CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Unless
otherwise indicated or the context otherwise requires, all references to the
"Company," "we," "us" or "our" and similar terms refer to KMA Global Solutions
International, Inc. and its subsidiaries.
The
information contained in this report on Form 10-QSB and in other public
statements by the Company and Company officers or directors includes or may
contain certain "forward-looking statements" within the meaning of Section
27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical facts included or incorporated by reference in this report,
including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected revenues, projected costs and
plans and objective of management for future operations, are forward-looking
statements. Forward-looking statements generally can be identified by the use
of
forward-looking terminology such as "may," "will," "expect," "intend,"
"project," "estimate," "anticipate," or "believe" or the negative thereof or
any
variation thereon or similar terminology.
Such
forward-looking statements are made based on management's beliefs, as well
as
assumptions made by, and information currently available to, management pursuant
to the "safe-harbor" provisions of the Private Securities Litigation Reform
Act
of 1995. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Such statements are not guarantees
of future performance or events and are subject to known and unknown risks
and
uncertainties that could cause the Company's actual results, events or financial
positions to differ materially from those included within the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. All subsequent
written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by these
cautionary statements. Except as required by law, we undertake no obligation
to
disclose any revision to these forward-looking statements to reflect events
or
circumstances after the date made, changes in internal estimates or
expectations, or the occurrence of unanticipated events.
Item
2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The
following Management's Discussion and Analysis is intended to help the reader
understand our results of operations and financial condition. Management's
Discussion and Analysis is provided as a supplement to, and should be read
in
conjunction with, our financial statements and the accompanying notes thereto.
The revenue and operating income (loss) amounts in this Management's Discussion
and Analysis are presented in accordance with United States generally accepted
accounting principles.
OVERVIEW
KMA
Global Solutions International, Inc., which was formed on March 9, 2006
under the laws of the State of Nevada, through our operating subsidiary, KMA
Global Solutions Inc. ("KMA (Canada)"), is an innovator and internationally
recognized leader in the Electronic Article Surveillance ("EAS") market. We
serve a diverse and geographically dispersed customer base consisting
predominantly of retailer suppliers, branded apparel, multimedia, pharmaceutical
companies and contract manufacturers, providing low cost and customized
solutions to protect against retail merchandise theft. The retail
industry generally refers to these losses as “inventory shrinkage” or
“shrink”. On average, shrink represents nearly 2% of a retailer's
revenue and can often be much more. Worldwide, retail losses due to
shrinkage are a problem now exceeding $98 Billion USD. We have developed a
suite
of proprietary EAS products to address the specific needs of a changing
marketplace, using patented processes to manufacture its tags at high speeds
and
deliver its products on a just in time basis. Our EAS solutions are designed
to
fit the needs of major suppliers to multinational retailers in the apparel,
multimedia, sporting goods, food and over-the-counter (OTC) pharmaceutical
and
health supplement industries.
The
Company is engaged in the supply of EAS solutions (including the Company's
products, NEXTag™ and DUAL Tag™), with a focusing on customized solutions in the
apparel, multi media, sporting goods, food and pharmaceutical industries. We
will grow by executing a strategy as a global operating company, while
maintaining a continued focus on providing customers with innovative products
and solutions, outstanding service, consistent quality, on-time delivery and
competitively priced products. Together with continuing investments in new
product development, state-of-the-art manufacturing equipment, and innovative
sales and marketing initiatives, management believes the Company is
well-positioned to compete successfully as a provider of EAS tagging solutions
to the retail apparel, multimedia and pharmaceutical industries, worldwide.
The
capital needed to fund our growth has been generated to date through investment
by the founding shareholders and through reinvestment of profits and private
placements of securities.
The
use
of EAS systems in the retail environment continues to generate significant
cost
savings for retailers. Our management believes that the extremely competitive
retail environment, and the Company's low cost solutions relative to other
EAS
suppliers, places us in a favorable position for the future. The addition of
new
high-speed high volume equipment is expected to drive costs of production lower
and may enable the Company to capture a larger share of the EAS market. With
the
completion of the implementation of new production equipment, we plan to open
production facilities in high-demand locations, thus shortening supply lines
on
raw materials, and reducing operating costs through efficiencies, and shipping
costs for finished goods. We anticipate increased demand for our products in
international as well as North American markets. Management's ongoing strategy
includes implementing process improvements to reduce costs in all of our
manufacturing facilities, re-deploying assets to balance production capacity
with customer demand, and seeking to expand our production in new and emerging
markets to minimize labor costs and maximize operating performance
efficiencies.
The
Company has begun to execute its expansion plan, which includes relocation
of
our existing manufacturing capacity from our Canadian facilities, primarily
to
facilities in Hong Kong, India and Mexico, expanding our sales operation to
include Europe and Asia, as well as relocating our headquarters from Ontario,
Canada to a suitably located US city.
RESULTS
OF OPERATIONS
The
Company’s results of operations for the three and nine months ended October 31,
2007 and 2006 in dollars and as a percent of sales, are presented
below:
|
|
|
Fiscal
Years
|
|
|
|
|
Three
Months ended October 31
|
|
|
Nine
Months ended October 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
1,377,478
|
|
|
|
100
|
%
|
|
|
1,688,891
|
|
|
|
100
|
%
|
|
|
3,893,884
|
|
|
|
100
|
%
|
|
|
4,704,503
|
|
|
|
100
|
%
|
|
Cost
of Sales
|
|
|
1,018,842
|
|
|
|
74.0
|
%
|
|
|
1,399,479
|
|
|
|
82.9
|
%
|
|
|
2,910,592
|
|
|
|
74.7
|
|
|
|
3,835,311
|
|
|
|
81.5
|
%
|
|
Gross
Profit
|
|
|
358,636
|
|
|
|
26.0
|
%
|
|
|
289,412
|
|
|
|
17.1
|
%
|
|
|
983,292
|
|
|
|
25.3
|
|
|
|
869,192
|
|
|
|
18.5
|
%
|
|
Selling
General &
Administrative
Expenses
|
|
|
1,044,383
|
|
|
|
75.8
|
%
|
|
|
478,703
|
|
|
|
28.3
|
%
|
|
|
2,552,792
|
|
|
|
65.6
|
%
|
|
|
1,688,822
|
|
|
|
35.9
|
%
|
|
Income
Before
Income
Taxes
|
|
|
(685,747
|
)
|
|
|
(49.8
|
%)
|
|
|
(189,291
|
)
|
|
|
(11.2
|
)%
|
|
|
(1,569,500
|
)
|
|
|
(40.3
|
%)
|
|
|
(819,630
|
)
|
|
|
(17.4
|
%)
|
|
Net
Income
|
|
|
(417,813
|
)
|
|
|
(30.3
|
%)
|
|
|
(114,918
|
)
|
|
|
(6.8
|
%)
|
|
|
(977,378
|
)
|
|
|
(25.1
|
%)
|
|
|
(553,246
|
)
|
|
|
(11.8
|
%)
|
Sales
The
Company's sales decreased $311,413 or 18.4% to $1,377,478, for the three months
ended October 31, 2007, compared to $1,688,891 for the three months ended
October 31, 2006 and decreased $810,619 to $3,893,884 for the nine months ended
October 31, 2007 compared to $4,704,503 for the nine months ended October 31,
2006, as a result the cancellation of a major retail program that had
contributed to a strong quarter and year to date result last year in spite
of
winning the support of a number of new accounts and expanding our programs
with
some others. Our ability to realize the potential from those gains
were hampered by delays in the receipt of actual orders and delays in the
implementation of new production lines.
Although
sales results are lower than anticipated, the trend for the final quarter and
the new fiscal year, appear to be significantly stronger. Therefore,
we expect positive sales growth to return.
During
the past fiscal year, we introduced a number of new feature sets to the NEXTag™
product line, including the use of new materials, greater printing capability,
and precisely matching material and ink colors in order to faithfully recreate
brand images and logos, all of which has been well received. We
believe these added value items will eventually permit us to secure additional
business, particularly from international accounts, as more and more specialty
retailers and design groups throughout the world have demonstrated interest
in
initiating EAS source tagging programs using custom branded
solutions.
The
planned re-positioning of our production and operations, which will allow us
to
move further forward with larger apparel programs, has moved more slowly than
expected; however, as we see various aspects of our plans realized, it is
apparent that these steps will gradually help to deliver increased sales
revenue. A major part of our strategic plan consists of placing
manufacturing facilities and operations in the countries and regions generating
product demand, increasing efficiencies and permitting a reduction in head
office costs.
Although
largely driven by North American retail accounts to date, a significant portion
of our current NEXTag™ activity involves offshore fulfillment, as the majority
of apparel manufacturing now takes place in overseas markets. In an
effort to better serve these markets, we have, for a number of years now,
maintained a local agency relationship in both Hong Kong and in Taiwan, while
manufacturing the majority of its products in Canada. We believe that
providing local representation has been important in helping to fuel growth
in
this segment, and as every indication suggests that this sector will continue
to
expand, earlier this year, we secured appropriate space to establish a
manufacturing facility in Hong Kong, and have hired local sales and operations
staff in order to better serve this important market.
Once
the
new Hong Kong facility is fully operational, we plan to turn our attention
to
another key apparel market by establishing a similar production facility in
one
of the principal garment manufacturing centers in India. Our plans
have been modified so that we now plan to secure a site and bring the new Indian
facility on line during the spring of 2008. When fully operational,
these two facilities will allow us to benefit from a number of economies, by
not
only physically locating production in the geographical centers where most
of
our finished goods are used, but will permit significant savings in raw
materials, freight and labor costs, by positioning our NEXTag product much
more
competitively. In addition, we plan to add local sales representation
in these international locations to directly interact with the many apparel
factories located in these regions, which will improve our ability to take
advantage of opportunities as they become available.
Our
DualTag™ involves supplying the only patented, dual-technology, label in the
industry, containing the base elements of the two most popular EAS technologies
in use today. By providing both technologies on a single adhesive
label or non-adhesive, insertable card, we enable manufacturers of a variety
of
consumer packaged goods, to tag their entire production with a single device,
permitting them to maintain a single inventory of each product, regardless
of
what EAS technology is in use at the store to which the product unit is
eventually shipped. Without DualTag, manufacturers traditionally find
it necessary to maintain multiple inventories of their products, differing
only
by label technology in order to comply with their retail customers’
requirements. We have also completed the necessary advance planning that will
allow the incorporation of RFID into the DualTag product as specialty retailers
begin to incorporate item-level RFID into their operations and begin to demand
its inclusion in their suppliers products.
Introduced
earlier this year, our insertable DualTag, suitable for such products as CD
and
DVD discs, or boxed products such as pharmaceuticals has received an
enthusiastic initial response from a number of accounts, with a number of new
opportunities pending. Although we anticipated bringing our new
DualTag production equipment fully online earlier this year, we continue to
be
hampered by a number of supplier delays, which prevented us from benefiting
from
the increased capacity we anticipated, thereby affecting our ability to take
advantage of certain DualTag opportunities that became available to
us. Although this resulted in lost sales during the period, we do not
expect it to negatively impact our relationship with the involved accounts
and
believe that we will benefit from future orders from these same
clients.
Gross
Profit
Gross
profit was $358,636 or 26.0% of sales for the three months ended October 31,
2007, compared with $289,412 or 17.1% for the three months ended October 31,
2006, and $983,292 or 25.3% for the nine months ended October 31, 2007, as
compared with $869,192 or 18.5% in the nine months ended October 31,
2006. Despite experiencing lower sales revenues, the gross profit for
the three months and nine months ended October 31, 2007, as compared to the
previous year, was considerably higher both in dollars and as a percentage
of
sales, primarily due to shifting production of our DualTag from an outsource
to
an in-house production line, realizing the benefits derived from a number of
improvements to our production methods, an aggressive focus on raw material
sourcing, and reduction in waste as a result of an increased focus on product
quality.
Management's
ongoing strategy to achieve and improve profitability continues to include
implementing process and purchasing improvements to reduce the fundamental
costs
in manufacturing and transferring the majority of existing manufacturing
capacity from our Canadian operations primarily to Hong Kong and other areas
in
order to minimize costs associated with labor, raw materials, and
freight.
Selling,
General and Administrative (SG&A) Expenses
SG&A
expenses were $1,044,383 or 75.8% of sales for the three months ended October
31, 2007, compared with $478,703 or 28.3% of sales for the three months ended
October 31, 2006, and $2,552,792 or 65.6% for the nine months ended October
31,
2007, as compared to $1,688,822 or 35.9% for the nine months ended October
31,
2006.
The
increase in the ratio of SG&A expenses to sales is primarily due
to: (i) an unfavorable shift in exchange rates as the Canadian dollar rose
strongly against its US counterpart, resulting in a significant foreign exchange
loss; (ii) the impact of lower sales revenues and its effect on SG&A as
a percentage of sales; and (iii) an increase in wages and benefits primarily
as
a result of the addition of experienced management, the full cost of which
is
included in the nine months ended October 31, 2007, versus only a portion of
which was included in the period ended October 31, 2006. Furthermore,
this increase was also due to the company implementing a full group benefits
program earlier this year, in order to both attract and retain quality staff
and
management, and occupancy costs associated with our new Hong Kong facility.
These higher expenses were offset to a degree through: (i) lower Production
and
warehouse expense; and (ii) reduced freight costs.
Operating
Income (Loss)
Operating
loss before taxes was $685,747 or 49.8% for the three months ended October
31,
2007, as compared with an operating loss before taxes of $189,291 or 11.2%
for
the three months ended October 31, 2006, and $1,569,500 or 40.3% for the nine
months ended October 31, 2007 as compared to an operating loss of $819,630 or
17.4% for the nine months ended October 31, 2006.
Taxes
on Income
The
Company experienced an operating loss and therefore recognized a future tax
benefit of $267,934 for the three months ended October 31, 2007 versus a future
tax benefit of $74,373 for the three months ended October 31, 2006, and for
the
nine months ended October 31, 2007, experienced a future tax benefit of $592,122
as compared to a future tax benefit of $266,384 for the nine months ended
October 31, 2006. The effective income tax rates of the future tax
benefit for the three and nine months ended October 31, 2007 was 39% and 38%
respectively. For the three and nine months ended October 31,
2006, the future tax benefit was 39% and 33%. The statutory income
tax rate going forward for the Company, with all of its operating activities
taxed in Canada, is approximately 36% as a result of applicable combined federal
and provincial tax rates.
Liquidity
and Capital Resources
The
table
below represents summary cash flow information for the nine months ended October
31, 2007, and 2006.
|
|
|
Nine
Months ended October 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net
cash from operating activities
|
|
$
|
(1,421,425
|
)
|
|
$
|
(302,834
|
)
|
|
Net
cash from investing activities
|
|
$
|
(452,615
|
)
|
|
$
|
(35,605
|
)
|
|
Net
cash from financing activities
|
|
$
|
1,783,851
|
|
|
|
243,619
|
|
|
Effect
of currency translation adjustments
|
|
$
|
134,408
|
|
|
$
|
(5,501
|
)
|
|
Total
change in cash and cash equivalents
|
|
$
|
44,219
|
|
|
$
|
(100,321
|
)
|
Overview
.
The Company had, as of the end of October 31, 2007, current liabilities of
$1,100,486 and current assets of $943,352. For the nine months ended October
31,
2007, cash flow was positive and management believes that we will generate
sufficient cash from its operating activities for the foreseeable future,
supplemented by the contracted infusion of capital, to fund its working capital
needs, strengthen its balance sheet and support its growth strategy of expanding
its geographic distribution and product offerings.
Operating
Activities
. Cash flow from operating activities for the nine
months ended October 31, 2007 resulted in a negative cash flow of $1,421,425,
as
compared to the nine-month period ended October 31, 2006, which saw a negative
cash flow of $302,834. For the nine months ended October 31, 2007,
the net loss, as adjusted for amortization, shares issued for services provided
and future income taxes, resulted in a negative cash flow of $1,458,052 and
with
changes in non-cash working capital of $36,627 our cash flows from operating
activities decreased by $1,421,425. For the nine months ended October
31, 2006, the net income, as adjusted for amortization and future income taxes,
resulted in a negative cash flow of $659,817, together with positive changes
in
non-cash working capital of $356,983, resulted in a negative cash flow from
operating activities of $302,834. The variances in cash flow from operations
between the nine months ended October 31, 2007 and October 31, 2006 are
primarily the result of a net loss, a decrease in future income taxes and a
decrease in accounts payable, which was offset to some degree by a decrease
in
accounts receivable and decrease in prepaid expenses.
Financing
Activities
. The Company's cash flow from financing activities for
the nine months ended October 31, 2007 amounted to $1,783,851, as a result
of an
issuance of capital stock in the amount of $700,000, the exercise of warrants
in
the amount of $1,270,000, a decrease in capital lease obligations of $44,719
and
a decrease in advances by shareholders of $141,430. By comparison, in
the nine months ended October 31, 2006 the Company experienced a decrease in
capital lease obligations of $38,422, an increase in advances from shareholders
of $140,461, and an increase in a promissory note amounting to $141,580
resulting in a net cash flow from financing activities of $243,619.
Investing
Activities
. In the nine months ended October 31, 2007, the Company
experienced an decrease in cash flow from investing activities of $452,615.
This
was due to an increase in purchase of equipment and patents of $242,372 and
an
increase in deposits on equipment and patents of $210,243. By
comparison in the nine months ended October 31, 2006, the Company experienced
an
decrease in cash flow from investing activities of $35,605, in large part due
to
an increase in purchase of equipment and patents of $232,359, a decrease in
deposits on equipment and patents that amounted to $145,404, and a decrease
in
advances to shareholders of $51,350.
Off-Balance
Sheet Arrangements
. The Company has no material transactions,
arrangements, obligations (including contingent obligations), or other
relationships with unconsolidated entities or other persons that have or are
reasonably likely to have a material current or future impact on its financial
condition, changes in financial condition, results of operations, liquidity,
capital expenditures, capital resources, or significant components of revenues
or expenses.
Market
Risk
. In the normal course of its business, the Company is exposed
to foreign currency exchange rate and interest rate risks that could impact
its
results of operations.
We
sell
our products worldwide, and a substantial portion of our net sales, cost of
sales and operating expenses are denominated in foreign currencies. This exposes
the Company to risks associated with changes in foreign currency exchange rates
that can adversely impact revenues, net income and cash flow. In addition,
the
Company is potentially subject to concentrations of credit risk, principally
in
accounts receivable. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Our major customers are
retailers, branded apparel companies and contract manufacturers that have
historically paid their balances with the Company.
There
were no significant changes in the Company's exposure to market risk in the
past
three years.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management
has identified the following policies and estimates as critical to the Company's
business operations and the understanding of the Company's results of
operations. Note that the preparation of this Form 10-QSB requires management
to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the
Company's financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates,
and the differences could be material.
Revenue
Recognition
SAB
No.
104 requires that four basic criteria be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred
or
services have been rendered; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. Should changes in conditions cause
management to determine that these criteria are not met for certain future
transactions, revenue recognized for a reporting period could be adversely
affected.
Sales
Returns and Allowances
Management
must make estimates of potential future product returns, billing adjustments
and
allowances related to current period product revenues. In establishing a
provision for sales returns and allowances, management relies principally on
the
Company's history of product return rates which is regularly analyzed.
Management also considers (1) current economic trends, (2) changes in customer
demand for the Company's products and (3) acceptance of the Company's products
in the marketplace when evaluating the adequacy of the Company's provision
for
sales returns and allowances. Historically, the Company has not experienced
a
significant change in its product return rates resulting from these factors.
For
the nine months ended October 31, 2007 and 2006, the provision for sales returns
and allowances accounted for as a reduction to gross sales was not
material.
Allowance
for Doubtful Accounts
Management
makes judgments, based on its established aging policy, historical experience
and future expectations, as to the ability to collect the Company's accounts
receivable. An allowance for doubtful accounts has been established. The
allowance for doubtful accounts is used to reduce gross trade receivables to
their estimated net realizable value. When evaluating the adequacy of the
allowance for doubtful accounts, management analyzes customer-specific
allowances, amounts based upon an aging schedule, historical bad debt
experience, customer concentrations, customer creditworthiness and current
trends. The Company's accounts receivable at October 31, 2007 was $184,844,
net
of an allowance of $0.
Inventories
Inventories
are stated at the lower of cost or market value, and are categorized as raw
materials, work-in-process or finished goods. The value of inventories
determined using the first-in, first-out method at October 31, 2007 was $265,048
for finished goods and $200,518 for raw materials.
On
an
ongoing basis, we evaluate the composition of its inventories and the adequacy
of our allowance for slow-turning and obsolete products. The market value of
aged inventory is determined based on historical sales trends, current market
conditions, changes in customer demand, acceptance of the Company's products,
and current sales activities for this type of inventory.
Goodwill
The
Company did not attribute any value to goodwill as at October 31,
2007.
Accounting
for Income Taxes
As
part
of the process of preparing the consolidated financial statements, management
is
required to estimate the income taxes in each jurisdiction in which the Company
operates. This process involves estimating the actual current tax liabilities,
together with assessing temporary differences resulting from the different
treatment of items for tax and accounting purposes. These differences result
in
deferred tax assets and liabilities, which are included in the consolidated
balance sheet. Management must then assess the likelihood that the deferred
tax
assets will be recovered and, to the extent that management believes that
recovery is not more than likely, the Company establishes a valuation allowance.
If a valuation allowance is established or increased during any period, the
Company records this amount as an expense within the tax provision in the
consolidated statement of income. Significant management judgment is required
in
determining the Company's provision for income taxes, deferred tax assets and
liabilities, and any valuation allowance recognized against net deferred tax
assets. Valuation allowances are based on management's estimates of the taxable
income in the jurisdictions in which the Company operates and the period over
which the deferred tax assets will be recoverable.
Item
3. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
management of the Company, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of the
Company’s disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b) as of the end of the period covered by this quarterly report. Based
on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are not
effective in providing reasonable assurance that all material information
relating to the Company that is required to be included in the reports that
the
Company files with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms.
Based
upon its evaluation, Management has revised and enhanced our accounting review
and scheduling procedures as well as instituted new training and other support
measures for its accounting personnel to ensure that material information
relating to periodic Exchange Act reports, including information from our
consolidated subsidiaries, will be made known to them by the staff and officers
of those entities, particularly during the periods in which the preparation
of
our Quarterly Reports shall occur.
Changes
in Internal Controls
With
the
exception of our revised accounting review and scheduling procedures, which
are
intended to eliminate any delays in the filing of our periodic financial
reports, there have been no changes in our internal controls over financial
reporting or in other factors identified in connection with the evaluation
that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting. Accordingly, the only corrective actions required or undertaken
were
for new and enhanced procedures for the review and filing of our periodic
financial reports.