------
EXPENSES
Salaries, employee benefits, and
retirement allowance ................ 684,239 642,743
Research and development ................ 270,950 291,498
Professional fees ....................... 198,070 111,595
Travel .................................. 107,895 40,942
Repairs and maintenance ................. 68,024 45,177
Office and general ...................... 64,743 51,502
Utilities ............................... 39,925 43,319
Advertising, promotion, and entertainment 17,748 142,527
Insurance ............................... 7,480 12,969
Bad debts ............................... 2,474 905
Rent .................................... 1,588 1,234
Foreign exchange ........................ -- 34
Depreciation ............................ 310,035 271,274
------------- -------------
1,773,171 1,655,719
------------- -------------
OPERATING LOSS .............................. (1,600,923) (1,581,639)
------------- -------------
OTHER INCOME (EXPENSES)
Net rental income ....................... 103,870 102,433
Miscellaneous income (loss) ............. 16,296 (55,172)
Interest expense - net .................. (1,304,518) (739,142)
Interest - other (note 16) .............. (132,343) (116,084)
Financing fees .......................... (32,698) --
------------- -------------
(1,349,393) (807,965)
------------- -------------
NET LOSS .................................... $ (2,950,316) $ (2,389,604)
============= =============
BASIC LOSS PER SHARE ........................ $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES (note 12) . 272,790,948 272,790,948
============= =============
-3-
EZCOMM ENTERPRISES, INC.
Consolidated Statements of Operations
Three Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
------------- -------------
REVENUE
Manufacturing ........................... $ 104,410 $ 576,608
Merchandise ............................. 169,755 198,533
------------- -------------
274,165 775,141
------------- -------------
COST OF SALES
Manufacturing ........................... 59,215 606,456
Merchandise ............................. 134,487 174,605
------------- -------------
193,702 781,061
------------- -------------
GROSS PROFIT ................................ 80,463 (5,920)
------------- -------------
EXPENSES
Salaries, employee benefits, and
retirement allowance ................ 211,044 200,346
Professional fees ....................... 76,848 42,358
Research and development ................ 55,928 109,211
Office and general ...................... 32,960 13,766
Repairs and maintenance ................. 25,558 14,208
Travel .................................. 21,680 12,279
Utilities ............................... 14,359 11,166
Insurance ............................... 3,437 3,244
Advertising, promotion, and entertainment 1,339 7,800
Rent .................................... 1,588 1,234
Bad debts recovered ..................... (5,673) (19,685)
Depreciation ............................ 114,177 93,413
------------- -------------
553,245 489,340
------------- -------------
OPERATING LOSS .............................. (472,782) (495,260)
------------- -------------
OTHER INCOME (EXPENSES)
Net rental income ....................... 31,365 31,574
Miscellaneous income (loss) ............. 28 (365)
Interest expense - net .................. (469,167) (257,140)
Financing fees .......................... (276) --
------------- -------------
(438,050) (225,391)
------------- -------------
NET LOSS .................................... $ (910,832) $ (721,191)
============= =============
BASIC LOSS PER SHARE ........................ $ 0.00 $ 0.00
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES (note 12) . 272,790,948 272,790,948
============= =============
-4-
EZCOMM ENTERPRISES, INC.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ....................................... $(2,950,316) $(2,389,604)
Adjustments for:
Depreciation ................................. 488,739 444,512
Amortization of intangible assets ............ 53,500 48,048
Change in non-cash working capital
Accounts receivable .......................... 818,252 (167,956)
Inventory .................................... (47,018) 243,834
Accounts payable ............................. 1,356,224 1,003,880
Accrued severance ............................ (35,801) 41,886
Prepaid and sundry assets .................... (1,261) (52,323)
Rental deposits .............................. -- 55,892
----------- -----------
(317,681) (771,831)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ........ (7,364) (244,256)
Intangible assets ............................ (33,859) (55,637)
----------- -----------
(41,223) (299,893)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to a related company ................ (578,666) (608,355)
Deposit ...................................... (343,112) 1,559,392
Loans payable ................................ (224,181) (423,131)
Advances from shareholders and officer ....... 236,133 (76,248)
Issuance of common stock ..................... 1,282,769 --
----------- -----------
372,943 451,658
----------- -----------
FOREIGN EXCHANGE ON CASH AND CASH EQUIVALENTS ...... (911) 19,933
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,128 (600,133)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR ...... 36,681 697,950
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR ............ $ 49,809 $ 97,817
=========== ===========
INTEREST AND INCOME TAXES PAID
During the year, the company had cash flows
arising from interest and income
taxes paid as follows:
Interest paid .................................. $ 87,262 $ 296,753
=========== ===========
Income taxes paid .............................. $ -- $ --
=========== ===========
-5-
EZCOMM ENTEPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
1. DESCRIPTION OF BUSINESS AND GOING CONCERN
a) Description of Business
Ezcomm Enterprises, Inc. ("the Company") was formerly an inactive
public shell company incorporated under the laws of the State of
Delaware, with no significant operations.
The Korean subsidiary, Eugene Science, Inc., operating in Bucheon,
Kyunggi-Do, Korea, was founded on July 1, 1997 under the laws of the
Republic of Korea to manufacture and sell bio-technology products.
In September 2005, the Company entered into a reverse-takeover
transaction with Eugene Science, Inc., whereby 89.5% of all the
outstanding shares of the Korean subsidiary were exchanged for
272,790,948 shares of the Company. As a result of the transaction,
the shareholders of Eugene Science, Inc. will control 88.5% of the
Company. While the Company is the legal parent, Eugene Science,
Inc., as a result of the reverse-takeover, became the parent company
for accounting purposes.
The Company manufactures CZTM series cholesterol-lowering functional
food ingredients, beverages and capsules fortified with CZTM series
ingredients, and ordinary corn oil. The merchandise sales include
the purchase and resale of vegetable oil products which include the
ingredients of CZTM series.
b) Going Concern
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company has
experienced recurring losses since 2000 and has negative cash flows
from operations that raise substantial doubt as to its ability to
continue as a going concern. For the periods ended September 30,
2005 and 2004, the Company experienced net losses of $2,950,316 and
$2,389,604 respectively.
For 2004 and 2005, the Company had no sales from its main product
CZTM, which accounted for 16% of its total sales and an estimated
gross margin of 28% in 2003.
The Company's ability to continue as a going concern is also
contingent upon its ability to secure additional financing,
initiating sale of its product and attaining profitable operations.
In May 2005, plant sterols, the main ingredient of CZTM series, was
formally approved as a health function food ingredient by the Korean
Food & Drug Administration, making it possible for the Company to
advertise the cholesterol-lowering function of CZTM and food
enriched with CZTM. The Company expects that the favorable change in
the regulation will strongly help in selling CZTM to major food
companies. The Company has also developed new capsule products that
are efficient and convenient in delivering the health function of
CZTM. The Company is actively developing sales channels for CZTM and
the capsule products.
-6-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
1. DESCRIPTION OF BUSINESS AND GOING CONCERN (cont'd)
The Company also plans to strengthen the cooperation with its
international partners to restart shipping to overseas markets. The
Company expects to sell CZTM to major food companies through its
international strategic partners such as Archer Daniels Midland
Company. In regards to CZTM capsules, the Company also plans to
provide a large volume to the United States market starting in the
fourth quarter of 2005 or early 2006 through marketing companies in
the United States.
In addition, management is pursuing various sources of equity
financing. Although the Company plans to pursue additional
financing, there can be no assurance that the Company will be able
to secure financing when needed or obtain such on terms satisfactory
to the Company, if at all.
The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may
result from the possible inability of the Company to continue as a
going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company are in accordance with generally
accepted accounting principles of the United States of America, and their
basis of application is consistent. Outlined below are those policies
considered particularly significant:
a) Basis of Presentation
The consolidated financial statements include the accounts of the
Company, and its 74% owned subsidiary UcoleBio Corp. Intercompany
accounts and transactions have been eliminated on consolidation.
These consolidated financial statements reflect all adjustments,
which are, in the opinion of management, necessary for a fair
presentation of the results for the year.
b) Unit of Measurement
The US Dollar has been used as the unit of measurement in these
financial statements.
-7-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
c) Revenue Recognition
The Company generates revenues from sales of manufactured goods and
merchandise, as well as rental of the company's buildings.
Revenues from products sales are recognized in accordance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB No. 101") when delivery has occurred provided
there is persuasive evidence of an agreement, the fee is fixed or
determinable and collection of the related receivable is probable.
The Company retains substantially all of the benefits and risks of
ownership of its income properties and therefore accounts for leases
with its tenants as operating leases.
d) Government Grants
Government grants are recognized as income over the periods
necessary to match them with the related costs that they are
intended to compensate.
e) Currency Translation
The Company's functional currency is Korean won. Adjustments to
translate those statements into U.S. dollars at the balance sheet
date are recorded in other comprehensive income.
Foreign currency transactions of the Korean operation have been
translated to Korean Won at the rate prevailing at the time of the
transaction. Realized foreign exchange gains and losses have been
charged to income in the year.
f) Cash and Equivalents
Highly liquid investments with maturities of three months or less
when purchased are considered cash equivalents and recorded at cost,
which approximates fair value.
g) Properties and Equipment
Properties and equipment are stated at cost. Major renewals and
betterments are capitalized and expenditures for repairs and
maintenance are charges to expense as incurred. Depreciation is
computed using the straight-line method over the following periods:
Building 20-40 years
Machinery 10 years
Vehicles 5 years
Furniture and equipment 3-5 years
-8-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h) Intangible Assets
Intangible assets such as cost of obtaining industrial rights and
patents are stated at cost, net of depreciation computed using the
straight-line method over 5 to 10 years.
i) Inventories
Inventories are stated at the lower of cost or net realizable value.
Net realizable value is determined by deducting selling expenses
from selling price.
The cost of inventories is determined on the first-in first-out
method, except for materials-in-transit for which the specific
identification method is used.
j) Investments
Investments in available-for-sale securities are being recorded in
accordance with FAS-115 "Accounting for Certain Investments in Debt
and Equity Securities". Equity securities that are not held
principally for the purpose of selling in the near term are reported
at fair market value with unrealized holding gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity.
k) Use of Estimates
Preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and related notes
to financial statements. These estimates are based on management's
best knowledge of current events and actions the Company may
undertake in the future. Actual results may ultimately differ from
estimates, although management does not believe such changes will
materially affect the financial statements in any individual year.
l) Financial Instruments
Fair values of cash equivalents, short-term and long-term
investments and short-term debt approximate cost. The estimated fair
values of other financial instruments, including debt, equity and
risk management instruments, have been determined using market
information and valuation methodologies, primarily discounted cash
flow analysis. These estimates require considerable judgment in
interpreting market data, and changes in assumptions or estimation
methods could significantly affect the fair value estimates.
-9-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
m) Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -
an amendment of ARB No. 43, Chapter 4" (Statement 151). This
statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage). As currently worded in ARB 43, Chapter 4, the term "so
abnormal" was not defined and its application could lead to
unnecessary noncomparability of financial reporting. This Statement
eliminates that term and requires that those items be recognized as
current-period charges regardless of whether they meet the criterion
of "so abnormal." In addition, this Statement requires that
allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities. The
adoption of Statement 151 will not have a material impact on the
Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29" (Statement
153). This Statement amends Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The
adoption of FAS 153 will not have a material impact on the Company's
consolidated financial statements.
In December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment" (Statement 123R). This Statement requires a
public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be
recognized over the period during which the employee is required to
provide service in exchange for the award requisite service period
(usually the vesting period). No compensation cost is recognized for
equity instruments for which employees do not render the requisite
service. Employee share purchase plans will not result in
recognition of compensation cost if certain conditions are met;
those conditions are much the same as the related conditions in
Statement 123. This Statement is effective for public entities that
do not file as a small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15,
2005. This Statement applies to all awards granted after the
required effective date and to awards modified, repurchased, or
cancelled after that date. The cumulative effect of initially
applying this Statement, if any, is recognized as of the required
effective date and is not expected to have a material impact on the
Company's consolidated financial statements.
-10-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
3. CASH AND CASH EQUIVALENTS
The Company had provided a $9,590 (2004 - $44,423) bond as security for
payment on future purchases from a vendor.
4. INVENTORY
Inventory includes $23,559 (2004 - $50,980) of finished goods, $37,024
(2004 - $29,823) of raw materials, and $257 (2004 - $14,400) of
merchandise.
5. ADVANCES TO A RELATED COMPANY
Advances to a company which has the same major shareholder and chief
executive officer bear interest at 9% per annum and are due on demand. The
company is in financial difficulty and thus, collectability of the
advances is uncertain.
6. PROPERTIES AND EQUIPMENT
Properties and equipment are comprised as follows:
2005 2004
ACCUMULATED Accumulated
COST DEPRECIATION Cost Depreciation
----------- ----------- ----------- -----------
Land ................... $ 4,328,306 $ -- $ 3,922,104 $ --
Buildings .............. 3,314,886 752,425 3,003,791 548,820
Equipment .............. 3,955,597 1,741,057 3,596,611 1,248,833
Furniture and fixtures . 932,698 890,289 897,354 763,260
----------- ----------- ----------- -----------
$12,531,487 $ 3,383,771 $11,419,860 $ 2,560,913
=========== =========== =========== ===========
Net carrying amount .... $ 9,147,716 $ 8,858,947
=========== ===========
-11-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
6. PROPERTIES AND EQUIPMENT (cont'd)
The land and buildings have been pledged as security for a bank loan as
described in note 9, the same bank's guarantee of a note payable as
described in note 9, and a rental deposit as described in note 8. During
the 2004 year, the Company defaulted on its payments of the loans and the
bank with the first charge on the Company's properties attempted to
auction off the Company's properties through court action. Also, various
creditors of the Company have put a provisional seizure on the properties
to protect their loans. The appraised value of the properties was
$9,952,000. However, in July 2005, the bank cancelled the auction of the
properties on the Company's payment of auction administrative cost of
$173,000. The loan remains in default.
7. INVESTMENTS
2005 2004
-------- --------
Private company .............................. 7.5% $509,117 $601,718
Company with same major shareholder and CEO .. 4.58% 1 1
Other marketable securities .................. 364 14,995
-------- --------
$509,482 $616,714
======== ========
Included in investments are certain shares of a private company with
carrying value of $269,832 (2004 - $318,911) that are pledged as security
for a trade payable in the amount of $297,725 (2004 - $315,514).
8. RENTAL DEPOSITS
A rental deposit of $57,540 (2004 - $52,140) is secured by a charge on the
land and buildings as described in note 6. The charge is subordinate to
the prior claim held by the bank as described in note 9.
-12-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
9. LOANS PAYABLE
2005 2004
CURRENT LONG-TERM TOTAL Total
----------- ----------- ----------- -----------
Bank loans ............... $ 5,703,812 $ -- $ 5,703,812 $ 5,561,932
Bank loan #2 ............. 1,913,972 -- 1,913,972 --
Note payable #1 .......... 2,281,086 -- 2,281,086 --
Notes payable (#2, 3, & 4) 179,997 -- 179,997 1,010,032
Government loans (#1 & 2) 60,759 310,961 371,720 356,472
Loan payable - customer .. 14,385 -- 14,385 56,485
----------- ----------- ----------- -----------
$10,154,011 $ 310,961 $10,464,972 $ 6,984,921
=========== =========== =========== ===========
Bank Loans
The bank loans bear interest at 4.5% to 18% and are due on demand. A bank
loan of $3,688,207 (2004 - $3,686,628) is secured by a first charge on the
land and buildings as described in note 6. The Company is currently in
default of these loans and, as such, the bank attempted to auction off the
Company's properties through court action. However, in July 2005, the
auction of the properties was cancelled by the bank as described in note
6.
In addition to the security mentioned above, a loan in the amount of
$1,289,815 (2004 - $1,168,769) is guaranteed by Korea Technology Credit
Guarantee Fund, a government operated fund. Additionally, another bank
loan of $273,822 is guaranteed by the chief executive officer as at
September 30, 2005.
Bank Loan #2
The bank loan bears interest at 4.6% per annum, is unsecured, and due on
maturity on December 22, 2005.
Note Payable #1
The note payable from Korea Technology Credit Guarantee Fund, a government
operated fund, bears interest at 21% per annum, is guaranteed by the chief
executive officer, and is due on demand.
Notes Payable #2, 3, & 4
The notes payable bear interest at 0% to 9% and are due on demand. As at
September 30, 2004, a note payable of $850,751 was guaranteed by the bank
with the first charge on the Company's land and buildings as described in
note 6. The loan was repaid by the same bank in the fourth quarter of
2004.
-13-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
9. LOANS PAYABLE (cont'd)
Government Loan #1
The loan is non-interest bearing, unsecured, repayable in three annual
payments of $20,253 and matures February 2006. The Company is in arrears
on the 2004 and 2005 annual payments. Total amount outstanding at
September 30, 2005 was $60,759.
Government Loan #2
The loan is non-interest bearing, unsecured, and is repayable when the
projects related to the loan have been completed.
Loan Payable - customer
The loan payable from a customer is non-interest bearing and due on
demand.
10. ADVANCES FROM SHAREHOLDERS AND OFFICER
2005 2004
-------- --------
Advances from shareholders ............... $ 70,470 $ --
Advances from Chief executive officer .... 237,065 8,105
-------- --------
$307,535 $ 8,105
======== ========
The advances from shareholders are non-interest bearing and is repayable
on demand.
The advances from the chief executive officer, who is also a shareholder,
bears interest at 9% per annum and is repayable on demand.
-14-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
11. CONVERTIBLE DEBENTURES
Pursuant to SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" the Company accounts
for the convertible debentures as a liability at face value and no formal
accounting recognition is assigned to the value inherent in the conversion
feature.
As at September 30, 2004, the Company had a convertible debenture with a
face value of $1,737,705, a guarantee yield of 8.64% per annum on
maturity, and an annual coupon rate of 3% payable quarterly. The debenture
was convertible, to a maximum of 1,538,460 shares of common stock at any
time prior to three business days before the maturity date of October 9,
2004. During 2004, the Company defaulted on the repayment of convertible
bond and its guarantor, KOTEC (Korea Technology Credit Guarantee Fund)
repaid the balance on behalf of the Company. The debt to KOTEC is
reflected in the books and records of the Company as note payable #1 as
described in note 9.
12. CAPITAL STOCK
Authorized:
480,000,000 common shares, par value $0.0001 (2004 - $0.0001)
20,000,000 preferred shares, par value $0.0001 (2004 - $0.0001)
2005 2004
Issued:
308,159,748 (2004 - 35,368,800) common shares $ 30,816 $ 3,537
======== ========
On September 30, 2005, in accordance with a Share Exchange Agreement dated
September 1, 2005, the Company entered into a reverse-takeover transaction
with Eugene Science, Inc., whereby 89.5% of all the outstanding shares of
the Korean subsidiary were exchanged for 272,790,948 shares of the
Company. As a result of the transaction, the shareholders of Eugene
Science, Inc. control 88.5% of the Company. While the Company is the legal
parent, Eugene Science, Inc., as a result of the reverse-takeover, became
the parent company for accounting purposes.
The financial statements have been retroactively adjusted to reflect the
reverse-takeover transaction.
-15-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
13. INCOME TAXES
The Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". This Standard prescribes the use of the
liability method whereby deferred tax asset and liability account balances
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates. The effects of future changes in tax laws or rates are not
anticipated. Corporate income tax rates applicable to the Company in 2005
and 2004 are 16.5 percent of the first 100 million Korean Won ($84,000) of
taxable income and 29.7 percent on the excess.
Under SFAS No. 109 income taxes are recognized for the following: a)
amount of tax payable for the current year, and b) deferred tax
liabilities and assets for future tax consequences of events that have
been recognized differently in the financial statements than for tax
purposes. The Company has deferred income tax assets arising from research
and development expenses. For accounting purposes, these amounts are
expenses when incurred. Under Korean tax laws, these amounts are deferred
and amortized on a straight-line basis over 5 years.
The Company has deferred income tax assets as follows:
2005 2004
----------- -----------
Deferred income tax assets
Research and development expenses
amortized over 5 years for tax purposes ... $ 313,080 $ 345,399
Other timing differences ....................... 64,895 352,912
Net operating loss carryforwards ............... 2,947,404 2,000,094
Valuation allowance for deferred income
tax assets .................................. (3,325,379) (2,698,405)
----------- -----------
$ -- $ --
=========== ===========
The Company provided a valuation allowance equal to the deferred income
tax assets because it is not presently more likely than not that they will
be realized.
-16-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
14. MAJOR CUSTOMERS
In 2004, the Company had three major customers which primarily accounted
for 78% of the total revenue. In 2005, sales to two of the same major
customers accounted for 72% of the total revenue.
15. RELATED PARTY TRANSACTIONS
FINISHED NET RENTAL ACCOUNTS ACCOUNTS
GOODS SALES INCOME PURCHASES RECEIVABLE PAYABLE
---------- ---------- ---------- ---------- ----------
Controlled by same chief
executive officer
- 2004 .............. $ 953,950 $ 60,223 $ 276,904 $2,316,227 $ 239,818
- 2005 .............. $ 108,147 $ 67,244 $ 310,985 $1,841,484 $ 410,573
Controlled by relatives of
chief executive officer
- 2004 .............. $ 103,636 $ 1,161 $ 57,363 $ 1,434 $ 63,247
- 2005 .............. $ 31,316 $ 1,323 $ 59,670 $ 3,481 $ 104,703
The Company with the same chief executive officer has negative working
capital and loss of approximately $900,000 in the nine months ended
September 30, 2005 and thus, collectability of accounts receivable is
uncertain.
These transactions were in the normal course of business and recorded at
an exchange value established and agreed upon by the above mentioned
parties, which approximates fair market value.
16. COMMITMENTS
In January 2004, the Company entered into a commitment to sell its land
and building. The transfer of title is to occur on January 31, 2009. The
Company has received an advance payment of $1,403,497. Until legal
transfer of the title in 2009, the Company is to pay $4,400 monthly in
cash. On any initial public offering, the Company is to also provide
shares based on initial public offering price and the number of months
since the agreement at $8,800 per month. After the initial public
offering, the Company is to pay $13,200 in cash monthly.
Before entering into the agreement, management had made the purchaser of
the properties aware the properties were pledged as security against the
Company's loans as described in note 6. At the time of agreement,
management and the purchaser determined that in the case of an auction of
the properties by the creditors such as the one described in note 6, the
remaining proceeds would allow the Company to return the advance payment.
In January 2005, a government loan repayable of approximately $44,000 was
forgiven. However, the Company is not allowed to participate in any new
government projects for one year.
-17-
EZCOMM ENTERPRISES, INC.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
(Unaudited)
17. SUBSEQUENT EVENTS
a) The Company is in default of its bank loans as disclosed in note 9
and $2,015,605 (2004 - $1,875,302) of these loans have been
transferred to collection agency as at September 30, 2005. The
Company plans to pay off the loans in partial payments.
b) On October 14, 2005, the Company issued 3.5 million shares of its
common stock at par value to an individual in consideration of
consulting services provided to the Company.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend that such forward-looking statements
be subject to the safe harbors for such statements. We caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. Any forward-looking statements represent management's best
judgment as to what may occur in the future. These forward-looking statements
include the plans and objectives of management for future growth of our
business, including plans and objectives related to the consummation of
acquisitions and future private and public issuances of our equity and debt
securities. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Although we believe that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-QSB will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved. We disclaim any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statement
or to reflect the occurrence of anticipated or unanticipated events.
The words "we," "us," "our," the "Company" refer to Ezcomm Enterprises,
Inc. The words or phrases "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate," or "continue," "would be," "will allow," "intends
to," "will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions, or the negative thereof, are
intended to identify "forward-looking statements." Actual results could differ
materially from those projected in the forward looking statements as a result of
a number of risks and uncertainties, including but not limited to: (a) limited
amount of resources devoted to achieving our business plan; (b) our failure to
implement our business plan within the time period we originally planned to
accomplish; and (c) other risks that are discussed in this Form 10-QSB or
included in our previous filings with the Securities and Exchange Commission.
BUSINESS OVERVIEW AND RECENT DEVELOPMENTS
We are a global biotechnology company that develops, manufactures and
markets nutraceuticals, or functional foods that offer health-promoting
advantages beyond that of nutrition. Our primary products are our plant sterol
products, including CZ(TM) Series of food additives, and our CholZero(TM)
branded beverageS AND capsules.
Our primary products are a series of cholesterol-lowering food additives,
consisting of specially formulated plant sterols that are soluble in both oil
and water. The key technology to produce such plant sterols is a patented
nanotechnology which allows plant sterols to be added to a wide range of oil and
water-based foods. Our nano-sized plant sterols used as food additives are
branded as "CZTM Series" additives and our food and consumable products
containing CZTM Series additives are being marketed under the brand name of
CholZeroTM. Our initial CholZeroTM products include CholZeroTM capsules
containing our CZ-STM Series additive, and a CholZeroTM beverage.
During the fiscal year ending December 31, 2004, we did not
aggressively market our nutraceuticals and functional food products, pending
regulatory approval of certain health claims associated with our products from
the government agencies in the Republic of Korea (or South Korea) and the United
States of America. In June 2005, we received this regulatory approval from South
Korea.
In May 2005, the Amendment Functional Health Food Law of 2005 was
adopted. The amendment allows us to market our CholZeroTM branded products as a
functional health food and to include claims of health benefits with respect to
the product's plant sterol ingredients. We anticipate that sales of our
CholZeroTM branded products will increase in the remainder fiscal year 2005 and
in fiscal year 2006 due to both the amendment of the Korean
-19-
Functional Health Food Law and our engagement of Nutra Nano Tech, as our
exclusive distributor of CholZeroTM capsules throughout the United States. Nutra
Nano Tech will primarily distribute our CholZeroTM capsules through television
infomercials. We anticipate that sales of CholZeroTM capsules in the United
States will begin in February 2006.
We also generate revenue from the sale of supplemental products,
including raw cooking oil (oils used in the manufacturing of cooking oil). We
own an approximately 73% equity interest in UcoleBio Corp., a company originally
formed to provide sales and distribution services for our products in South
Korea.
CORPORATE HISTORY AND EXCHANGE TRANSACTION
We were incorporated on August 26, 1998 under the name Orcas Ltd.,
under the laws of the State of Delaware. As Orcas Ltd., we were in the business
of building and promoting arcade video games and vending machines. We underwent
a reverse merger and abandoned this enterprise to develop a loyalty reward
program based in Taipei, Taiwan, and changed our name to Ezcomm Inc. to reflect
this change in business. We were unable to raise enough capital to finance the
research and development of our proposed consumer incentive and loyalty program
in Asia and all efforts to develop the business were abandoned in January 2001.
We remained inactive until July 2004, when we changed our name to Ezcomm
Enterprises, Inc. and began to consider and investigate potential business
opportunities, including an acquisition by merger.
On September 30, 2005, pursuant to an Exchange Agreement dated
September 1, 2005 by and among our Company, Eugene Science, Inc. ("Eugene
Science") and certain stockholders of Eugene Science, we acquired approximately
89.5% of the issued and outstanding shares of Eugene Science in exchange for the
issuance of an aggregate of 272,790,948 shares of our Common Stock to the former
Eugene Science stockholders. In addition, and pursuant to the Exchange
Agreement, we exchanged an equal amount of cash with the Eugene Science
Stockholders (an aggregate of $103,514.48) and we assumed all of Eugene
Science's outstanding options. As a result of the Exchange Transaction, Eugene
Science is now our subsidiary, and the former Eugene Science stockholders held
approximately 89% of our voting stock on a fully-diluted basis immediately
following completion of the exchange transaction. Prior to the exchange
transaction we were a "shell company" as defined in Rule 12b-2 under the
Securities Exchange Act of 1934. In conjunction with the exchange transaction we
also issued a warrant to purchase 7,073,760 shares of our common stock to
WestPark Capital, Inc., at $0.17 per share as partial compensation for their
financial advisory services with respect to the exchange transaction.
The exchange transaction was accounted for as a reverse merger
(recapitalization) with Eugene Science deemed to be the accounting acquirer, and
us as the legal acquirer. Accordingly, the historical financial information
presented in the consolidated financial statements included in this report are
that of Eugene Science as adjusted to give effect to any difference in the par
value of ours and Eugene Science's stock with an offset to capital in excess of
par value. The basis of the assets, liabilities and retained earnings of Eugene
Science, the accounting acquirer, have been carried over in the
recapitalization.
GOING CONCERN
Our independent auditor has expressed substantial doubt as to our
ability to continue as a going concern, in its report for the year ended
December 31, 2004, based on significant operating losses that we incurred and
the fact that we do not have adequate working capital to finance our day-to-day
operations. Our continued existence depends upon the success of management's
efforts to raise additional capital necessary to meet the Company's obligations
as they come due and to obtain sufficient capital to execute its business plan.
The Company intends to obtain capital primarily through issuances of debt or
equity. There can be no degree of assurance that the Company will be successful
in completing additional financing transactions. If we cannot obtain adequate
funding or achieve revenues from the sale of our products, we could be required
to significantly curtail or even shutdown our operations.
RESULTS OF OPERATIONS
Because Eugene Science's owners as a group retained or received the
larger portion of the voting rights in the Company after the exchange
transaction and Eugene Science's senior management represents a majority of the
senior management of the combined entity, Eugene Science was considered the
acquirer for accounting purposes. Therefore, the information set forth below has
been derived from Eugene Science's financial statements
-20-
accompanying this Report. This information should be read in conjunction with
such financial statements and the notes thereto.
COMPARISON OF THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
SEPTEMBER 30, 2004
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2005 2004 2005
---------- ---------- ---------- ----------
Manufacturing .......... $ 576,608 $ 104,410 $1,849,542 $ 399,201
Merchandise ............ 198,533 169,755 496,170 391,278
---------- ---------- ---------- ----------
Total revenues ...... $ 775,141 $ 274,165 $2,345,712 $ 790,479
========== ========== ========== ==========
Our sales of raw cooking oil, CZTM Series additives, animal feed, and
CholZeroTM branded products, including beverages and capsules, are accounted for
as manufacturing revenues. Our sales of CholZeroTM cooking oil (our branded
version of DG Oil), deodorants other non-functional food products are accounted
for as merchandise revenues.
Revenues decreased $1.6 million, or 66%, for the nine months ended
September 30, 2005, as compared to the same period in 2004. Revenues decreased
$0.5 million, or 65%, for the three months ended September 30, 2005, as compared
to the third quarter of 2004. The decrease in revenues in the current year
periods is primarily attributable to the assignment of our raw cooking oil
supply contract to our affiliate, OnBio Corporation, in March 2005. During the
nine months ended September 30, 2004, approximately 42% of our revenues were
derived from the sale of raw cooking oil to OnBio Corporation. In March 2005 we
assigned our raw cooking oil supply contract to OnBio Corporation as part of our
plan to eliminate businesses unrelated to our primary nutraceutical business.
Since this assignment, our revenues have been derived entirely from our
remaining supplemental products.
We anticipate that sales of our products during the fourth quarter of
2005 and in 2006 will increase as a result of our ability to make health claims
with respect to our CZTM Series additives and CholZeroTM products in Korea after
enactment of the Amendment of Health Functional Food Standards, and upon the
anticipated approval of our "Generally Recognized as Safe" application with the
U.S. FDA for our CZTM-S additive in the United States. We have engaged ADM as
our exclusive distributor of CZTM Series additives in North America and Europe
and have authorized ADM to manage our U.S. FDA approval process in the United
States.
OPERATING EXPENSES
COST OF SALES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2005 2004 2005
---------- ---------- ---------- ----------
Cost of Sales
Manufacturing ..... $ 606,456 $ 59,215 $1,759,193 $ 308,203
Merchandise ....... $ 174,605 $ 134,487 512,439 310,028
Gross profit for the nine months ended September 30, 2005 increased
$98,168, or 133%, to $172,248, as compared to $74,080 for the prior year period.
Gross profit for the quarter ended September 30, 2005 was $80,463, compared to a
gross loss of $5,920 in the third quarter of 2004. Gross margin increased to
21.8% for the first nine months of fiscal 2005, compared to 3.2% for the first
nine months of fiscal 2004. The increase in gross margin for the current year
was due primarily to partial return of products from our Japanese distributor
due to the expiration of the
-21-
additive's stated shelf life, which was reflected as a cost of sales in the
prior year period. No such charge was recorded in the current year period.
EXPENSES
General expenses primarily include salary, employee benefits and
retirement allowance; professional fees; research and development; office and
general; travel; repairs and maintenance; utilities; advertising, promotion and
entertainment; insurance; bad debts; rent; foreign exchange; and depreciation.
These expenses increased $117,452, or 7.1%, for the nine months ended September
30, 2005 as compared to the prior year. For third quarter of 2005, these
expenses increased $63,905, or 13.1% as compared to the third quarter of 2004.
The increase in expenses for the first nine months of fiscal year 2005 are
primarily due to increased professional fees and travel during the current year
in connection with the exchange transaction described above, offset by a
reduction in advertising, promotion and marketing expenses.
OTHER INCOME (EXPENSE)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2004 2005 2004 2005
----------- ----------- ----------- -----------
Net rental income ............. $ 31,574 $ 31,365 $ 102,433 $ 103,870
Miscellaneous income (loss) ... (365) 28 (55,172) 16,296
Interest expense -net ......... (257,140) (469,167) (739,142) (1,304,518)
Interest - Other .............. -- -- (116,084) (132,343)
Financing fees ................ -- (276) -- (32,698)
----------- ----------- ----------- -----------
Total other income (expense) $ (225,931) $ (438,050) $ (807,965) $(1,349,393)
Other expenses increased $531,428, or 67.0%, for the nine months ended
September 30, 2005 as compared to the same period of 2004. The increase is
primarily the result of increased interest due on loans in default. All of our
bank loans, except for our loan from the National Agricultural Cooperative
Federation, were in default as of December 31, 2004 and remained in default as
of September 30, 2005. The interest rate on such loans ranges from 4.5% to 18%.
We are currently in negotiations with these lenders to settle our outstanding
debts.
NET LOSS
Net loss increased approximately $0.6 million for the first nine months
of 2005, or 23.5%, to $3.0 million, as compared to $2.4 million for the first
nine months of 2004. Net loss per share for the three and nine months ended
September 30, 2005 was $0.00 and $0.01, respectively. The increase in net loss
is primarily due the reduced revenues in the current year period, for the
reasons described above, and increased professional, travel and interest
expenses, offset by the reduction of cost of sales.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, we had cash and cash equivalents of $49,809.
As of September 30, 2005, we had negative working capital of $13,918,735. We
expect a significant use of cash during the balance of fiscal year 2005 as we
expand our marketing and distribution operations.
If additional funds are raised through the issuance of equity
securities, the current stockholders may experience dilution. Furthermore, there
can be no assurance that additional financings will be available when needed or
that if available, such financings will include terms favorable to our
stockholders. If such financings are not available when required or are not
available on acceptable terms, we may be unable to take advantage of business
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
-22-
CASH FLOWS
We currently satisfy our working capital requirements primarily through
cash flows generated from operations, bank loans and sales of equity and debt
securities. For the nine months ended September 30, 2005, we had a net increase
in cash and cash equivalents of approximately $13,128. Cash flows from
operating, financing and investing activities for the nine months ended
September 30, 2004 and 2005 are summarized in the following table:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
ACTIVITY 2004 2005
--------- ---------
Operating activities ............................. $(771,831) $(317,681)
Investing activities ............................. (299,893) (41,223)
Financing activities ............................. 451,658 372,943
Foreign exchange on cash & cash equivalents ...... 19,933 (911)
--------- ---------
Net increase (decrease) in cash ............... $(600,133) $ 13,128
Net cash used in operating activities of $317,681 during the nine
months ended September 30, 2005 was primarily result of the net loss of
approximately $3.0 million, increases in accounts receivable of approximately
$845,388 and increases in accounts payable of approximately $1.2 million. The
increase in accounts receivable is primarily due to extension of payment terms
for our largest customer. Net cash used in operating activities during the first
nine months of 2005 decreased $454,150 when compared to the same period in 2004.
This is due to the decrease in production and marketing efforts, and the fact
that we received a one-time advance payment of $1,768,344 upon the execution of
an agreement in 2005 in conjunction with the sale of its real property in Korea
to Wando Seafood Distribution Co. Ltd.
The $41,223 of net cash used in investing activities during the nine
months ended September 30, 2005 was due primarily to the decrease in intangible
assets and acquisition of property and equipment.
The $372,943 of net cash provided by financing activities during the
nine months ended September 30, 2005 is primarily the result of approximately
$1.3 million raised from the sale of common stock and $236,133 in advances from
a shareholder and officer, offset by advances of $578,666 to a related company
and repayment of loans.
BANK LOANS
Since 1999 we have borrowed the principal amount of $3,688,207 from
Industrial Bank of Korea. These loans bear interest at 4.5% to 18% and are due
on demand. A portion of these loans was secured by our real property. Loans in
the aggregate principal amount of $1,289,815 are guaranteed by the Korea
Technology Credit Guarantee Fund, a government-operated fund. At September 30,
2005, the principal balance and accrued interest on these loans was
approximately $4,616,669. At December 2004, we were in default under these loans
and, as such, at December 31, 2004, the bank requested that our real property be
auctioned to repay the loan. Industrial Bank of Korea has since agreed to cancel
the auction upon the payment by us of administrative costs of $173,000. As of
September 30, 2005, we remained in default under these loans. We are currently
in negotiations with Industrial Bank of Korea to settle our outstanding debts.
In December, 2004 we obtained a short-term loan from the National
Agricultural Cooperative Federation ("NACF") in the principal amount of
$1,946,104. This loan has an interest rate of 4.6% and is due on December 22,
2005. This loan is guaranteed by Korea Technology Credit Guarantee Fund
("KOTEC"). At September 30, 2005, the principal balance and accrued interest on
this loan was $1,913,972.
In September 2002, we obtained a short-term loan from ChoHeung Bank in
the principal amount of $273,822. This loan has an interest rate of 9.5%, was
due on August 1, 2004, and was personally guaranteed by our Chief Executive
Officer. At September 30, 2005, we were in default under this loan and the
principal balance and accrued interest due was approximately $341,409. We are
currently in negotiations with ChoHueng Bank to settle our outstanding debts.
-23-
In July 2001 and December 2002, we entered into loan arrangements with
Kookmin Bank. Each loan was for $1,000,000, was unsecured, and had interest
rates of 6.22% and 11.22%, respectively. Both loans were due on November 15,
2004. At September 30, 2005 we were in default under both loans and the
principal and accrued interest due was approximately $2,175,322. We are
currently in negotiations with Kookmin Bank to settle our outstanding debts.
We are in default of certain bank loans described above, and
approximately $2.0 million of our obligations under these loans have been
transferred to collection agency as at September 30, 2005. We plan to pay off
the loans in partial payments.
NOTES PAYABLE
On October 9, 2004, we issued to KOTEC a note in connection with its
payout as guarantor of our Convertible Debenture described below. The Note bears
interest at 21% per annum, is guaranteed by our Chief Executive Officer, and is
due on demand. To date, no demands for payment have been made. At September 30,
2005, the balance of the note was approximately $2,281,086. Interest payments on
the note are classified in our financial statements as accounts payable.
In April, 2002 we issued to Korean Institute of Industrial Technology
Evaluation and Planning a non-interest bearing note in the amount of $44,463.
The note was due on demand. The note was paid in full on January 2005.
In February 2004 we issued a note bearing 9% interest to Luxware Co.,
Ltd. in the principle amount of $68,257. The note was paid in full in March
2005.
In October, we issued a note bearing 9% interest to Jae Ho Lee, the
President of UcoleBio Corp., our 73% owned subsidiary. The note was due on
demand and the remaining balance of this loan was $46,983 at September 30, 2005.
In February, 2002, we issued a note of $100,000 bearing 8% interest to
Kyungioils.co, Ltd. The note was due on demand, and the remaining balance of
this loan was $17,933 at September 30, 2005.
In January, 2002, we issued a note in the principal amount of $846,835
to KTB Network. The note bore interest at 10.2% percent, was due in full in
December 2004 and was guaranteed by the Industrial Bank of Korea. We defaulted
on periodic payments due under the note in June 2004 and the guarantor,
Industrial Bank of Korea agreed to assume the note and make payments thereunder.
CONVERTIBLE DEBENTURES
On October 9, 2001, we issued to KOTEC a convertible debenture in the
principal amount of $1,950,200. At December 31, 2003, the Convertible Debenture
had a face value of $1,666,791, a guarantee yield of 8.64% per annum on
maturity, and an annual coupon rate of 3% payable quarterly. The debenture was
convertible into a maximum of 1,538,460 shares of common stock at any time prior
to three business days before the maturity date of October 9, 2004. During 2004,
we defaulted on the repayment of the Convertible Debenture and its guarantor,
KOTEC repaid the balance on our behalf.
GOVERNMENT LOANS
On March 2, 2003, we received a non-interest bearing, unsecured
government loan from in the principal amount of $61,779. The loan must be repaid
in three annual installments of $20,593, beginning February 26, 2004 and matures
in its entirety in February 2006. We are in arrears on the 2004 and 2005
payments. At September 30, 2005, the total amount outstanding was $60,759 under
this loan arrangement.
We received a $316,181 government loan in connection with a certain
research and development projects over the period from 1999 to 2002. The project
was not successful, and we are therefore obligated to refund to the government
the principal amount of the loan.
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In 2001 we received a $225,984 loan and $12,676 loan, and in 2003 we
received a $77,520 loan, from the Ministry of Commerce, Industry and Energy in
connection with a research and development project related to the development of
a protein chip. At September 30, 2005, the loans remained outstanding and were
not due, pending conclusion of the funded research.
OTHER LOANS
We received a loan in the principal amount of $63,382 from our
customer, Sim chon, Co., Ltd, in December, 2004. The loan is non-interest
bearing and due on demand. The principal of $48,997 was repaid during the first
nine months of 2005. As of September 30, 2005, the balance of the loan was
$14,385.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2005, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance, variable interest or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. As such, we are not exposed to any financing, liquidity, market or
credit risk that could arise if we had engaged in such relationships.
RELATED PARTY TRANSACTIONS
Other than as described below, there are no proposed transactions or
series of related transactions, nor were there any transactions or series of
related transactions during Fiscal 2003 and 2004, to which the we or Eugene
Science was a party, in which the amount involved exceeded or will exceed
$60,000 and in which any director, executive officer, holder of more than 5% of
our common stock or any member of the immediate family of any of the foregoing
persons had or will have a direct or indirect material interest:
In March, 2005 we assigned our raw cooking oil supply contract to OnBio
Corporation. Our Chief Executive Officer and significant stockholder, Dr. S.K.
Noh, is also the Chief Executive Officer and a significant stockholder of OnBio
Corporation. OnBio Corporation is one of our suppliers (for DG Oil) and was our
largest customer in fiscal year 2004. At September 30, 2005, we had an account
receivable from OnBio Corporation in the amount of $1,841,484, resulting
primarily from the purchase of our raw cooking oil.
During the last two fiscal years we and Onbio Corporation have
periodically provided cash advances to each other. All advances accrue interest
at a rate of 9% per annum and are due on demand. As of September 30, 2005, the
current net principal and interest owed to us by OnBio Corporation for advances
made is $1,476,055. OnBio Corporation is currently in financial difficulty,
however we believe that the advance will be repaid.
Tony Kim, a member of our board of directors, is the Chief Executive
Officer of Nutra Nanotech, an entity that we have engaged to market and
distribute its CholZeroTM capsules in the United States.
On March 1, 2005, Eugene Science, Inc. issued 2,500,000 shares in a
private placement transaction to Telos, LLC at a price of approximately $0.40
per share. These shares were exchanged for 23,063,381 shares of our common stock
pursuant to the exchange transaction described above. Tony Kim, a member of our
board of directors, is also a director and executive officer and has an
ownership interest in Telos, LLC.
During fiscal year 2004 and the nine months ending September 30, 2005,
we purchased goods from Boo Won Sil Up, an entity controlled by the father of
our Chief Executive Officer, director and significant shareholder, Dr. S.K. Noh.
At September 30, 2005, we had an account payable of $104,703 owing to Boo Won
Sil Up.
On various dates through 2004 we received advances of an aggregate of
$6,169 from our Chief Executive Officer, director and significant stockholder,
Dr. S.K. Noh. The advances accrued interest at 9% per annum and were due on
demand. As of September 30, 2005, the balance of the advances was $247,200.
We provided a $418,600 term deposit at December 31, 2003 as security
for a loan incurred by our affiliate, OnBio Corporation. During 2004, the term
deposit ceased and the proceeds loaned to Onbio Corporation for repayment of its
bank loan.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. We are required to make assumptions about
matters, which are highly uncertain at the time of the estimate. Different
estimates we could reasonably have used or changes in the estimates that are
reasonably likely to occur could have a material effect on our financial
condition or result of operations. Estimates and assumptions about future events
and their effects cannot be determined with certainty. On an ongoing basis, we
evaluate estimates, including those related to returns, discounts, bad debts,
inventories, intangible assets, income taxes, and contingencies and litigation.
We base our estimates on historical experience and on various assumptions
believed to be applicable and reasonable under the circumstances. These
estimates may change as new events occur, as additional information is obtained
and as our operating environment changes. In addition, management is
periodically faced with uncertainties, the outcomes of which are not within its
control and will not be known for prolonged period of time.
We believe our financial statements are fairly stated in accordance
with accounting principles generally accepted in the United States of America
and provide a meaningful presentation of our financial condition and results of
operations.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a further discussion on the application of these and
other accounting policies, see Note 2 of the "Notes to Consolidated Financial
Statements" to our consolidated financial statements for the year ended December
31, 2004, included in our Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 6, 2005.
REVENUE RECOGNITION. We generate revenues from sales of manufactured
goods and merchandise, as well as rental of the company's buildings. Revenues
from products sales are recognized in accordance with Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" ("SAB No. 101") when
delivery has occurred provided there is persuasive evidence of an agreement, the
fee is fixed or determinable and collection of the related receivable is
probable. We retain substantially all of the benefits and risks of ownership of
our income properties and therefore account for leases with our tenants as
operating leases.
ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS. We
evaluate the collectibility of accounts receivable and chargebacks (disputes
from the customer) based upon a combination of factors. In circumstances where
we are aware of a specific customer's inability to meet its financial
obligations (such as in the case of bankruptcy filings or substantial
downgrading of credit sources), a specific reserve for bad debts is taken
against amounts due to reduce the net recognized receivable to the amount
reasonably expected to be collected. For all other customers, we recognize
reserves for bad debts and chargebacks based on our historical collection
experience. If our collection experience deteriorates (for example, due to an
unexpected material adverse change in a major customer's ability to meet its
financial obligations to us), the estimates of the recoverability of amounts due
us could be reduced by a material amount.
INVENTORIES. Inventories are stated at the lower of cost or net
realizable value. Net realizable value is determined by deducting selling
expenses from selling price. The cost of inventories is determined on the
first-in first-out method, except for materials-intransit for which the specific
identification method is used. Inventory adjustments are made for the difference
between the cost of the inventory and the estimated market value and charged to
operations in the period in which the facts that give rise to the adjustments
become known.
INTANGIBLE ASSETS. Intangible assets such as cost of obtaining
industrial rights and patents are stated at cost, net of depreciation computed
using the straight line method over 5 to 10 years.
INCOME TAXES. As part of the process of preparing our consolidated
financial statements, management is required to estimate income taxes in each of
the jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for book and tax purposes. These timing differences
result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. Management records a valuation allowance to reduce
our net deferred tax assets to
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the amount that is more likely than not to be realized. Management has
considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance. Increases in the valuation
allowance result in additional expense to be reflected within the tax provision
in the consolidated statement of operations.
We have deferred income tax assets arising from research and
development expenses. For accounting purposes, these amounts are expenses when
incurred. Under Korean tax laws, these amounts are deferred and amortized on a
straight-line basis over 5 years.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" (Statement 151). This statement amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). As currently worded in ARB 43, Chapter 4,
the term "so abnormal" was not defined and its application could lead to
unnecessary noncomparability of financial reporting. This Statement eliminates
that term and requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. The adoption of Statement 151 will not have a material impact on our
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29" (Statement 153). This
Statement amends Opinion 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
adoption of FAS 153 will not have a material impact on our consolidated
financial statements.
In December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment" (Statement 123R). This Statement requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which the
employee is required to provide service in exchange for the award requisite
service period (usually the vesting period). No compensation cost is recognized
for equity instruments for which employees do not render the requisite service.
Employee share purchase plans will not result in recognition of compensation
cost if certain conditions are met; those conditions are much the same as the
related conditions in Statement 123. This Statement is effective for public
entities that do not file as a small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005. This
Statement applies to all awards granted after the required effective date and to
awards modified, repurchased, or cancelled after that date. The cumulative
effect of initially applying this Statement, if any, is recognized as of the
required effective date and is not expected to have a material impact on our
consolidated financial statements.
CAUTIONARY STATEMENTS AND RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS REPORT BEFORE PURCHASING SHARES OF OUR COMMON
STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF ANY OF
THE FOLLOWING EVENTS OR OUTCOMES ACTUALLY OCCURS, OUR BUSINESS OPERATING RESULTS
AND FINANCIAL CONDITION WOULD LIKELY SUFFER. AS A RESULT, THE TRADING PRICE OF
OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU
PAID TO PURCHASE OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
OUR AUDITORS HAVE A GOING CONCERN QUALIFICATION IN THEIR OPINION CONTAINED IN
OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS WHICH RAISES SUBSTANTIAL DOUBT
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
As a result of our substantial historical operating losses, limited
revenues and working capital and our capital needs, our auditors added a going
concern qualification (explanatory paragraph) in their report contained in
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our audited consolidated financial statements for the fiscal year ended December
31, 2004 which raises substantial doubt about our ability to continue as a going
concern. While we have relied principally in the past on external financing to
provide liquidity and capital resources for our operations, we can provide no
assurances that cash generated from operations together with cash received in
the future from external financing will be sufficient to enable us to continue
as a going concern.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL AND IT MAY NOT BE AVAILABLE TO US ON
FAVORABLE TERMS OR AT ALL; INABILITY TO OBTAIN ANY NEEDED ADDITIONAL CAPITAL ON
FAVORABLE TERMS COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
We will need to raise additional capital over the next twelve months to
support our operations, meet competitive pressures and/or respond to
unanticipated requirements during and beyond that period. While there are no
definitive arrangements with respect to sources of additional financing,
management is optimistic that these funds can be raised through debt and/or
equity offerings. However, our inability to obtain additional financing, when
needed or on favorable terms, could materially adversely affect our business,
results of operations and financial condition and could cause us to curtail or
cease operations.
WE MAY FAIL TO ESTABLISH OR CULTIVATE STRATEGIC RELATIONSHIPS TO EXPAND OUR
BUSINESS.
We intend to develop our business model and build our business initially
through strategic relationships with large manufacturers. We may not be able
successfully to form or manage such relationships, and if not, our ability to
execute our business plan will be at risk. Further, if these partnerships are
formed but are not successful in their execution, further revenue derived from
sales of patented products may not materialize.
BECAUSE WE RELY ON A LIMITED NUMBER OF CUSTOMERS, ANY REDUCTION IN ORDERS FROM
ANY SINGLE CUSTOMER WOULD HARM OUR BUSINESS.
During the fiscal year ended December 31, 2004, sales to three major
customers accounted for 87% of our total revenue. We may fail to capture a share
of the market for such products. Because we are dependent on a limited number of
customers, any decrease or elimination of such customer's purchases could
materially harm our business.
WE FACE PRODUCT LIABILITY RISKS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE INSURANCE
TO PROTECT OURSELVES AGAINST LOSSES.
We maintain liability insurance with policy limits generally of
$200,000 per occurrence and $200,000 per year. Our insurance coverage includes
property, casualty, comprehensive general liability, and products liability
insurance. We believe that our insurance coverage is adequate. The testing,
marketing, and sale of health care products, however, entail an inherent risk of
product liability. We cannot assure you that product liability claims relating
to dietary supplement products will not be asserted against us, our licensees,
or third parties with whom we operate. Many claims related to dietary
supplements have already been brought against businesses in our industry.
Further, we cannot assure you that such insurance will provide adequate coverage
against any potential claims. A product liability claim or product recall could
have a material adverse effect on our business, financial condition, or results
of operations.
WE MAY EXPERIENCE DIFFICULTY IN ENTERING INTERNATIONAL MARKETS.
The creation of strategic customer relationships and the marketing and
sale of our functional nutrition technology/products could experience difficulty
entering both the U.S. and additional international markets due to greater
regulatory barriers, the necessity of adapting to new regulatory systems and
problems related to entering new markets with different cultural bases and
political systems. Operating in international markets exposes us to certain
risks, including, among other things: (a) changes in or interpretations of
foreign regulations that may limit our ability to sell certain products; (b)
exposure to currency fluctuations; (c) the potential imposition of trade or
foreign exchange restrictions or increased tariffs; and (d) political
instability. In addition, there can be no assurance that we will be able to
enter into agreements with additional international marketing partners and
thereby would limit the expansion of our revenue base.
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WE RELY ON PATENTS, LICENSES AND INTELLECTUAL PROPERTY RIGHTS TO PROTECT OUR
PROPRIETARY INTERESTS.
Our success depends in part on our ability to obtain patents, licenses
and other intellectual property rights covering its products. There can be no
assurance that our licenses, patents and patent applications are sufficiently
comprehensive to protect our products. The process of seeking further patent
protection can be long and expensive, and there can be no assurance that we will
have sufficient capital reserves to cover the expense of patent prosecution for
their application or that all or even any patents will issue from currently
pending or any future patent applications or that any of the patents when issued
will be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to us. While we believe the bases on which patent
applications were filed correspond to the patents that have been issued for
composition and method of production and use and are reasonable given the
issuance of the latter patents, there can be no assurance that the patents for
which it has applied will be issued. We may be subject to or may be required to
initiate interference proceedings with international patent and trademark
authorities. Such proceedings could demand significant financial and management
resources. We may receive communications alleging possible infringement of
patents or other intellectual property rights of others. We believe that in most
cases it could obtain necessary licenses or other rights on commercially
reasonable terms, but it may be unable to do so. In addition, litigation could
ensue or damages for any past infringements could be assessed. Litigation, which
could result in substantial cost to and diversion of efforts by our management,
may be necessary to enforce patents or our other intellectual property rights or
to defend against claimed infringement of the rights of others. The failure to
obtain necessary licenses or other rights or litigation arising out of
infringement claims could have a material adverse effect on us.
OUR SUCCESS DEPENDS IN PART ON OUR SUCCESSFUL DEVELOPMENT AND SALE OF PRODUCTS
CURRENTLY IN THE RESEARCH AND DEVELOPMENT STAGE.
Many of our product candidates are still in the research and
development stage. The successful development of new products is uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early states of development may not reach the market for a number
of reasons, including but not limited to, the cost and time of development.
Potential products may be found to be ineffective or cause harmful side effects,
fail to receive necessary regulatory approvals, be difficult to manufacture on a
large scale or be uneconomical or fail to achieve market acceptance.
Additionally, our proprietary products may not be commercially available for a
number of years, if at all.
There can be no assurance that any of our products in development will
be successfully developed or that we will achieve significant revenues from such
products even if they are successfully developed. Our success is dependent upon
our ability to develop and market our products on a timely basis. There can be
no assurance that we will be successful in developing or marketing such
products, or taking advantage of the perceived demand for such products. In
addition, there can be no assurance that products or technologies developed by
others will not render our products or technologies non-competitive or obsolete.
WE WILL RELY IN PART ON INTERNATIONAL SALES, WHICH ARE SUBJECT TO ADDITIONAL
RISKS.
International sales may account for a significant portion of our
revenues. International sales can be subject to many inherent risks that are
difficult or impossible for us to predict or control, including:
o unexpected changes in regulatory requirements and tariffs;
o difficulties and costs associated with staffing and managing
foreign operations, including foreign distributor
relationships;
o longer accounts receivable collection cycles in certain
foreign countries;
o adverse economic or political changes;
o unexpected changes in regulatory requirements;
o more limited protection for intellectual property in some
countries;
o changes in our international distribution network and direct
sales force;
o potential trade restrictions, exchange controls and import and
export licensing requirements;
o potentially adverse tax consequences of overlapping tax
structure; and
o foreign currency fluctuations.
-29-
FAILURE TO ADEQUATELY EXPAND TO ADDRESS EXPANDING MARKET OPPORTUNITIES COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We anticipate that a significant expansion of operations will be
required to address potential market opportunities. There can be no assurances
that we will expand our operations in a timely or sufficiently large manner to
capitalize on these market opportunities. The anticipated substantial growth is
expected to place a significant strain on our managerial, operational and
financial resources and systems. While management believes it must implement,
improve and effectively use our operational, management, research and
development, marketing, financial and employee training systems to manage
anticipated substantial growth, there can be no assurances that these practices
will be successful.
WE DO NOT HAVE A SEPARATE STANDING AUDIT COMMITTEE, COMPENSATION COMMITTEE OR
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE, SO THE DUTIES CUSTOMARILY
DELEGATED TO THOSE COMMITTEES ARE PERFORMED BY THE BOARD OF DIRECTORS AS A
WHOLE, AND NO DIRECTOR IS AN "AUDIT COMMITTEE FINANCIAL EXPERT" AS DEFINED BY
THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION.
Our Board of Directors consists of four members. The Board of Directors
as a whole performs the functions of an Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee. None of the directors is
considered "independent" under Rule 4200(a)(15) of the National Association of
Securities Dealers listing standards, and neither qualifies as an audit
committee financial expert as defined in Item 401 of Regulation S-B.
Accordingly, we will not be able to list our common stock with a nationally
recognized exchange until we recruit independent directors to the Board and
restructure our Board to comply with various requirements currently in place by
those self-regulating organizations, and as a result, it may be difficult for
you to sell our common stock.
OUR BUSINESS IS SUBJECT TO THE POTENTIAL ADVERSE CONSEQUENCES OF EXCHANGE RATE
FLUCTUATIONS.
We expect to conduct business in various foreign currencies and will be
exposed to market risk from changes in foreign currency exchange rates and
interest rates. Fluctuations in exchange rates between the U.S. Dollar and such
foreign currencies may have a material adverse effect on our business, results
of operations, and financial condition and could specifically result in foreign
exchange gains and losses. The impact of future exchange rate fluctuations on
our operations cannot be accurately predicted. To the extent that the percentage
of our non-U.S. Dollar revenue derived from international sales increases in the
future, our exposure to risks associated with fluctuations in foreign exchange
rates will increase further. Moreover, as a result of operating a manufacturing
facility in South Korea, a substantial portion of our costs are and will
continue to be denominated in the South Korean Won. Adverse changes in the
exchange rates of the South Korean Won to the U.S. Dollar will affect our costs
of goods sold and operating margins and could result in exchange losses.
THE REQUIREMENTS OF THE SARBANES-OXLEY ACT, INCLUDING SECTION 404, ARE
BURDENSOME, AND OUR FAILURE TO COMPLY WITH THEM COULD HAVE A MATERIAL ADVERSE
AFFECT ON OUR BUSINESS AND STOCK PRICE.
Except with respect to the adoption of our Code of Ethics and our
compliance with certain requirements specifically applicable to our Annual
Report on Form 10-KSB and our other periodic reports, our management has not
commenced any specific procedures to comply with the requirements of the
Sarbanes Oxley Act of 2002, including specifically, the process necessary to
implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
which requires our management to assess the effectiveness of our internal
controls over financial reporting and include an assertion in our annual report
as to the effectiveness of our controls. Beginning with our Annual Report on
Form 10-KSB for the year ended December 31, 2007, unless otherwise amended by
the Securities and Exchange Commission, our independent registered accounting
firm will be required to attest to whether our assessment of the effectiveness
of our internal control over financial reporting is fairly stated in all
material respects and separately report on whether it believes we maintained, in
all material respects, effective internal controls over financial reporting as
of December 31, 2007. Because of our management's lack of resources, and our
limited operations, we have not commenced the process of preparing the system
and process documentation, performing an evaluation of our internal controls
required for our management to make this assessment and for the auditors to
provide their attestation report, and accordingly, have not begun testing of the
effectiveness of these internal controls. We expect that this process will
require significant amounts of management time and resources, as well as higher
expenses in the form of higher audit and review fees, higher legal fees and
higher internal costs to document, test and potentially remediate internal
controls. Accordingly, with respect to Section 404 in particular, there exists a
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significant risk that we will not be able to meet all the requirements of
Section 404 by the end of fiscal year 2007, when we are required to report on
our internal controls and provide our auditor's opinion thereon. Additionally,
even in the event we attempt to comply with Section 404, in the course of
evaluation and testing, management may identify deficiencies that will need to
be addressed and remediated, which could potentially have a material adverse
effect on our stock price and could result in significant additional
expenditures.
RISKS RELATED TO OUR INDUSTRY
OUR FAILURE TO COMPLY WITH CURRENT OR FUTURE GOVERNMENTAL REGULATIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
The formulation, manufacturing, packaging, labeling, advertising,
distribution, and sale of functional foods and food additives, such as those
sold by us, are subject to regulation by a number of federal, state and local
agencies, including the U.S. FDA, and the U.S. Federal Trade Commission ("FTC"),
as well as government agencies in other countries where we may operate. Among
other matters, this regulation is concerned with product safety and claims made
with respect to a product's ability to provide health-related benefits. These
agencies have a variety of procedures and enforcement remedies available to
them, including the following:
o initiating investigations;
o issuing warning letters and cease and desist orders;
o requiring corrective labeling or advertising;
o requiring consumer redress, such as requiring that a
Registrant offer to repurchase products previously sold to
consumers;
o seeking injunctive relief or product seizures; and
o imposing civil penalties or commencing criminal prosecution.
United States Federal and state agencies have in the past used these
remedies in regulating participants in the dietary supplements industry,
including the imposition by federal agencies of civil penalties in the millions
of dollars against a few industry participants. In addition, publicity related
to dietary supplements may result in increased regulatory scrutiny of the
nutritional supplements industry.
Our failure to comply with applicable laws could subject us to severe
legal sanctions, which could have a material adverse effect on our business and
results of operations. We cannot assure you that the regulatory environment in
which we operate will not change or that such regulatory environment, or any
specific action taken against us, will not result in a material adverse effect
on our business and operations. We cannot assure you that a state will not
interpret claims presumptively valid under federal law as illegal under that
state's regulations, or that future FDA regulations or FTC decisions will not
restrict the permissible scope of such claims. Additionally, we cannot assure
you that such proceedings or investigations or any future proceedings or
investigations will not have a material adverse effect on our business or
operations.
WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH COMPETITORS OF PERCEIVED COMPETING
TECHNOLOGIES OR DIRECT COMPETITORS THAT MAY ENTER OUR MARKET WITH NEW
TECHNOLOGIES.
The market for our products is relatively new. Our ability to increase
revenues and generate profitability is directly related to our ability to
maintain a competitive advantage. We face potential direct competition from
companies that may enter this market with new competing technologies and with
greater financial, marketing and distribution resources than us. These greater
resources could permit our competitors to introduce new products and implement
extensive advertising and promotional programs, with which we may not be able to
compete. As a result, we can provide no assurances that we will be able to
compete effectively in the future.
IF OUR INDUSTRY RECEIVES UNFAVORABLE PUBLICITY, OUR BUSINESS COULD BE HARMED.
We believe the nutraceutical market is affected by media attention
regarding the consumption of dietary supplements and functional goods. Future
scientific research or publicity could be unfavorable to the functional
nutrition market or any particular product, or inconsistent with earlier
favorable research or publicity. Future reports of research that are perceived
as less favorable or that question such earlier research could hurt our
business. Because of our dependence upon consumer perceptions, adverse publicity
associated with adverse effects resulting from the consumption of our products
or any similar products distributed by other companies could also hurt our
business. Such adverse publicity could arise even if the adverse effects
associated with such products resulted from
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consumers' failure to consume such products as directed. In addition, we may not
be able to counter the effects of negative publicity concerning the efficacy of
our products.
RISKS RELATED TO OUR COMMON STOCK
WE HAVE A LIMITED TRADING VOLUME AND SHARES ELIGIBLE FOR FUTURE SALE BY OUR
CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE.
To date, we have had a very limited trading volume in our common stock.
As long as this condition continues, the sale of a significant number of shares
of common stock at any particular time could be difficult to achieve at the
market prices prevailing immediately before such shares are offered. In
addition, sales of substantial amounts of common stock, including shares issued
upon the exercise of outstanding options and warrants, under Rule 144 or
otherwise could adversely affect the prevailing market price of our common stock
and could impair our ability to raise capital at that time through the sale of
our securities.
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE.
The market price of our common stock is likely to be highly volatile as
the stock market in general has been highly volatile.
Factors that could cause such volatility in our common stock may
include, among other things:
o actual or anticipated fluctuations in our quarterly operating
results;
o announcements of technological innovations;
o changes in financial estimates by securities analysts;
o conditions or trends in our industry; and
o changes in the market valuations of other comparable
companies.
THE SALE OF OUR COMMON STOCK ON THE OVER-THE-COUNTER BULLETIN BOARD AND THE
POTENTIAL DESIGNATION OF OUR COMMON STOCK AS A "PENNY STOCK" COULD IMPACT THE
TRADING MARKET FOR OUR COMMON STOCK.
Our securities, as traded on the Over-the-Counter Bulletin Board, will
be subject to Securities and Exchange Commission rules that impose special sales
practice requirements upon broker-dealers who sell such securities to persons
other than established customers or accredited investors. For purposes of the
rule, the phrase "accredited investors" means, in general terms, institutions
with assets in excess of $5,000,000, or individuals having a net worth in excess
of $1,000,000 or having an annual income that exceeds $200,000 (or that, when
combined with a spouse's income, exceeds $300,000). For transactions covered by
the rule, the broker-dealer must make a special suitability determination for
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability of
broker-dealers to sell our securities and also may affect the ability of
purchasers to sell their securities in any market that might develop therefor.
In addition, the Securities and Exchange Commission has adopted a
number of rules to regulate "penny stock." Because our securities may constitute
"penny stock" within the meaning of the rules, the rules would apply to us and
to our securities. The rules may further affect the ability of owners of our
common stock to sell our securities in any market that might develop for them.
Shareholders should be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differentials and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, resulting in investor losses.
Our management is aware of the abuses that have occurred historically in the
penny stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
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WE DO NOT FORESEE PAYING DIVIDENDS IN THE NEAR FUTURE.
We have not paid dividends on our common stock and do not anticipate
paying such dividends in the foreseeable future.
OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH
COULD LIMIT OUR STOCKHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY
TRANSACTIONS.
As of September 30, 2005, our officers and directors and their affiliates
owned approximately 42% of our outstanding voting shares. As a result, our
officers and directors are able to exert considerable influence over the outcome
of any matters submitted to a vote of the holders of our common stock, including
the election of our Board of Directors. The voting power of these stockholders
could also discourage others from seeking to acquire control of us through the
purchase of our common stock, which might depress the price of our common stock.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Members of the company's management, including our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures, as defined by paragraph (e) of Exchange Act
Rules 13a-15 or 15d-15, as of September 30, 2005, the end of the period covered
by this report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective.
CHANGES IN CONTROLS AND PROCEDURES
During the third quarter of 2005 there were no significant changes in
our internal controls or in other factors known to the Chief Executive Officer
or the Chief Financial Officer that materially affected, or are reasonably
likely to materially effect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
31.1 Certification by Chief Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934, as amended.
31.2 Certification by Chief Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a) under the Securities
Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EZCOMM ENTERPRISES, INC.
Date: November 21, 2005 By: /s/ Seung Kwon Noh
------------------------
Seung Kwon Noh
Chief Executive Officer
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