Item 2. Management’s Discussion
and Analysis of Financial Conditions and Results of Operations
The following is management’s discussion
and analysis of financial condition and results of operations and is provided as a supplement to the accompanying unaudited condensed
financial statements and notes to help provide an understanding of our financial condition, results of operations and cash flows
during the periods included in the accompanying unaudited condensed financial statements.
In this Quarterly Report on Form 10-Q, “Company,”
“the Company,” “us,” and “our” refer to Quarta-Rad, Inc., a Delaware corporation, unless the
context requires otherwise.
We intend the following discussion to assist
in the understanding of our financial position and our results of operations for the three and nine months ended September 30,
2017 and 2016. You should refer to the Financial Statements and related Notes in conjunction with this discussion.
Results of Operations
General
We were incorporated under the laws of the
State of Delaware on November 29, 2011 with fiscal year end in December 31. We were formed to distribute and sell detection devices
to homeowners and interested consumers in North America. Initially, our business plan was to sell products on consignment from
Star Systems Japan, a corporation owned by our majority shareholder. We purchased these products from Quarta-Rad, Ltd., a company
owned by our minority shareholder. We also targeted direct-to-consumer sales since we believe we can distribute these products
through the Internet. We have never been party to any bankruptcy, receivership or similar proceeding, nor have we undergone any
material reclassification, merger, consolidation, purchase or sale of a significant amount of assets not in the ordinary course
of business.
As of the date of this Form 10-Q, we continue
to expand our operations and expect to increase our revenues with additional working capital. Our chief executive officer and director,
Victor Shvetsky, and our director and president, Alexey Golovanov, are our only employees. Mr. Shvetsky and Mr. Golovanov will
devote at least ten hours per week to us but may increase the number of hours as necessary. In 2012, Messrs. Shvetsky and Golovanov’s
companies have been the source of commissionable consignment sales and we did not carry any inventory. In 2013, we discontinued
selling the products on consignment from our majority shareholder’s company for a commission or consignment fee and began
purchasing inventory directly from Quarta-Rad, Ltd (Russia) (“QRR”) to sell on the Internet to direct consumers and
to third party resellers. In 2012, when a reseller placed an order from us we purchased the product from our related party supplier
and have it ship the product directly to the reseller. Beginning in 2013, we began purchasing the products from Quarta-Rad, Ltd.,
our related party supplier and it shipped the products to us. We then shipped the products to a third party online retailer, to
hold for Internet sales and sales to our third-party resellers.
Our administrative office is located at 1201
N. Orange St., Suite 700, Wilmington, DE 19801, which is a virtual office.
We continue to focus our business operations
on the development of our distribution agreements and reseller network as well as continue to advertise on the Internet. We plan
to continue to utilize our website to promote the products to home renovation contractors and other purchasers of detection devices.
We are promoting the detection products by advertising our website and marketing to independent distributors and others interested
in detection devices. We purchase the products from QRR, which is owned by our minority shareholder and is the original manufacturer
for RADEX product line. Under an oral agreement with QRR, we have the exclusive distribution rights for sale of QRR products in
Europe, the US, and Asia (excluding China) for a period of 10 years. We sell the products we purchase from QRR directly to third
party buyers and to resellers. The purchase terms require us to prepay for the products we purchase at a price that is set forth
in each purchase order.
Critical Accounting Policy and Estimates.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our condensed
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America. The preparation of these condensed financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the condensed financial statements and the reported amounts
of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases
its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The most significant accounting estimates inherent in the preparation of our condensed financial statements include estimates as
to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. In addition,
these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the condensed
financial statements included in this Quarterly Report on Form 10-Q.
The following discussion of our financial condition
and results of operations should be read in conjunction with our unaudited financial statements for the three and nine months ended
September 30, 2017 and 2016, together with notes thereto, which are included in this Quarterly Report on Form 10-Q.
Three months ended September 30, 2017 compared
with the three months ended September 30, 2016
Revenues.
Our net revenues increased
$150,971 or 72.11% to $360,321 for the three-months ended September 30, 2017 compared with $209,350 for the three-months ended
September 30, 2016. The increase in revenues was due to an increase in the sales of our RD1503 model, and a strong demand in the
U.S. market.
Cost of Goods Sold.
Our Cost of Goods
Sold increased $69,582 or 34.80% to $269,541 for the three months ended September 30, 2017 compared to $199,959 for the comparable
period in 2016. The increase is due to an overall increase in sales at a higher margin.
Operating Expenses.
For the three-months
ended September 30, 2017, our total operating expenses increased $11,225 or 38.00%, to $40,765 compared to $29,540 for the three-months
ended September 30, 2016. The increase is attributable to the Company’s increase in advertising and general and administrative
expenses.
Net Income.
Our net income increased
$65,022 to a net income of $44,873 for the three-months ended September 30, 2017 compared to a net loss of ($20,149) for the comparable
period in 2016. The increase is primarily due to an increase in revenues.
Liquidity and Capital Resources
. During
the three months ended September 30, 2017, we used cash for operating expenses from cash on hand and the sale of products on the
Internet and from independent, third party resellers.
Nine months ended September 30, 2017 compared
with the nine months ended September 30, 2016
Revenues.
Our net revenues increased
$366,813 or 60.12%, to $976.897 for the nine months ended September 30, 2017 compared with $610,084 for the nine months ended September
30, 2016. The increase in revenues was due to an increase in the sales of our RD1503 model and a strong demand in the U.S. market.
Cost of Goods Sold.
Our Cost of Goods
Sold increased $277,995, or 43.96% to $746,648 for the nine months ended September 30, 2017 compared to $518,653 for the comparable
period in 2016. The increase is due to an overall increase in sales at a higher margin.
Operating Expenses.
For the nine-months
ended September 30, 2017, our total operating expenses increased $22,761, or 22.46%, to $124,106 compared to $101,345 for the nine-months
ended September 30, 2016. The increase is attributable to the increase in professional fees and advertising.
Net Income (loss).
Our net income increased
by $110,695, to a net income of $100,731 for the nine-months ended September 30, 2017 compared to a net loss of ($9,914) for the
comparable period in 2016. The increase is primarily due to an increase in revenues.
Liquidity and Capital Resources
. During
the nine months ended September 30, 2017, we used cash for operating expenses from cash on hand and the sale of products on the
Internet and from independent, third party resellers.
Our
total assets were $292,726 and $202,253 as of September 30, 2017 and December 31, 2016, respectively, consisting of $57,045 and
$67,513, respectively, in cash. Our working capital surplus was $223,881 and $123,150 as of September 30, 2017 and December 31,
2016, respectively. Our inventory was $191,410 and $83,586 as of September 30, 2017 and December 31, 2016, respectively. The
inventory increase was due to an increase in projected sales and timing.
We used $15,468 and $48,880 in cash from operating
activities for the nine months ended September 30, 2017 and 2016, respectively.
We had no cash provided by investing activities
for the nine months ended September 30, 2017 and 2016, respectively.
We had $5,000 and $3,000 cash provided by financing
activities for the nine months ended September 30, 2017 and 2016, respectively.
We do not have sufficient funds for pursuing
our plan of operation, which includes acquisitions, but we are in the process of trying to procure funds sufficient to fund our
plan. There can be no assurance that we will be able to procure funds sufficient for such purpose. If operating difficulties or
other factors (many of which are beyond our control) delay our realization of revenues or cash flows from operations, we may be
limited in our ability to pursue our business plan. Moreover, if our resources from obtaining additional capital or cash flows
from operations, once we commence them, do not satisfy our operational needs or if unexpected expenses arise due to unanticipated
pressures or if we decide to expand our business plan beyond its currently anticipated level or otherwise, we will require additional
financing to fund our operations, in addition to anticipated cash generated from our operations. Additional financing might not
be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms,
our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our business or otherwise
respond to competitive pressures would be significantly limited. In a worst-case scenario, we might not be able to fund our operations
or to remain in business, which could result in a total loss of our stockholders’ investment. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced, and
these newly issued securities might have rights, preferences or privileges senior to those of existing stockholders.
The Company had no formal long-term lines or
credit or other bank financing arrangements as of September 30, 2017.
The Company has no current plans for the purchase
or sale of any plant or equipment.
The Company has no current plans to make any
changes in the number of employees.
Impact of Inflation
The Company believes that inflation has had
a negligible effect on operations over the past quarter.
Capital Expenditures
The Company expended no amounts on capital
expenditures for the nine months ended September 30, 2017.
Plan of Operation
Our business strategy is to continue to market
our website (
www.quartarad.com
). We have used our website to market products for sale to consumers as well to third party
distributors. We will continue to strengthen our presence on e-commerce sites. We are also focusing on expanding our reseller
network by targeting large consumer retail chains.
The number of detection devices, which we will
be able to sell will depend upon the success of our marketing efforts through our website and the distributors that we will enter
into agreement with to sell the products.
We intend to implement the following tasks
within the next twelve months:
Inventory
: (Estimated cost $40,000-$225,000).
We intend to purchase inventory to increase our sales. We believe that these funds will be initially sufficient for us to increase
our inventory from Quarta-Rad, Ltd. We intend to pay for this expense from cash flow from operations.
Marketing
: (Estimated cost $25,000-$75,000).
In addition to the website modification costs, we intend to increase our marketing efforts on the Internet to generate leads and
sales. We will also utilize funds to develop marketing brochures and materials to market the products to industry professionals
such as home renovation contractors.
Secure Distribution Agreements
: (Estimated
cost $10,000). We plan to seek and secure distribution agreements for the sale of our detection devices.
Our management does not anticipate the need
to hire additional full or part- time employees over the next six (6) months, as the services provided by our officers and directors
and our independent contractor appear sufficient at this time. We believe that our operations are currently on a small scale that
is manageable by these two individuals as well as our independent contractor. Our management’s responsibilities are mainly
administrative at this stage. While we believe that the addition of employees is not required over the next six (6) months, the
professionals we plan to utilize will be considered independent contractors. We do not intend to enter into any employment agreements
with any of these professionals. Thus, these persons are not intended to be employees of our company.
Our management does not expect to incur research
costs in the next twelve months; we currently do not own any plants or equipment that we would seek to sell soon; we do not have
any off-balance sheet arrangements; and we have not paid for expenses on behalf of our directors. Additionally, we believe that
this fact shall not materially change. Our majority shareholder and director, Victor Shvetsky, has developed a software program
called RadexRead, which is currently being used by Quarta-Rad, Ltd in the manufacture of the RD 1212 product at no cost to the
Company.
Off-Balance Sheet Arrangements
None.
Forward Looking Statements
This Quarterly Report on Form 10-Q, including
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of
this report include forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended,
and the Private Securities Litigation Reform Act of 1995 (collectively, the “Reform Act”). The Reform Act provides
a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors
that could cause actual results to differ from the projected results. All statements, other than statements of historical fact
that we make in this Quarterly Report on Form 10-Q are forward-looking. The words “anticipates,” “believes,”
“expects,” “intends,” “will continue,” “estimates,” “plans,” “projects,”
the negative of these terms and similar expressions are intended to identify forward-looking statements. However, the absence of
these words does not mean the statement is not forward-looking.
Forward-looking statements involve risks,
uncertainties or other factors which may cause actual results to differ materially from the future results, performance or achievements
expressed or implied by the forward-looking statements. These statements are based on our management’s beliefs and assumptions,
which in turn are based on currently available information. Certain risks, uncertainties or other important factors are detailed
in this Quarterly Report on Form 10-Q and may be detailed from time to time in other reports we file with the Securities and Exchange
Commission, including on Forms 8-K and 10-K.
We operate in a very competitive and rapidly
changing environment. New risks emerge from time to time. It is not possible for us to predict all those risks, nor can we assess
the impact of all those risks on our business or the extent to which any factor may cause actual results to differ materially from
those contained in any forward-looking statement. We believe these forward-looking statements are reasonable. However, you should
not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to update
publicly any of them considering new information or future events.
Critical Accounting Policies
Our condensed financial statements and accompanying
notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make
estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually
evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical
experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ
from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed
critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended
December 31, 2016, and Note 1 to the Condensed Financial Statements in this Form 10-Q.