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| SWME.OB > SEC Filings for SWME.OB > Form 10QSB on 17-May-2004 | All Recent SEC Filings |
17-May-2004
Quarterly Report
The following discussion should be read in conjunction with the Company'sFinancial Statements and Notes thereto, included elsewhere within this Report.
Management's discussion and analysis of results of operations andfinancial condition are based on our financial statements. These statements havebeen prepared in accordance with accounting principles generally accepted in theUnited States of America. These principles require management to make certainestimates, judgments and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates based onhistorical experience and various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.
RESULTS OF OPERATIONS
OVERVIEW
Prior to May 16, 2003 we were a holding company focused on acquiring,expanding and developing technology companies and we had no operations.
As of May 16, 2003 we began to implement a new business plan pursuantto which we will market and distribute proprietary bioscience health products,focused on chronic ailments. We retained a new management team to implement thisnew business plan. The global market for chronic ailment products is in excessof $100 billion and is currently dominated by prescription, chemical baseddrugs. The global market for natural, herbal and bioscience products iscurrently estimated to be over $60 billion and growing rapidly.
On May 16, 2003 we acquired certain assets of General CosmeticsCorporation, a Delaware corporation based in Munich, Germany. The acquisitionwas made by issuing to General Cosmetics Corporation 6,750,000 shares of ourClass A Common Stock, subject to adjustment based on the terms of the March 31,2003 definitive agreement. The assets we acquired included a patented essentialoil bioscience product family that has been developed for pain relief, menstrualcramps, cold sores and other ailments. We intend to introduce these products tothe market over time. We are currently marketing and selling the pain reliefformulation called "024 Pain Relief" in both Canada and the United States. O24pain relief complies with FDA regulations and can be sold in the United Statespursuant to an FDA monograph. We have not yet determined when the remainingproducts will be introduced. The combined U.S., over-the-counter andprescription market for pain relief products is estimated to be $12 billion in2003.
We will continue to look for quality proprietary, natural bioscienceproducts to license and/or acquire. We plan to sell our products throughmultiple distribution channels including, retail outlets, via the Internet, viahealth care professionals, and via direct response, and via healthcareprofessionals.
To date during 2004, we have expanded the distribution of O24 painrelief into major retail outlets in Canada and anticipate entering major retailoutlets in the United States in the latter part of 2004.
We currently have 8 individuals who render services to us for ourday-to-day operations.
Forward Looking Statements
This report may contain "forward-looking statements" which represent theCompany's expectations or beliefs, including, but not limited to, statementsconcerning industry performance and the Company's results, operations,performance, financial condition, plans, growth and strategies, which include,without limitation, statements preceded or followed by or that include the words"may," "will," "expect," "anticipate," "intend," "could," "estimate," or"continue" or the negative or other variations thereof or comparableterminology. Any statements contained in this report or the informationincorporated by reference that are not statements of historical fact may bedeemed to be forward-looking statements within the meaning of Section 27(A) ofthe Securities Act of 1933 and Section 21(F) of the Securities Exchange Act of1934. For such statements, the Company claims the protection of the safe harborfor forward-looking statements contained in the Private Securities LitigationReform Act of 1995. These statements by their nature involve substantial risksand uncertainties, some of which are beyond the Company's control, and actualresults may differ materially depending on a variety of important factors, manyof which are also beyond the Company's control. You should not place unduereliance on these forward-looking statements, which speak only as of the date ofthis report. The Company does not undertake any obligation to update or releaseany revisions to these forward-looking statements to reflect events orcircumstances after the date of this report or to reflect the occurrence ofunanticipated events, except to the extent such updates and/or revisions arerequired by applicable law.
Management's Discussion and Analysis of Financial Condition and Results ofOperations
QUARTER ENDED MARCH 31, 2004
Swiss Medica net revenues for the first quarter of 2004 were $6,069.Swiss Medica began generating revenues in the third quarter of 2003, and priorto June 2003 had no active operations. Therefore any comparisons of results ofoperations and financial position with the quarter ended March 31, 2003 are notrelevant.
The following is a summary of financial information for the quarter ended March31, 2004:
Net Sales: $ 6,069 Cost of Sales: $ 1,222 ----------
Gross Profit: $ 4,847 Gross Profit as % of Sales: 80%
Operating expenses: Wages & Salaries: $ 15,944 Selling General & Administrative expenses: $2,146,038 Depreciation and amortization: $ 48,863
Total operating expenses: $2,210,845
Net Loss: 2,205,998
Loss per Common Share: $ 0.07
SALES
Our revenues from operations for the quarter ended March 31, 2004 were$6,588 (before discount allowances), and were generated predominately by salesto Canadian retail outlets totaling $5,153 (before discount allowances). Thebalance of our first quarter revenue (approximately 12%) was generated viainternet (on-line) sales, totaling $1,435. We allowed a provision of $519 tocover discounts, commissions and cooperative advertising costs.
COST OF SALES AND GROSS PROFIT
Our first quarter ending March 31, 2004, cost of sales are $1,222,generating a percentage margin on sales of 82%. Our gross profit percentage ishigher than we would anticipate for the balance of 2004 as our cost of saleswere lower than expected due to below market priced inventory acquired fromGeneral Cosmetics Corporation. We anticipate normalized gross profit percentagesto be between 50% and 60%, depending on the distribution mix of our revenue andrelated discounts and cooperative advertising costs. It should also be notedthat the raw materials used in the production process are commodities and pricesmay vary significantly, depending upon prevalent market conditions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
A summary of our Selling, General and Administrative costs is asfollows:
Stock based compensation to Directors, Officers, Consultants &Professional Advisors totaled $1,266,879. An additional $287,500 stock warrantswere issued to consultants in exchange for services. Stock based compensationwas granted to recruit and compensate executives, directors, legal advisors,marketing, business and development advisors.
Cash based compensation was paid to our staff of eight full-timeemployees, consulting fees for outside directors, legal advisors and marketingconsultants. Certain executives currently have not received cash basedcompensation since September 2003 but have been compensated exclusively withstock based compensation.
Other selling, general and administrative costs include rent and otheroffice expenses relating to two offices in Toronto and Vancouver, and travelexpenses.
DEPRECIATION & AMORTIZATION
Depreciation & Amortization expenses of $48,863 were incurred duringthe quarter ended March 31, 2004 to amortize the tangible and intangible assetsacquired from the General Cosmetics Corporation acquisition.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, our current assets exceed current liabilities inthe amount of $2,161,258. As a result of our operating losses during the firstquarter of 2004, we generated a cash flow deficit of $526,988 from operatingactivities. We used no cash flows in connection with investing activities in2004. We met our cash requirements through the private placement of $ 2,886,500of common stock.
In the first quarter of 2004 we completed private offerings ofsecurities totaling $2,886,500 to provide working capital to fund ouroperations, acquire inventory, step-up our marketing & advertising campaign andto repay $117,013 of third party advances.
On February 13, 2004 we closed a private equity financing of $250,000through a private placement to Platinum Partners Global Equity Fund, L.P.,issuing 2,500,000 Common shares and 3,750,000 related Warrants. On February 13,2004 we closed a private equity financing of $50,000 through a private placementto Fennmore Holdings, issuing 500,000 Common shares and 750,000 relatedWarrants. On March 30, 2004 we closed an equity financing of $2.5 millionthrough a private placement to eighteen investors, issuing 15,625,000 Commonshares and 23,437,500 related Warrants. We will continue to fund our operationsthrough additional sales of our securities and/or through shareholder loans asrequired. During the Quarter we also closed several private equity financingstotaling $86,500, for which we issued a total of 865,000 Common shares and865,000 related Warrants.
By adjusting its operations and development to the level ofcapitalization, management believes it has sufficient capital resources to meetprojected cash flow requirements through the next twelve months . However, ifthereafter, we are not successful in generating sufficient liquidity fromoperations or in raising sufficient capital resources, on terms acceptable tous, this could have a material adverse effect on our business, results ofoperations, liquidity and financial condition.
Our independent certified public accountants have stated in theirreport, which is included with our audited financial statements in the Form10-KSB for the period ended December 31, 2003, that we have incurred operatinglosses in the last two years and that we are dependent on management's abilityto raise capital and develop profitable operations. These factors, among others,may raise substantial doubt about our ability to continue as a going concern.
FACTORS AFFECTING BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
An investment in us involves a high degree of risk and should beundertaken only by persons whose financial resources are sufficient to enablethem to assume such risk and to bear the total loss of their investment. Thissection sets forth a brief summary of some of the principal risk factors. If theCompany is unable to address and deal with one or more of the risks describedbelow or any other risks which it may face, then its business, operating resultsand financial condition could be materially adversely affected, and you couldlose all or part of your investment. For these reasons, prospective investorsshould carefully consider the risks described below as well as any otherpossible risks that could be important.
WE ARE A DEVELOPMENT STAGE COMPANY WITH A LIMITED OPERATING HISTORY.
We have been engaged in our current business for less than one year.Accordingly, we have a limited operating history and our operations are subjectto all the risks inherent in a business enterprise with such a limited operatinghistory, including limited capital, possible delays in the development andimplementation of our business plan, uncertain markets, and the absence of anoperating history. The likelihood that we will succeed must be considered inlight of the problems, expenses, and delays frequently encountered in connectionwith the development of new businesses, as well as many other factors. There isno assurance that we will be able to develop successfully the business we arepursuing. We cannot be certain that our business will be successful or that wewill generate significant revenues.
WE HAVE CAPITAL REQUIREMENTS AND WE WILL HAVE THE NEED FOR ADDITIONAL CAPITAL IN
THE FUTURE.
We have been dependent primarily on private placements of our equitysecurities and shareholder loans to fund our operations. In the near term, weintend to focus on increasing our marketing efforts for our existing products.There can be no assurance that any such funding will be available to us whenneeded, on commercially reasonable terms, or at all. If we are unable to obtainadditional financing if needed, we will likely be required to curtail ourmarketing and operating plans and possibly cease our operations. In addition,any additional equity financing may involve substantial dilution to ourthen-existing stockholders.
Our independent accountants have included an explanatory paragraph inour financial statements included in our public filings, which are incorporatedby reference into this prospectus, stating that we have incurred operatinglosses in the last two years and that we are dependent on our management'sability to develop profitable operations, and that these factors, among others,may raise substantial doubt about our ability to continue as a going concern.
WE ARE SUBJECT TO GOVERNMENT REGULATIONS WHICH MAY HINDER OUR GROWTH.
In the United States, governmental agencies and extensive federalregulations regulate the manufacture, packaging, labeling, advertising,promotion, distribution and sale of our products. The Food and DrugAdministration (FDA) regulates the safety and effectiveness of our products andthe Federal Trade Commission (FTC) regulates how we advertise and market ourproducts. O24 and any other products we may manufacture or sell in the futureare also subject to regulation by, among other regulatory entities, the ConsumerProduct Safety Commission, the U.S. Department of Agriculture, and theEnvironmental Protection Agency. The laws, regulations and enforcement policiesgoverning our products are relatively new and are still evolving, and we cannotpredict what enforcement positions the FDA or other governmental agencies maytake with respect to our products.
There are similar regulatory bodies and regulations in Canada, andother countries in which we may decide to market, sell and distribute ourproducts. We cannot be certain that we comply or will comply with all laws andregulations in this area. Enforcement actions by any of these regulatoryagencies can result in civil and criminal penalties, an injunction to stop ormodify certain selling methods, seizure of products, adverse publicity orvoluntary recalls and labeling changes. If any governmental agency were toundertake an enforcement action against us, this could cause an immediatedecrease in our revenues, cause us to incur significant additional expenses andresult in a decrease in our stock price.
WE MAY NEVER BECOME PROFITABLE.
We have incurred net operating losses in each fiscal quarter since wehave been in business. We expect to continue to experience losses until thetime, if ever, when we are able to sell products sufficient to generate revenuesadequate to support our operations.
WE MAY NOT BE SUCCESSFUL IN ACQUIRING OR LICENSING NEW PRODUCTS.
We are currently seeking to license or acquire new products orcompanies with bioscience products, manufacturing or distribution capabilitiesconsistent with our commercial objectives. There can be no assurance that wewill be able to acquire such products. We may not be able to find and acquireadditional bioscience products with demonstrative competitive advantages. Wepresently do not have the capital to make acquisitions. Accordingly, in the nearterm, any such acquisitions would most likely require that we issue stock in ourcompany to effect acquisitions which would result in dilution to ourshareholders.
WE HAVE RISKS ASSOCIATED WITH OUR DEPENDENCE ON THIRD PARTY MANUFACTURING.
We depend upon third parties to manufacture our products. Theinability of a manufacturer to ship orders of our products in a timely manner,including as a result of local financial market disruption which could impairthe ability of such manufacturers to finance their operations, or to meetquality standards, could cause us to miss the delivery date requirements of ourcustomers for those items, which could result in cancellation of orders, refusalto accept deliveries or a reduction in purchase prices, any of which could havea material adverse effect on our financial condition and results of operations.We have no long-term formal arrangements with any of our third partymanufacturers. Although we believe we could replace such manufacturers ifnecessary, without a material adverse effect on us, there can be no assurancethat such manufacturers could be replaced in a timely manner, and the loss ofsuch manufacturers could have a material adverse effect on our business,financial condition and results of operations.
THERE IS NO CERTAINTY AS TO THE POTENTIAL MARKET FOR OUR PRODUCTS.
We have not undertaken an independent analysis or survey of the marketfor our products. We believe that consumers are willing to expend large sums forthe purchase of bioscience and herbal health products; however, there can be noassurance that our products and services have the commercial potential tosucceed in these target markets.
WE ARE DEPENDENT ON OUR TRADEMARKS AND PATENTS.
The market for certain of our products will be, in part, dependent uponthe goodwill engendered by our trademarks and trade names. Trademark protectionis therefore material to a portion of our business. The failure to obtaintrademark protection, or illegal use of any trademarks we may obtain, may havean adverse effect on our business, financial condition and operating results.
The Company owns United States Patent Number 6,444,238 (issuedSeptember 3, 2002) which covers our O24 product, however, there is no assurancewe will be able to obtain patent protection for any derivative uses of O24, orfor any other products we may later acquire or develop. We also cannot assurethat we will be able to obtain foreign patents to protect our products.
The failure to protect our patent, trademarks and trade names, may havea material adverse effect on our business, financial condition and operatingresults. Litigation may be required to enforce our intellectual property rights,protect our trade secrets or determine the validity and scope of proprietaryrights of others. Any action we take to protect our intellectual property rightscould be costly and could absorb significant management time and attention. Inaddition, as a result of any such litigation, we could lose any proprietaryrights we have. If any of the foregoing occurs, we may be unable to execute onour business plan and you could lose your investment.
OUR EXECUTIVE OFFICERS AND DIRECTORS CONTROL A LARGE PERCENTAGE OF OUR COMMON
STOCK, WHICH ALLOW THEM TO CONTROL MATTERS SUBMITTED TO STOCKHOLDERS FOR
APPROVAL.
Our executive officers and directors (and their affiliates), in theaggregate, own approximately 25% of our outstanding common stock, and asubstantial majority of our outstanding voting stock. There is currently anaggregate of 57,351,524 shares of Class A and Class B Common Stock outstanding.The holders of the Class A and Class B Common Stock vote together on all matterssubmitted to a shareholder vote. Raghunath Kilambi, our Chief Executive Officer,Chief Financial Officer and a director, owns 1,784,451 shares of our Class ACommon Stock, and 2,000,000 shares of our Class B Common Stock which constitutesall outstanding shares of our Class B Common Stock. Each share of Class B CommonStock is entitled to fifty votes of Class A Common Stock. Therefore, Mr. Kilambihas the ability to decide the outcome of matters submitted to our stockholdersfor approval (including the election and removal of directors and any merger,consolidation or sale of all or substantially all of our assets) and to controlour management and affairs. Accordingly, such concentration of ownership mayhave the effect of delaying, deferring or preventing a change in control, impedea merger, consolidation, takeover or other business combination or discourage apotential acquirer from making a tender offer or otherwise attempting to obtaincontrol, which in turn could have an adverse effect on the market price of ourcommon stock.
WE NEED TO BUILD OUT OUR SALES AND MARKETING ORGANIZATION.
We are and shall continue marketing our existing products and futureproducts that we may license or acquire either through the utilization ofcontract sales representatives and brokers, the establishment of our own salesforce, strategic alliances and various other methods. We are in the early stagesof developing such sales and marketing channels, and further development ofthose channels will require an investment of substantial amounts of capitalwhich we currently do not possess and which we may never be able to access.Accordingly, despite our plans, we may be unable to substantially develop ourown marketing channels.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR OUR PRODUCTS.
Customers may sue us if any of our products sold to them injure theuser. Liability claims could require us to spend significant time and money inlitigation and pay significant damages. As a result, any of these claims,whether or not valid or successfully prosecuted, could have a substantial,adverse effect on our business and financial results. In addition, we currentlyhave product liability insurance, however, the amount of damages awarded againstus in such a lawsuit may exceed the policy limits.
WE DEPEND ON KEY PERSONNEL AND WILL REQUIRE ADDITIONAL SKILLED EMPLOYEES TO
EXECUTE OUR GROWTH PLANS.
Our potential for success depends significantly on our executiveofficers, including, Raghunath Kilambi, our Chief Executive Officer and ChiefFinancial Officer, Grant Johnson, our President, and Greg Nuttall, our ExecutiveVice President, Strategy & Business Development. We do not carry key-man lifeinsurance on any executive. Given the early stage of our development and ourplans for rapid expansion, the loss of the services of any executive or theservices of any other key employees we may hire in the future would have asubstantial, adverse effect on our business. We believe that our future successwill depend in large part on our ability to attract and retain highly skilledsales, marketing and management personnel. If we are unable to hire thenecessary personnel, the development of our business would likely be delayed orprevented. Competition for these highly skilled employees is intense. As aresult, we cannot assure you that we will be successful in retaining our keypersonnel or in attracting and retaining the personnel we require for expansion.
WE FACE SIGNIFICANT COMPETITION.
The market for health-related retail goods and services ischaracterized by intense competition. We believe that the principal competitivefactors for companies in the industries in which we compete are:
o functionality; o quality of merchandise; o discounts and rewards; o brand recognition; o customer loyalty; and o price.Nearly all of our existing and potential competitors have longeroperating histories, greater experience, greater name recognition, largercustomer bases and significantly greater financial, technical and marketingresources than we do. Because of their greater resources, our competitors areable to undertake more extensive marketing campaigns for their brands andservices, and make more attractive offers to potential employees, retailaffiliates, and others. We cannot assure you that we will be able to competesuccessfully against our current or future competitors or that our business andfinancial results will not suffer from competition.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED IF TOO MUCH OF IT
IS SOLD AT ONCE.
Sales of substantial amounts of our common stock in the public marketcould adversely affect the market price of the common stock. Such sales alsomight make it more difficult for us to sell equity or equity-related securitiesin the future at a time and price that we deem appropriate.
In addition, we often compensate consultants who provide services tothe Company through the issuance to them of shares of publicly traded Class ACommon Stock and other securities. The shares of Class A Common Stock are oftenregistered under a Form S-8 Registration Statement that we filed with the SECwhich allows the consultants to immediately sell such shares on the open market.The sale of those shares will likely adversely affect the market price of theClass A Common Stock.
OUR STOCK IS QUOTED ON THE OTC BULLETIN BOARD AND COULD BE SUBJECT TO EXTREME
VOLATILITY.
Our common stock is currently quoted under the symbol "SWME" on the OTCBulletin Board, which is often characterized by low trading volume. A largevolume of stock being sold into the market at any one time could cause the stockto rapidly decline in price. In addition, we must comply with ongoingeligibility rules to ensure our common stock is not removed from the OTCBulletin Board, which would materially adverse affect the liquidity andvolatility of our common stock.
APPLICABILITY OF "PENNY STOCK RULES" TO BROKER-DEALER SALES OF OUR COMMON STOCK
COULD HAVE A NEGATIVE EFFECT ON THE LIQUIDITY AND MARKET PRICE OF OUR COMMON
STOCK.
Our common stock is subject to the "penny stock rules" adopted pursuantto Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, whichapply to non-NASDAQ companies whose common stock trades at less than $5.00 pershare or which have a tangible net worth of less than $5,000,000 - or $2,000,000if they have been operating for three or more years. The penny stock rulesimpose additional sales practice requirements on broker-dealers which sell suchsecurities to persons other than established customers and institutionalaccredited investors. For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and havereceived the purchaser's written consent to the transaction prior to sale.Consequently, the penny stock rules affect the ability of broker-dealers to sellshares of our common stock and may affect the ability of stockholders to selltheir shares in the secondary market if such a market should ever develop, ascompliance with such rules may delay and/or preclude certain tradingtransactions. The penny stock rules could have a material adverse effect on theliquidity and/or market price of our common stock.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE
YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If weraise additional funds through the issuance of equity, equity-related orconvertible debt securities, these securities may have rights, preferences orprivileges senior to those of the holders of our common stock. The issuance ofadditional common stock or securities convertible into common stock by ourmanagement will also have the effect of further diluting the proportionateequity interest and voting power of holders of our common stock.
In addition, under our Certificate of Incorporation, the Board isauthorized to issue, without obtaining shareholder approval, shares of preferredstock having the rights, privileges and designates as determined by the Board.Therefore, the Board could issue shares of preferred stock that would havepreferential liquidation, distribution, voting, dividend or other rights.
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH
DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings to the extent we have earnings, tofund our operations. We do not plan to pay any cash dividends in the foreseeablefuture. We cannot guarantee that we will, at any time, generate sufficientsurplus cash that would be available for distribution as a dividend to theholders of our common stock. You should not expect to receive cash dividends onour common stock.
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