UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended: June 30, 2006
or
|_| Transition Report Pursuance to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
COMMISSION FILE NUMBER: 000-23039
ORALABS HOLDING CORP.
(Exact name of small business issuer as specified in its charter)
Colorado 14-1623047
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18685 East Plaza Drive, Parker, Colorado 80134
---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(303) 783-9499
--------------
(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.
|X| Yes |_| No
Indicate by check mark whether the registrant is a shell Company (as defined in
Rule 12b-2 of The Exchange Act).
Yes |_| |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after the
distribution of securities under a plan confirmed by a court.
|_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 30, 2006 Issuer had 4,789,015 shares of common stock, $.001 Par
Value, outstanding.
Transitional Small Business Disclosure Format (check one)
Yes |_| |X| No
Table of Contents
Part I. Financial Information
Item 1. Financial Statement Page
Consolidated Balance Sheets as of June 30, 2006
(Unaudited) and December 31, 2005........................... 2
Consolidated Statements of Operations, Three Months
and Six Months Ended June 30,2006 and 2005 (Unaudited)...... 3
Consolidated Statement of Stockholders' Equity, Six Months
Ended June 30, 2006 (Unaudited)............................. 4
Consolidated Statements of Cash Flows, Six Months Ended
June 30, 2006 and 2005 (Unaudited).......................... 5
Notes to Consolidated Financial Statements................... 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations..................... 10-13
Item 3. Controls and Procedures.................................. 13
Part II. Other Information.......................................... 14-15
Signatures........................................................... 16
Exhibit Index........................................................ 16
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2006 December 31, 2005
----------------- -----------------
Unaudited
Assets
Current assets
Cash and cash equivalents $ 2,578,696 $ 1,834,144
Accounts receivable-trade, net of allowance for
doubtful accounts of $67,064 (2006) and $86,639 (2005) 1,181,107 1,795,898
Inventories 2,812,677 2,555,634
Prepaid expenses 204,401 173,533
Deposits and other assets 324,137 257,949
----------------- -----------------
Total current assets 7,101,018 6,617,158
----------------- -----------------
Non-current assets
Deferred tax assets, net 179,000
Property and equipment, net 2,115,348 1,858,754
----------------- -----------------
Total non-current assets 2,115,348 2,037,754
----------------- -----------------
Total assets $ 9,216,366 $ 8,654,912
================= =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 836,652 $ 1,021,153
Deferred revenue 85,148 630,000
Accrued liabilities 177,779 121,321
Reserve for returns 50,188 100,810
Income tax payable 130,365
Current portion of long-term debt 6,300 6,300
Deferred tax liability- current 248,016 221,724
----------------- -----------------
Total current liabilities 1,534,448 2,101,308
----------------- -----------------
Non-current liabilities
Long-term debt, less current portion 3,675 6,825
Deferred tax liability- long-term 26,618
----------------- -----------------
Total non-current liabilities 30,293 6,825
----------------- -----------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 1,000,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 25,000,000 shares
authorized, 4,789,015 (2006) and 4,693,015 (2005)
issued and outstanding 4,789 4,693
Additional paid-in capital 1,828,683 1,511,820
Retained earnings 5,818,153 5,030,266
----------------- -----------------
Total stockholders' equity 7,651,625 6,546,779
----------------- -----------------
Total liabilities and stockholders' equity $ 9,216,366 $ 8,654,912
================= =================
See Notes to Consolidated Financial Statements
2
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2006 and June 30, 2005
Unaudited
--------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
06/30/06 06/30/05 06/30/06 06/30/05
--------------------------------------------------------------------------------------------------------
Product sales, net $4,400,146 $2,543,188 $8,918,855 $6,124,024
Cost of sales 2,405,372 1,597,957 5,113,858 3,978,471
---------- ---------- ---------- ----------
Gross profit 1,994,774 945,231 3,804,997 2,145,553
---------- ---------- ---------- ----------
Operating Expenses:
Engineering 28,113 34,838 73,765 127,709
Selling and marketing costs 431,405 244,949 864,442 656,411
General and administrative 850,574 693,107 1,617,804 1,403,122
Other 4,235 5,554 30,058 25,907
---------- ---------- ---------- ----------
Total operating expenses 1,314,327 978,448 2,586,069 2,213,149
---------- ---------- ---------- ----------
Net operating income (loss) 680,447 (33,217) 1,218,928 (67,596)
Interest and other income 22,938 28,908 35,343 40,258
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes 703,385 (4,309) 1,254,271 (27,338)
Income tax (expense) benefit (249,393) 1,383 (466,384) 8,748
---------- ---------- ---------- ----------
Net income (loss) $ 453,992 $ (2,926) $ 787,887 $ (18,590)
========== ========== ========== ==========
Basic and diluted income (loss) per
common share $ .10 $ * $ .17 $ *
========== ========== ========== ==========
Weighted average shares outstanding
- basic 4,777,047 4,669,688 4,735,263 4,669,154
========== ========== ========== ==========
Weighted average shares outstanding
- diluted 4,818,368 4,669,688 4,778,253 4,669,154
========== ========== ========== ==========
* Amount is less than $(.01) per share
See Notes to Consolidated Financial Statements
3
ORALABS HOLDING CORP AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2006
Unaudited
Common Addl. Paid-In Retained
Shares Amount Capital Earnings Total
------------------------------------------------------------------
Balance at December 31, 2005 4,693,015 $4,693 $1,511,820 $5,030,266 $6,546,779
Stock options exercised 96,000 96 210,104 210,200
Tax benefit on exercise
of stock options (Note 2) 104,109 104,109
Stock-based compensation expense 2,650 2,650
Net income 787,887 787,887
------------------------------------------------------------------
Balance at June 30, 2006 4,789,015 $4,789 $1,828,683 $5,818,153 $7,651,625
==================================================================
See Notes to Consolidated Financial Statements
4
ORALABS HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005
Unaudited
2006 2005
---- ----
Cash flows from operating activities:
Net income (loss) $ 787,887 $ (18,590)
----------------- -----------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 270,843 275,958
Recovery of doubtful accounts (16,575) (140,379)
Deferred income taxes 231,910 (8,748)
Stock-based compensation expense 2,650
Changes in assets and liabilities:
Accounts receivable - trade 631,366 601,853
Inventories (257,043) (308,589)
Prepaid expenses, deposits and other assets (97,056) 187,296
Accounts payable - trade (184,501) (33,108)
Deferred revenue (544,852)
Accrued liabilities 56,458 1,851
Reserve for returns (50,622) (110,446)
Income taxes payable/receivable 130,365 135,567
----------------- -----------------
172,943 601,255
----------------- -----------------
Net cash provided by operating activities: 960,830 582,665
----------------- -----------------
Cash flows from investing activities:
Investment in property and equipment (527,437) (419,466)
----------------- -----------------
Net cash used in investing activities (527,437) (419,466)
----------------- -----------------
Cash flows from financing activities:
Payment on long term debt (3,150) (7,294)
Stock options exercised 210,200 48,800
Tax benefit on exercise of stock options (Note 2) 104,109
----------------- -----------------
Net cash provided by financing activities 311,159 41,506
----------------- -----------------
Net increase in cash and cash equivalents 744,552 204,705
Cash and cash equivalents, beginning of the period 1,834,144 866,432
----------------- -----------------
Cash and cash equivalents, end of the period $ 2,578,696 $ 1,071,137
================= =================
See Notes to Consolidated Financial Statements
5
ORALABS HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. This report should, therefore, be read in
conjunction with the Annual Report on Form 10-KSB for the year ended December
31, 2005 (the "2005 Form 10-KSB") of OraLabs Holding Corp. and Subsidiaries (the
"Company").
The information included in this report is unaudited but reflects all
adjustments which, in the opinion of management, are necessary to a fair
statement of the results of the interim periods covered thereby. All adjustments
are of a normal and recurring nature except as described herein.
NOTE 2 - RECENT ACCOUNTING PROUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS 123R supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95,
"Statement of Cash Flows". SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including
grants of employee stock options, to be recognized as additional compensation
expense in the financial statements based on the calculated fair value of the
awards. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation costs to be reported as a financing cash flow. This
excess amount was $104,109 for the six months ended June 30, 2006 and is shown
as "Tax benefit on exercise of stock options" in the Statement of Cash Flows. We
adopted this statement effective for our fiscal year beginning January 1, 2006.
We have described the impact of adopting SFAS 123R in Note 6 to the consolidated
financial statements.
In October 2005, the FASB issued FASB Staff Position ("FSP") 123R-2, "Practical
Accommodation to the Application of Grant Date as Defined in FASB Statement No.
123(R) ("FSP 123R-2")". FSP 123R-2 provides companies with a "practical
accommodation" when determining the grant date of an award that is subject to
the accounting provisions in SFAS 123R. Specifically, assuming a company meets
all of the other criteria in the definition of grant date in SFAS 123R, a mutual
understanding (between the company and the recipient) of the key terms and
conditions of an award is presumed to exist at the date the award is approved
(in accordance with the company's normal corporate governance policy) if (1) the
award is a unilateral grant meaning that the recipient does not have the ability
to negotiate the key terms and conditions of the award, and (2) the key terms
and conditions of the award are expected to be communicated to the recipient
within a relatively short period of time (as defined in the FSP 123R-2) after
the grant was approved. This FSP was effective upon initial adoption of SFAS
123-R on January 1, 2006.
In November 2005, the FASB issued FSP 123R-3, "Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards" ("FSP 123R-3").
FSP 123R-3 provides a practical exception when a company transitions to the
accounting requirements in SFAS 123R. SFAS 123R requires a company to calculate
the pool of excess tax benefits available to absorb tax deficiencies recognized
subsequent to adopting SFAS 123R ("APIC Pool"), assuming the company had been
following the recognition provisions prescribed by SFAS 123. The FASB learned
that several companies do not have the necessary historical information to
calculate the APIC pool as envisioned by SFAS 123R and accordingly, the FASB
decided to allow a practical exception as documented in FSP 123R-3. This FSP was
effective on its issuance date.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2006:
Machinery and equipment $ 3,963,709
Construction in progress 470,043
Leasehold improvements 146,211
------------
4,579,963
Less accumulated depreciation (2,464,615)
------------
$ 2,115,348
============
6
NOTE 4 - LINE-OF-CREDIT
The Company has a $2,000,000 line-of-credit agreement with a bank secured by
substantially all of the Company's assets. The line of credit expires in
September 2006. As of June 30, 2006, the Company had no outstanding balance on
this line-of-credit.
NOTE 5 - RESERVE FOR RETURNS AND ALLOWANCES
The reserve for returns and allowances is calculated as a percentage of sales
with a consideration of historical returns. The reserve was decreased in 2005
following an evaluation of historical returns as well as an analysis of current
outstanding accounts receivable and future return estimates. The rate of returns
decreased during 2005 and through the first six months of 2006.
NOTE 6 - STOCK-BASED COMPENSATION
The Company has two stock option plans, an incentive stock option plan, the 1997
Stock Option Plan (the "1997 Plan"), and the 1997 Non-Employee Directors' Option
Plan (the "1997 Directors' Plan"), (collectively, the "Plans"). Under the 1997
Plan, grants of incentive stock options are permitted. Incentive stock options
may only be granted to employees of the Company, including officers and
directors who are also employees. Under the 1997 Directors' Plan, non-qualified
options may be issued to directors of the Company. The exercise price of
incentive stock options granted under the 1997 Plan must be at least 100% of the
fair market value of the Company's stock at the grant date. The exercise price
of non-qualified options is at the fair market value of the Company's stock at
the grant date. Aggregate common shares of 250,000 are reserved for issuance
under the 1997 Plan. Shares forfeited can be reissued under the 1997 Plan.
Options issued under the 1997 Plan vest over five years and expire ten years
from the date of grant. Options issued under the 1997 Directors' Plan vest over
four years and expire five years from the date of grant.
Effective January 1, 2006, the Company adopted SFAS 123R, using the modified
prospective method. SFAS 123R requires the recognition of the cost of employee
services received in exchange for an award of equity instruments in the
financial statements and is measured based on the grant date fair value of the
award. SFAS 123R also requires the stock option compensation expense to be
recognized over the period during which an employee is required to provide
service in exchange for the award (the vesting period). Prior to our adopting
SFAS 123R, we accounted for our stock-based compensation plans under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, generally no compensation expense is
recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of grant. We adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
For the six months ended June 30, 2006, the Company calculated compensation
expense of $2,650 related to stock options.
For options granted subsequent to the adoption date of SFAS 123R on January 1,
2006, the fair value of each stock option grant will be estimated on the date of
grant using the Black-Scholes option pricing model. The Company had no stock
option grants during the six months ended June 30, 2006 and granted 50,500 stock
options during the six months ended June 30, 2005. The weighted average fair
value of stock options at the date of grant during the six months ended June 30,
2005 was $1.52.
The expected life of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
our common stock. The risk-free interest rate represents the U.S. Treasury bill
rate for the expected life of the related stock options. The dividend yield
represents our anticipated cash dividend over the expected life of the stock
options.
The following are the weighted-average assumptions used for options granted
during the six months ended June 30, 2006 and 2005:
June 30,
2006 2005
-------- --------
Approximate risk free rate 3.74% - 6% 3.74%
Average expected life 5 years 5 years
Dividend yield 0% 0%
Volatility 65% - 80% 81%
7
A summary of stock option activity for the six months ended June 30, 2006 is
presented below:
Weighed
Weighted Average
Shares Average Remaining Aggregate
Under Exercise Contractual Intrinsic
Option Price Life Value
----------- ----------- ----------- -----------
Outstanding at January 1, 2006 169,000 $ 2.21
Granted -- --
Exercised (96,000) 2.19
Forfeited (6,250) 1.75
Expired (7,500) 4.75
-----------
Outstanding at June 30, 2006 59,250 1.97 2.79 years $90,394
===========
Exercisable at June 30, 2006 50,500 2.02 2.48 years $74,644
A summary of the status of the Company's non-vested stock options as of and for
the six months ended June 30, 2006 is presented below:
Non-vested Weighted
Shares Average
Under Grant Date
Option Fair Value
------------ ------------
Non-vested at January 1, 2006 18,750 $ 1.67
Granted
Vested (3,750) 1.80
Forfeited (6,250) 1.67
------------
Non-vested at June 30, 2006 8,750 1.62
============
As of June 30, 2006, there was approximately $11,325 of unrecognized
compensation cost related to stock options that will be recognized over a
weighted average period of approximately 4 years.
Prior to January 1, 2006, the Company determined the value of stock-based
compensation arrangements under the provisions of APB Opinion No. 25 "Accounting
for Stock Issued to Employees" and made pro forma disclosures required under
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 permits
the use of either a fair value based method or the method defined in APB No. 25
which requires the disclosure of pro forma net income (loss) and earnings per
share that would have resulted from the use of the fair value based method. Had
compensation expense for stock option grants been determined based on the fair
value at the grant dates consistent with the method prescribed in FASB 123, the
Company's net loss and net loss per share would have been adjusted to the
proforma amounts below for the three- month and six-months ended June 30, 2005,
as indicated below:
Three months ended Six months ended
6/30/05 6/30/05
----------- -----------
Net loss, as reported $ (2,926) $ (18,590)
Total stock-based employee compensation
expense determined under fair market value
method for an award (98,931) (98,931)
----------- -----------
Net loss available to common shareholders-
pro forma $ (101,857) $ (117,521)
Basic and diluted loss per common share-
as reported $ * $ *
Basic and diluted loss per common share-
pro forma $ (0.02) $ (0.03)
* Amount is less than $(.01) per share
NOTE 7 - CUSTOMER CONCENTRATIONS
The Company's revenues are generated from customers located in the United
States. The following table summarizes sales to individual customers that
comprised more than 10% of the Company's sales for the periods ended June 30.
3 months ended 6 months ended
--------------- --------------
Customer 6/30/06 6/30/05 6/30/06 6/30/05
-------- ------- ------- ------- -------
A 16% 7% 10% 14%
B 6% 12% 7% 13%
C - - 14% -
8
NOTE 8 - COMMITMENTS AND CONTINGENCIES
RELATED PARTY OPERATING LEASES
The Company leases office and manufacturing facilities under an operating lease
for property controlled by the Company's President, which expires in September
2006. Rent expense recorded during both the three and six months ended June 30,
2006 and 2005 was $111,522 and $223,044, respectively, under this related party
lease.
OTHER
The Company also has one operating lease for a vehicle, which expires in June
2010. Payments under this lease are $723 per month.
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company
DEPOSITS
At June 30, 2006 the Company had deposits of $324,137 for orders of production
materials.
NOTE 9 - STOCK EXCHANGE AGREEMENT
The Company entered into a Stock Exchange Agreement (the "Agreement") dated as
of March 31, 2006, as amended on July 20, 2006, with Partner Success Holdings
Limited ("PSHL") under which all of the issued and outstanding shares of PSHL
are to be acquired by the Company in consideration for the issuance to the
owners of PSHL of common stock representing a 94% ownership interest in the
Company, after giving effect to a redemption by the Company of 3,629,350 shares
of its outstanding common stock owned individually by its President, Gary H.
Schlatter. The redemption is to be in consideration for the transfer to Mr.
Schlatter of all of the Company's outstanding common stock of its wholly-owned
operating subsidiary, OraLabs, Inc. The 94% ownership interest in the Company is
to be determined on a fully-diluted basis that will take into account the
issuance of 300,000 shares to the non-employee directors of the Company prior to
closing and after receiving shareholder approval, and any options that may be
exercised by employees prior to the closing. Under the amendment, OraLabs, Inc.
will pay certain tax liabilities arising out of closing the transactions and
will fund all or a part of the payment by purchasing up to 100,000 shares of the
Company, the domicile of the Company will be changed from Colorado to Delaware
and the number of authorized shares of the Company will be increased to
62,000,000. If the closing of the Agreement occurs, PSHL will become a
wholly-owned subsidiary of the Company. The closing of the Agreement is
conditioned upon, among other things, customary closing conditions, including
the satisfaction of both the Company and PSHL with their due diligence
investigations of the other party and the receipt by the Board of Directors of
the Company of a fairness opinion. There can be no assurance that closing of the
transactions described in the Agreement will occur.
9
ORALABS HOLDING CORP AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note on Forward-Looking Statements
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, provide a safe harbor for certain
forward-looking statements. This quarterly report contains statements that are
forward-looking. Forward looking statements include those which are not
historical facts, including without limitation statements about management's
expectations for any period beyond the fiscal quarter ended June 30, 2006. Words
such as "expect", "anticipate", "believe", "intend" and "estimate" and similar
expressions are examples of words which identify forward looking statements.
While these statements reflect the Company's beliefs as of the date of this
report, they are subject to assumptions, uncertainties and risks that could
cause actual results to differ materially and adversely from the results
contemplated, forecast or estimated in the forward-looking statements included
in this report. These factors include, but are not necessarily limited to, the
impact of competitive products, the acceptance of new products or product lines
in the marketplace, the Company's ability to manage growth, the availability of
an adequate work force, and changes in market conditions.
Results of Operations. For the three month period ended June 30, 2006 as
compared with the three month period ended June 30, 2005.
Product sales increased $1,856,958 or 73%. This increase in revenue was
primarily a result of an increase in sales due to increased customer demand and
higher sales at the retail level during the second quarter of 2006. The Company
received increased orders on its breath freshening products as well as new
customers for its new and core products in the second quarter of 2006. The
Company believes that it can supply any orders that it would reasonably expect
to receive during the third quarter of 2006. The Company cannot be sure that any
increased level of sales will occur.
Gross profit increased $1,049,543. As a percentage of sales, gross profit
increased 8%. A greater concentration of sales were to higher margin customers
resulting in increased gross profit margin. The Company's capital investment in
automation continues, as it did in 2005, to make a positive impact on labor
costs. The Company anticipates continued improvements in costs of operations,
which will be a positive factor in managing gross profit.
Engineering costs decreased by $6,725 due to a decrease in variable labor costs
to maintain and repair manufacturing equipment, as well as by an increase in the
amount of engineering salaries being capitalized in second quarter 2006 toward
production automation projects.
Selling and marketing increased by $186,456 due to an increase in sales
commissions, sales salaries, advertising, and trade show expense. These expenses
are expected to remain at the same increased level through the remainder of
2006.
Administrative expenses increased $157,467. Salaries increased in the second
quarter of 2006 by $41,419. Legal fees, accounting fees and insurance costs also
increased significantly from the previous period.
The Company had net income of $453,992 in the second quarter of 2006 compared to
a net loss of $2,926 in the second quarter of 2005 as explained by the above
activities.
The effective tax rate increased from 32% to 35% for the quarter ended June 30,
2006 compared to the quarter ended June 30, 2005. The Company's remaining net
operating loss carry forwards were fully offset with taxable income resulting in
income taxes payable of $130,365 as of June 30, 2006. Taxable income in the
future will result in income taxes payable.
Results of Operations. For the six month period ending June 30, 2006 as compared
with the six month period ending June 30, 2005.
Product sales increased $2,794,831 or 46%. This increase in revenue was
primarily a result of an increase in sales due to increased customer demand and
higher sales at the retail level. The Company received increased orders on its
breath freshening products as well as new customers for its new and core
products. Future sales to its new customers are uncertain at this time. The
Company believes that the second half of the year will bring a higher level of
sales due to the seasonality of our primary product line. The Company believes
that it is now in a position to fill a higher level of orders, should they
occur. The Company cannot be sure that any increased level of sales will occur.
Gross profit increased $1,659,444. As a percentage of sales, gross profit
increased 8%. A greater concentration of sales were to higher margin customers,
thereby reducing the cost of materials as a percentage of sales. The increase in
gross profit is also, but to a lesser extent, due to decreased costs of labor
and overhead and materials. The Company's capital investment in automation made
a positive impact on labor costs during 2006. The Company anticipates continued
improvements in cost of operations and is hopeful that gross profit will
continue to make small incremental improvement, although no assurances can be
given.
10
Engineering expenses decreased $53,944 due to an increased amount of engineering
salaries being capitalized in 2006 towards production automation projects.
Selling and marketing expenses increased $208,031 due to an increase in
salaries, commissions, and advertising. These costs should remain stable through
the end of the year.
Administrative expenses increased $214,682 due to an increase in salaries, legal
fees, accounting fees, and insurance. The Company expects a decrease in legal
fees related to corporate reorganization transactions in the last six months of
2006, as compared to the first six months, but other administrative expenses
should remain consistent.
Other expense increased $4,151, remaining stable from 2005 to 2006. Other
expenses are expected to remain stable going forward.
The Company had net income of $787,887 in the first six months of 2006 compared
to a net loss of $18,590 for the same period in 2005. The effective tax rate for
the first six months of 2005 was 32%, while the rate for the first six months of
2006 was 37% consistent with management's expectations.
Liquidity and Capital Resources. Balance Sheet as of June 30, 2006 compared to
December 31, 2005.
At June 30, 2006, the Company had $2,578,696 of cash and its current ratio was
4.6 to 1. The Company believes its current capital resources are sufficient to
fund operations for the next twelve months.
Net cash provided by operating activities during the six months ended June 30,
2006 in the amount of $960,830 consists of the following:
Accounts receivable, net of allowance for doubtful accounts, decreased $614,791.
While A/R decreased by $631,366, the allowance for doubtful accounts decreased
by $13,575. The Company collected past due receivables by over $200,000 from
December 31, 2005 to June 30, 2006 and is working towards comprehensive customer
account reconciliations to reduce the amount of allowances against open past due
balances. The Company anticipates the third quarter to have similar revenue to
the second quarter and therefore expects accounts receivable to remain
consistent.
Inventory increased $257,043, due to an increase in anticipated sales. Inventory
is anticipated to remain stable throughout the last half of 2006.
Prepaid expenses and deposits increased $97,056 due primarily to a greater
volume of purchases requiring wire pre-payment, as well as a large outlay for
insurance premiums.
Accounts payable decreased $184,501 due to timing of payments.
Accrued liabilities increased $56,458 due to accruals for sales commission,
payroll, and workman's compensation.
Reserve for returns decreased $50,622 due to an expected decrease in customer
deductions for returns based on historical trends of actual returns. It is
anticipated that the reserve for returns will remain stable going forward.
Deferred revenue decreased $544,852 due to the sale in first quarter to a
customer that had prepaid in fourth quarter 2005. The prepayment in 2005 was
recorded as deferred revenue.
Income taxes payable increased $130,365. The Company's remaining net operating
loss carry forwards were fully offset with taxable income during the six months
ended June 30, 2006. As a result, future taxable income, if any, will result in
income taxes payable.
Cash from investing activities:
Investment in property and equipment was $527,437. This is comprised of various
automation projects designed to reduce production labor costs and increase
capacity. Equipment additions of approximately $100,000 are planned for the
third quarter.
11
Cash flows from financing activities:
Long-term debt decreased $3,150 due to payments made on the vehicle note.
Stock options were exercised in the second quarter resulting in cash flow of
$210,200.
A benefit of $104,109 for tax deductions in excess of recognized compensation
costs was recorded during the six-months ended June 30, 2006, which will result
in less taxes owed by the Company.
Trends. Revenues from sales of lip balm, the Company's major product line, were
$6,926,352 in the first 6 months of 2006 compared to $4,829,343 for the same
period in 2005, or a 43% increase. As stated above in results of operations,
this increase in revenue was primarily a result of sales to new customers. Since
these new sales do not have any historical information, it is uncertain whether
there will be additional future revenue. The Company believes that the third
quarter of the year will bring increased sales, as it has historically. However,
the Company cannot be sure that any increased level of sales will occur. The
Company expects that its product line has been trimmed where appropriate and new
items added such that it is in a position for an increased sales trend. However,
the Company has no assurances of these increases and there are many outside
influences from a competitive standpoint that the Company has little control
over.
Sales of sour drops and breath fresheners in the first 6 months of 2006 were
$1,291,392 compared to $927,927 for the same period in 2005, or a 39% increase.
The Company continues to maintain a solid base of customers. The increase from
2005 to 2006 is attributed to the addition of new breath freshening products.
The Company anticipates growth in the third quarter 2006 and beyond.
Sales of sterile products, $238,169 in the first 6 months of 2006, represented
3% of the overall revenue. The Company anticipates that sales of this product
will increase over time. The Company has made a capital investment of
approximately $270,000 to purchase equipment and for plant and equipment
modification during the first half of 2006.
The nutritional supplements provided revenues of $68,688. Revenues were down
$106,838 in the first six months of 2006 compared to 2005, or a 61% decrease.
The Company is in the process of discontinuing this product line.
Sales of hand sanitizers were $394,254 in the first 6 months compared to
$174,295 in the first 6 months of 2005. The sales in first six months of 2005
were not material to the company's overall sales and therefore were not broken
out as a separate group. The Company anticipates a continued steady increase in
hand sanitizers in 2006.
Impact of fuel increases. The Company has seen a continued increase in its cost
of plastic components and an increase in fuel surcharges by freight companies.
If these trends continue, which the Company expects, the Company could see
future erosion on margins.
Impact of Inflation. The Company's financial condition has been affected by the
recent modest inflation. However, it is not certain to what extent. The Company
has been receiving many raw material price increases. At this time the Company
does not believe that revenues will be materially affected by inflation. The
Company's lip care and oral care products are primarily very low retail price
points and impulse items.
The following table shows aggregated information about contractual obligations
as of June 30, 2006:
Payments Due by Period
-------------------------------------------------------------------------------------------
Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
--------------------------------------------------------------------------------------------------------------------
Long-Term Debt $9,975 $6,300 $3,675
Building Lease $111,522 $111,522
Vehicle $34,704 $8,676 $26,028
--------------------------------------------------------------------------------------------------------------------
Total $156,201 $126,498 $29,703
====================================================================================================================
12
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision
of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS
No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including
grants of employee stock options, to be recognized as additional compensation
expense in the financial statements based on the calculated fair value of the
awards. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation costs to be reported as a financing cash flow. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. We adopted this statement effective for our
fiscal year beginning January 1, 2006. We have described the impact of adopting
SFAS 123R in Note 5 to the consolidated financial statements.
In October 2005, the FASB issued FASB Staff Position ("FSP") 123R-2, "Practical
Accommodation to the Application of Grant Date as Defined in FASB Statement No.
123(R) ("FSP 123R-2")". FSP 123R-2 provides companies with a "practical
accommodation" when determining the grant date of an award that is subject to
the accounting provisions in SFAS 123R. Specifically, assuming a company meets
all of the other criteria in the definition of grant date in SFAS 123R, a mutual
understanding (between the company and the recipient) of the key terms and
conditions of an award is presumed to exist at the date the award is approved
(in accordance with the company's normal corporate governance policy) if (1) the
award is a unilateral grant meaning that the recipient does not have the ability
to negotiate the key terms and conditions of the award, and (2) the key terms
and conditions of the award are expected to be communicated to the recipient
within a relatively short period of time (as defined in the FSP 123R-2) after
the grant was approved. This FSP was effective upon initial adoption of SFAS
123-R on January 1, 2006.
In November 2005, the FASB issued FSP 123R-3, "Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards" ("FSP 123R-3").
FSP 123R-3 provides a practical exception when a company transitions to the
accounting requirements in SFAS 123R. SFAS 123R requires a company to calculate
the pool of excess tax benefits available to absorb tax deficiencies recognized
subsequent to adopting SFAS 123R ("APIC Pool"), assuming the company had been
following the recognition provisions prescribed by SFAS 123. The FASB learned
that several companies do not have the necessary historical information to
calculate the APIC pool as envisioned by SFAS 123R and accordingly, the FASB
decided to allow a practical exception as documented in FSP 123R-3. This FSP was
effective on its issuance date.
ITEM 3. CONTROLS AND PROCEDURES
Control deficiencies were identified by management in 2004 in consultation with
EKS&H, the Company's previous independent auditors. EKS&H advised the Company of
a material weakness relating to controls over the inventory process and
reportable conditions relating to financial reporting and lack of oversight in
the accounting process. The Company implemented new software at the end of 2004
along with training staff on the Company's new systems. However, the perpetual
inventory contained costing and lot tracking errors with the data conversion
from the previously used software, which was absent of immediate correction and
caused problems with processing of raw material usage and manufactured items. As
the Company worked through the associated auditing and processing issues
quarterly physical inventories were performed. The physical inventories were
internally audited for costing in detail to assure an accurate representation of
inventory and the related cost of materials in 2005. The Company's investment in
a widely used, mid-sized business accounting and inventory system along with
retention and ongoing training of its accounting staff has successfully
minimized processing and control deficiencies. The CEO and CFO have been and
remain actively involved in the daily operations of the business and analyze
financial data on a daily basis.
Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive
Officer and its Chief Financial Officer, after evaluating the effectiveness of
the Company's disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of the last day of the
period of the accompanying financial statements (the "Evaluation Date")), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities, particularly during the period in which
this quarterly report on Form 10-QSB was being prepared.
Our external auditors have not issued an attestation report on management's
assessment of the Company's internal control over financial reporting, as it is
not required for the Company at this time.
13
PART II - OTHER INFORMATION
Item No. 1. Legal Proceedings.
The Company is not a party to any material pending legal proceedings, and to the
best of its knowledge, no such proceedings by or against the Company have been
threatened.
Item No. 2. Changes in Securities. None.
Item No. 3. Defaults Upon Senior Securities. None.
Item No. 4. Submission of Matters to a Vote of Security Holders. None.
Item No. 5. Other Information.
Effective May 1, 2006, the Amended and Restated Employment Agreement between
OraLabs, Inc. and Gary Schlatter dated May 1, 2003, was extended for one year
(i.e., until April 30, 2007), at an annual salary of $522,610.00.
Item No. 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed are listed below: Certain of the following
exhibits are hereby incorporated by reference pursuant to Rule 12(b)-32 as
promulgated under the Securities and Exchange Act of 1934, as amended, from the
reports noted below:
Exhibit
No. Description
--- -----------
3.1(i)(1) Articles of Incorporation
3.1(ii)(2) Amended and Restated Bylaws
3.1(ii)(3) Second Amended and Restated Bylaws
4(2) Specimen Certificate for Common Stock
10.1(2) 1997 Stock Plan
10.2(2) 1997 Non-Employee Directors' Option Plan
10.4(2) Stock Option Grant under 1997 Non-Employee Directors'
Option Plan
10.5(iv)(4) Lease between the Company's Subsidiary and 18501 East
Plaza Drive, LLC dated September 4, 2003
10.10(5) Amended and Restated Employment Agreement between the
Company's Subsidiary and Gary Schlatter dated May 1,
2003
10.11(6) Agreement as of May 1, 2006, extending Amended and
Restated Employment Agreement between the Company's
Subsidiary and Gary Schlatter
10.12(7) Stock Exchange Agreement between the Company and
Partner Success Holdings Limited as of March 31, 2006
11 No statement re: computation of per share earnings is
required since such earnings computation can be
clearly determined from the material contained in this
Quarterly Report on Form 10-QSB.
21(2) List of Subsidiaries of the Company
14
31.1(6) Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 302 Of The Sarbanes-Oxley
Act Of 2002
31.2(6) Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 302 Of The Sarbanes-Oxley
Act Of 2002
32.1(6) Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
32.2(6) Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
1 Incorporated herein by reference to Exhibit C of the Definitive Information
Statement filed by the Company's predecessor, SSI Capital Corp., on July 24,
1997.
2 Incorporated herein by reference to the Company's Form 10-K filed for fiscal
year 1997.
3 Incorporated herein by reference to the Company's Form 10-KSB filed for fiscal
year 1998.
4 Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended September 30, 2003.
5 Incorporated herein by reference to the Company's Form 10-QSB filed for the
quarter ended June 30, 2003.
6 Filed herewith.
7 Incorporated herein by reference to the Company's Form 8-K filed April 6,
2006.
(b) Reports on Form 8-K were filed by the Company on April 6, 2006, concerning
Item 1.01 (Entry into a Material Definitive Agreement) and on July 25, 2006
concerning Item 1.01 with respect to a First Amendment to the Stock Exchange
Agreement.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORALABS HOLDING CORP.
By: /s/ Gary H. Schlatter
---------------------
Gary H. Schlatter, President
By: /s/ Emile J. Jordan
-------------------
Emile J. Jordan, Chief Financial Officer
Dated: August 18, 2006
Exhibit Index
Exhibit
No. Description
--------- ------------
10.11 Agreement as of May 1, 2006, extending Amended and
Restated Employment Agreement between the Company's
Subsidiary and Gary Schlatter
31.1 Certification of President Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 302 Of
The Sarbanes-Oxley Act Of 2002
31.2 Certification of Chief Financial Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification of President 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
16