[November 14, 2011] ZEVOTEK, INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Tweet (Edgar Glimpses Via Acquire Media NewsEdge) General The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report. Historical results and percentage relationships among any amounts in these financial statements are not necessarily indicative of trends in operating results for any future period. This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements, which are not historical facts contained in this Report, including this Management's discussion and analysis of financial condition and results of operation, and notes to our unaudited condensed consolidated financial statements, particularly those that utilize terminology such as "may" "will," "should," "expects," "anticipates," "estimates," "believes," or "plans" or comparable terminology are forward-looking statements. Such statements are based on currently available operating, financial and competitive information, and are subject to various risks and uncertainties. Future events and our actual results may differ materially from the results reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, dependence on existing and future key strategic and strategic end-user customers, limited ability to establish new strategic relationships, ability to sustain and manage growth, variability of operating results, our expansion and development of new service lines, marketing and other business development initiatives, the commencement of new engagements, competition in the industry, general economic conditions, dependence on key personnel, the ability to attract, hire and retain personnel who possess the technical skills and experience necessary to meet the service requirements of our clients, the potential liability with respect to actions taken by our existing and past employees, risks associated with international sales, and other risks described herein and in our other filings with the Securities and Exchange Commission. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Company History We were organized on March 19, 2005 under the state laws of Delaware with an original name of "The Diet Coffee Company." On March 1, 2006, we amended our Certificate of Incorporation and changed our name from "The Diet Coffee Company, Inc." to "Diet Coffee, Inc." On June 25, 2008, we changed our name to "Zevotek, Inc." Our principal executive offices are located at 900 Southeast Ocean Boulevard, Suite 130D, Stuart, FL 34994. Our telephone number is (772) 600-2676. Company Overview We market and sell innovative personal and home care items. We are engaged in the direct marketing and distribution of consumer products. On February 24, 2009, we entered into an Exclusive License and Sales Agreement giving us the worldwide rights to manufacture, market, use, sell, distribute and advertise an air purifier that is contained in an energy saving compact fluorescent light bulb named the Ionic Bulb. We market the Ionic Bulb through TV infomercials, our website newionicbulb.com and Amazon.com. We plan to sell through catalogs and major U.S. retail and specialty stores. 18 --------------------------------------------------------------------------------On December 10, 2010, we entered into an Exclusive License and Sales Agreement giving us the worldwide rights to develop, manufacture, market, use, sell, distribute and advertise a U.S. patented new product named "Gung H2O" that reduces water use in the home. Gung H2O is a patented plumbing valve that is installed in the traditional gravity toilet tank of a non-low flow toilet. The Gung H2O valve regulates the amount of water used to fill and flush a toilet. The valve is adjustable to enable the toilet to use more or less water as desired. The Gung H2O valve enables a traditional non-low flow toilet to use less water to achieve the equivalent level of flushing power of a non-low flow toilet. We plan to sell Gung H20 to major U.S. retail stores and directly to American consumers using TV ads and Internet marketing. We are currently seeking new products to sell. Products Ionic Bulb The Ionic Bulb is an air-purifying product. The air-purifying component of the Ionic Bulb is placed in the base of a CFL bulb and consists of electronics and a spout through which negative ions produced by the air-purifying component are dispersed into the air. The electricity used to operate the air-purifying component also lights the CFL bulb to illuminate a room in the same manner as ordinary CFL bulbs. We sell the Ionic Bulb through our wholly owned subsidiary Ionicbulb.com, Inc. The Ionic Bulb combines the performance features of ionic air cleaning technology with those of a 10,000 hour reduced energy use compact fluorescent light bulb (CFL). The Ionic Bulb contains an air purifying microchip ion emitter that is powered by the bulb's own energy. The Ionic Bulb is designed for use in any U.S. home. When illuminated, the Ionic Bulb via silent emission of negative ions helps to eliminate smoke, dust, pollen, pet dander and odors from the air within a surrounding 100 square foot area. The Ionic Bulb is designed for consumer use. We believe the Ionic Bulb product to be a less expensive and space saving alternative to air purifiers. Gung H2O Gung H2O is a patented plumbing valve that is installed in the traditional gravity toilet tank of a non-low flow toilet. The Gung H2O valve regulates the amount of water used to fill and flush a toilet. The valve is adjustable to enable the toilet to use more or less water as desired. The Gung H2O valve enables a traditional non-low flow toilet to use less water to achieve the equivalent level of flushing power of a non-low flow toilet. We plan to sell Gung H2O, a patented new product that proposes to reduce water use in the average American family home and reduces utility bill savings. Comparison of Three Months Ended September 30, 2011 to September 30, 2010 Results of Operations Revenue Our sales were $374 for the three months ended September 30, 2011 and $5,340 for the three months ended September 30, 2010, a decrease of $4,966 or 93.0%. Sales for the three months ended September 30, 2011 and 2010 are comprised of Ionic Bulb sold directly to individual consumers who bought the Ionic Bulb on the Internet. Our revenues exclude shipping and handling fees, which we include as an offset to our shipping and handling costs. During the three months ended September 30, 2011, we made changes in our warehousing and fulfillment operations to better suit our needs for filling customer orders, which resulted in a period of time during which we stopped taking orders for the Ionic Bulb while we moved our inventory to new fulfillment and warehouse center locations and reconfigured our online sales operations. We are currently recruiting additional new sales agents for the Ionic Bulb and have hired three new sales agencies to solicit Ionic Bulb orders from their customer base that is comprised of major national retailers, specialty and regional retailers, a home shopping channel, catalog merchants, and ecommerce companies which we expect will result in increased sales of the Ionic Bulb in future periods resulting from orders they place with us. We also expect the next generation Ionic Bulb we plan to introduce, with its new more compact design for consumers' smaller light fixtures and recessed ceiling lights and Energy Star qualification, to increase demand for the Ionic Bulb. Starting January 1, 2012, 100-watt incandescent light bulbs will no longer be allowed to be sold in the U.S. in accordance with the Energy Independence and Security Act of 2007. U.S. consumers will need to buy alternative lighting products to replace their burnt out 100-watt incandescent bulbs. We are positioning the Ionic Bulb to take advantage of this change toward more energy efficient lighting products and for the trend in consumer preference that favors products that improve the quality of life and health. 19 --------------------------------------------------------------------------------Gross Profit Our gross profit was $128 for the three months ended September 30, 2011 and $2,199 for the three months ended September 30, 2010, a decrease of $2,071 or 94.2% which was primarily due to the decrease in sales. We anticipate improving our gross profit margin through the introduction of a next generation Ionic Bulb manufactured by a factory in China at a lower cost than the cost of our current model of the Ionic Bulb. Operating Expenses Operating expenses were $90,904 for the three months ended September 30, 2011 and $326,677 for the three months ended September 30, 2010, a decrease of $235,773 or 72.2% which was primarily due to reductions in fulfillment and warehousing costs, salaries, advertising, professional fees and consulting fees. We incurred $14,985 and $137,704 in selling expenses during the three months ended September 30, 2011 and 2010, respectively. Selling expenses for the three months ended September 30, 2011 were comprised of marketing expenses. Selling expenses for the three months ended September 30, 2010 were comprised of advertising and marketing costs in connection with a sales and marketing campaign to generate Ionic Bulb sales orders. We anticipate increased selling expenses in the future as we increase Ionic Bulb promotional activities and plans to support sales growth. We incurred $75,919 and $188,973 in general and administrative expenses for the three months ended September 30, 2011 and 2010, respectively. Net Loss Our net loss decreased by $6,911 or 1.7% to $393,122 for the three months ended September 30, 2011 as compared to our net loss of $400,033 for the three months ended September 30, 2010. The decrease was primarily due to our reductions in operating expenses. Our net loss per common share was $1.42 (basic and diluted) for the three months ended September 30, 2011 as compared to our net loss per common share of $10.42 for the three months ended September 30, 2010. The weighted average number of outstanding shares was 277,504 (basic and diluted) for the three months ended September 30, 2011 as compared to 38,373 (basic and diluted) for the three months ended September 30, 2010. Liquidity and Capital Resources Overview As of September 30, 2011, we had a working capital deficit of $1,462,270. As of June 30, 2011, we had a working capital deficit of $1,030,872. Our cash position at September 30, 2011 was $1,946 as compared to $4,737 at June 30, 2011. Our working capital deficit did not significantly change during the three months ended September 30, 2010. Cash provided by financing activities for the three months ended September 30, 2011 and 2010 totaled $79,100 and $74,000, respectively, consisting of advances from a note holder. 20 --------------------------------------------------------------------------------We expect capital expenditures to be nominal for the year ending June 30, 2012. These anticipated expenditures are for investments in property and equipment used in our business. Financing Needs Since our inception on December 19, 2005 to September 30, 2011, we have generated revenues of $1,406,175 and have incurred a net loss of $7,122,259. We hope to begin achieving sustainable revenues within the next 12 months, of which there can be no guarantee. Our ability to achieve profitability is dependent on several factors, including but not limited to, our ability to: generate liquidity from operations and satisfy our ongoing operating costs on a timely basis. We may still need additional investments in order to continue operations to cash flow break even, but we cannot guarantee that we will be able to obtain such investments. From time to time, we may receive additional funding from existing investors. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and conditions in the U.S. stock and debt markets make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations again, attempt to further restructure financial obligations and/or seek a strategic merger, acquisition or a sale of assets. The effect of inflation on our revenue and operating results was not significant. Our operations are located in North America and there are no seasonal aspects that would have a material effect on our financial condition or results of operations. We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Financial Reporting Release No. 60, recently released by the Securities and Exchange Commission (the "SEC"), requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The notes to the unaudited condensed consolidated financial statements include a summary of significant accounting policies and methods used in the preparation of our unaudited condensed consolidated financial statements. In addition, Financial Reporting Release No. 61 was recently released by the SEC requires all companies to include a discussion which addresses, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The following is a brief discussion of the more significant accounting policies and methods used by us. The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. On an on-going basis, we evaluate our estimates. The most significant estimates relate to our recognition of revenue, the allowance for doubtful accounts receivable and inventory valuation reserves. 21 --------------------------------------------------------------------------------We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. Reverse Stock Split On September 26, 2011, the Company filed a Certificate of Amendment to the Company's Certificate of Incorporation in order to effect a reverse split on the outstanding shares of the Company's common stock on a 1 for 5,000 basis (the "Reverse Split"). All per share numbers in this quarterly report are reflective of the Reverse Split. The Financial Industry Regulatory Authority ("FINRA") effected the Reverse Split on October 27, 2011. Revenue Recognition The Company recognizes revenue from product sales based on four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. The Company does not have any multiple element arrangements. Inventories / Cost of Goods Sold The Company has adopted a policy to record inventory at the lower of cost or market determined by the first-in-first-out method. The elements of cost that comprise inventory and cost of goods sold are FOB shipping point costs, freight and destination charges, customs and importation fees and taxes, customer broker fees (if any) and other related costs. Warehousing costs are charged to cost of goods in the period the costs are incurred. The Company provides inventory allowances based on estimates of obsolete inventories. Allowance for doubtful accounts The Company maintains an allowance for doubtful accounts to reduce amounts to their estimated realizable value, including reserves for customer and other receivable allowances and incentives. In estimating the provision for doubtful accounts, the Company considers a number of factors including age of the accounts receivable, trends and ratios involving the age of the accounts receivable and the customer mix of each aging categories. Advertising The Company charges the costs of advertising to expenses as incurred. Off Balance Sheet Arrangements None [ Back To TMCnet.com's Homepage ]